WHAT IS GOODWILL?
The value of a business is not always defined by what assets it owns and what it owes. A successful business will develop customer loyalty and an overall positive reputation in its community, which will cause its market value to be greater than its book value. A company may also generate a higher value if it proves over time that it can generate superior revenues than its competition through managerial expertise, its reputation within its business sector, and other company attributes.
The difference between the value of a company as reflected in its balance sheet and its market value is known as its goodwill. Accounting goodwill is the excess value of a firm's net assets and is recorded at time of business acquisition or combination. Goodwill is not associated with a physical object that the business owns, so it is an intangible asset and is listed on a company's balance sheet. In comparison, economic goodwill refers to company attributes that are hard to quantify, such as brand loyalty, brand recognition, company innovation, and executive talent.
A company can list goodwill on its balance sheet when it acquires another business at a higher cost than what the assets and liabilities on the acquired company's balance sheet dictate. In short, goodwill equals the acquisition price minus net assets.
Say a business was purchased for 100 million. Its assets were worth 80 million but it had 30 million in liabilities. The acquired business' assets would be equal to 50 million, and the acquiring business would record 50 million worth of goodwill on its balance sheet.
However a business may not record goodwill that it generates for itself. Using the same example, assume the business was not acquired, but it was worth 100 million and still had 80 million of assets with 30 million in liabilities. The business would not be able to
