Goodwill
Goodwill in accounting is an intangible asset that occurs when an established company is absorbed by a buyer. Goodwill illustrates properties that are not recognizable individually. In other words, Goodwill is a long-lasting, intangible commodity that represents the company’s credibility and reputation. Goodwill cannot be won immediately, but rather is created by the company’s long-term operation, leading to a positive effect on society and stakeholders. Different types of goodwill are available, Institutional (Enterprise) or Technical (Personal). Institutional goodwill can be characterized as the intrinsic property that, without the intervention of a particular owner, will continue to ensure the organization. Professional goodwill can be characterized as the intangible benefit attributed solely to the company owner’s activities or credibility. The main distinction between the two forms of goodwill is whether the goodwill is transferable without a non-competition clause upon selling to a third party.
In almost every area of your life, building goodwill among people is significant. Spreading goodwill helps people feel good for you, encouraging them to extend goodwill to others. In industry, building goodwill will allow you to create partnerships that guarantee your company’s long-term success. Goodwill promotes brand loyalty, gives you a competitive advantage, enhances the profitability of the business, promotes forgiveness, and others. It is therefore important to work for goodwill.
Goodwill accounting treatment depends on the type of business enterprise. Example. In the case of a partnership, when a new partner is accepted, the value of goodwill is evaluated and the new partner brings its share of goodwill in cash, which is then distributed in its sacrifice ratio among existing partners.
If the market value of the business increases to an amount greater than goodwill the asset cannot be increased to reflect the new value. The only way goodwill can be increased is through the acquisition of another company as a subsidiary. In this way goodwill is a useful asset to increase its future earning potential. Goodwill indicates a good value of the company in the market, and customers will easily have faith in brand items produce by the company as it has a public image.
Investors on the other hand also use goodwill information to make important investment decisions in that company. Investors with other factors may affect their investment in the company such as financial position, credit rating, and benefit earning capacity of the company. Goodwill indicates a good image of the company in the market and this good image is a result of a good financial position of the company, customer satisfaction, and a good rate of return to investors. If an investor invests in a company having goodwill and a good market image he is assured of better and timely return.
The nature of goodwill is still difficult to understand, that is to account for goodwill companies should prepare a consolidated financial statement in accordance with the international financial reporting standards IFRS. Goodwill in accounting is a tangible asset that arises when a buyer acquires an existing business. Goodwill now represents assets that are not separately identifiable under US GAAP and IFRS. Goodwill represents the amount paid in excess of the fair value of the identifiable net assets for the business acquisition. An opportunity to make goodwill a cleaner accounting object is offered by the IFRS on business combinations.
Therefore goodwill is an important and useful asset of any company for both its customers and investors too. Goodwill is the image of the company in the market in its financial position and perceived customer satisfaction.