Goodwill is an accounting concept that describes the value of a business entity not directly attributable to its physical assets and liabilities.
For example, a software company may have physical assets of some desktop PCs, servers, office equipment etc valued at $1 million, but the company's overall value (including brand, customer, intellectual capital) is valued at $10 million. Anybody buying that company would show $10 million total assets comprising $1 million physical assets, and $9 million in goodwill.
Goodwill is often included on a balance sheet as an asset, but its valuation may be suspect if supporting evidence like an independent survey is missing. Goodwill is forced onto the balance sheet when a company is purchased for more than the sum of the value of the assets of the company. The difference between the purchase price and the sum of the assets is by definition the value of the "goodwill" of the company.
For example:
- A quality provider of goods or services builds up a good reputation (UPS, L.L. Bean).
- A brand name controlled by the business becomes recognizable by a large part of the population (Tide, Cheerios).
Goodwill is no longer amortized under U.S. generally accepted accounting principles (GAAP). However, under International Accounting Standards, goodwill amortization is still allowed.
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