Goodwill
Goodwill
Can be conveniently divided into two classes that which had been
– Internally generated
– Purchased
There is general agreement that the former category should not be brought to account because it was impossible to do so within the accepted rules of double entry bookkeeping and historical cost based accounting – it is the goodwill not purchased but generated via the internal operations of the organisation
No difficulty in bringing purchased goodwill to account, but controversy raged as to how to treat the amount, once recognized
Traditionally, then, goodwill is “the unidentifiable intangible asset” although its status as an asset and the accounting treatment is still hotly debated
Purchased goodwill is ‘the difference between the cost of an acquired entity and the aggregate of the fair values of that entity’s identifiable assets and liabilities.’ In these definitions, it is almost implied that the calculation brings goodwill into existence. (“FRS 10”)
Examples of good will
• consumer loyalty;
• economies of scale within the organization itself or resulting from acquisition;
• a well-developed distribution network;
• benefits arising from location in a particular area;
• possession of a monopoly in one or more areas of operation;
• know-how (as distinct from patents) and technical skills vested in individual
• executives or teams within the organisation
• Innovative use of technology
Treatment of goodwill
• Previously handled via amortization. The normal maximum amortization period was 20 years. This was justified by the claim that a payment for goodwill is made in anticipation of future economic benefits, either arising from synergy or from assets which would otherwise not qualify for recognition.
• This makes estimates inherently more unreliable the longer the estimated life – hence the presumption that the life of goodwill will not exceed 20 years.
• While there was no allowance for goodwill to be considered to have an indefinite life, the 20 year
Can be conveniently divided into two classes that which had been
– Internally generated
– Purchased
There is general agreement that the former category should not be brought to account because it was impossible to do so within the accepted rules of double entry bookkeeping and historical cost based accounting – it is the goodwill not purchased but generated via the internal operations of the organisation
No difficulty in bringing purchased goodwill to account, but controversy raged as to how to treat the amount, once recognized
Traditionally, then, goodwill is “the unidentifiable intangible asset” although its status as an asset and the accounting treatment is still hotly debated
Purchased goodwill is ‘the difference between the cost of an acquired entity and the aggregate of the fair values of that entity’s identifiable assets and liabilities.’ In these definitions, it is almost implied that the calculation brings goodwill into existence. (“FRS 10”)
Examples of good will
• consumer loyalty;
• economies of scale within the organization itself or resulting from acquisition;
• a well-developed distribution network;
• benefits arising from location in a particular area;
• possession of a monopoly in one or more areas of operation;
• know-how (as distinct from patents) and technical skills vested in individual
• executives or teams within the organisation
• Innovative use of technology
Treatment of goodwill
• Previously handled via amortization. The normal maximum amortization period was 20 years. This was justified by the claim that a payment for goodwill is made in anticipation of future economic benefits, either arising from synergy or from assets which would otherwise not qualify for recognition.
• This makes estimates inherently more unreliable the longer the estimated life – hence the presumption that the life of goodwill will not exceed 20 years.
• While there was no allowance for goodwill to be considered to have an indefinite life, the 20 year