Goodwill is an intangible asset linked with one company’s acquisition by another that indicates non-physical objects that contribute to a company’s value but can not be easily defined or priced.
Mergers and acquisitions (M&A) are generally associated with Goodwill. It is the sum charged over the market value.
Some examples of Goodwill are the company’s brand name, good employee relations, good customer relations, stable customer base, and any patents or proprietary technologies.
What is Goodwill in Accounting?
Goodwill occurs when an organisation buys another organization as a whol. The sum of Goodwill is the expense of purchasing the company minus the fair market value of the tangible assets, the identifiable intangible assets and the liabilities acquired in the acquisition.
Calculation of Goodwill
To measure Goodwill, subtract the price at which it was purchased from the market value of the acquired company’s assets and liabilities.
For example, Company X bought Company Y for £ 1,20,000. Company Y had £80,000 worth of assets and £20,000 worth of liabilities. We can value Goodwill at £60,000 using the following formula:
£1,20,000 – (£80,000 – £20,000) = £60,000
Various factors affecting Goodwill
The following aspects have an impact on Goodwill, which are:
- Business Location: A business situated in an appropriate location would have a more beneficial chance of greater Goodwill than a company located in a remote location.
- Quality of products and services: An organization that offers higher quality goods and services has a better chance of winning more Goodwill than rivals that offer more inferior goods and services.
- Effectiveness of management: Efficient management results in an improvement in the company’s earnings, which results in a better reputation and Goodwill.
- Business risk: A company with less risk has a higher chance of gaining reputation than a high-risk company.
- Nature of the enterprise: It means the type of goods that the enterprise deals with, the degree of competition in the industry. In all these areas, an organization that has a positive result would have more significant Goodwill.
- Favourable contracts: If a corporation has access to profitable deals to sell goods, it will enjoy more significant Goodwill.
- Trademark and patent ownership: companies holding patents and trademarks will enjoy a business monopoly, which will lead to an improvement in the company’s Goodwill.
- Capital: Investors would consider a business with a higher return on investment and lower capital investment to be more profitable and have more Goodwill.