Quick Summary
Goodwill represents intangible value like brand reputation, customer relationships, and business reputation.
Goodwill is an intangible asset that arises when a company is purchased for more than the fair market value of its identifiable net assets. It represents non-physical assets like brand reputation, customer relationships, employee relations, and proprietary technology.
Goodwill Calculation
Goodwill = Purchase Price - Fair Value of Net Identifiable Assets
Where:
Net Identifiable Assets = Total Assets (at fair value) - Total Liabilities
Example
Company A acquires Company B for:
- Purchase Price: ₹500 lakhs
- Fair Value of Identifiable Assets: ₹400 lakhs
- Fair Value of Liabilities: ₹100 lakhs
Net Identifiable Assets = ₹400 - ₹100 = ₹300 lakhs
Goodwill = ₹500 - ₹300 = ₹200 lakhs
Components of Goodwill
- Brand name and reputation
- Customer relationships and lists
- Employee skills and relations
- Proprietary technology and patents
- Strategic locations
- Distribution networks
- Going concern value
Accounting Treatment
- Recognized only in business combinations
- Not amortized (under Ind AS/IFRS)
- Tested annually for impairment
- Shown as non-current asset on balance sheet
- Internally generated goodwill not recognized
Key Points
- Intangible asset from acquisitions
- Purchase price over fair value of net assets
- Not amortized, tested for impairment
- Represents brand, reputation, relationships
- Only recognized in business combinations