Assessment of Goodwill in Accounting

Often, the purchase price for a company exceeds the value of the net assets acquired. The difference between the purchase price and the net assets is referred to as Goodwill.

Treatment of Goodwill

Regardless of whether a share deal or an asset deal is made, the purchase price is generally higher than the value of the net assets. This extra value is referred to as Goodwill. The premium is determined by the income or the benefit which the buyer expects. Generally, there are various reasons for company acquisitions. For one, distribution channels can be used together, or by strengthening the market position, higher margins can be achieved. Moreover, a buyer often expects more favorable cost structures.

Brands and Patents

If a company has built a strong brand over several years or used patents to develop protected know-how, this can represent part of the paid additional value. Especially the value of a proprietary brand can often not be adequately reflected in the financial statements due to accounting regulations. Goodwill is also referred to as the present value of the expected future excess profits. Today, there is a regulation that Goodwill must be capitalized and then amortized over the planned usage duration. However, there is no obligation to amortize. Nonetheless, a so-called impairment test must be conducted regularly. This tests whether a value adjustment needs to be made.

   
• Further information
   
• Calculate an offer for fiduciary accounting