To be competitive in the market, entrepreneurs and managers of various enterprises, the company is important to pay attention to the business reputation of the brand. At the same time, the popular notion of goodwill plays an important role here. We propose to find out what goodwill is in accounting, what kinds of goodwill are and how different they are from each other.
What is Goodwill?
In the accounting sense, goodwill is the value expression of a company's business reputation, showing the difference between the acquisition price of an enterprise as an integral financial and property complex and the total value of its net assets. Goodwill is positive and negative. Literally from English, good will means "goodwill" and in this context means favor, disposition, benevolence.
How to calculate goodwill?
Determining the coefficient of goodwill is not so difficult. To do this you need:
- At current market value, assess the entire set of assets available to the acquired enterprise as if they were purchased separately.
- Determine the indicator of net assets.
- Compare the two values.
The resulting difference can be called goodwill or negative goodwill. If compared with other intangible assets, it is customary to qualify as an unidentifiable intangible asset. As for the identifiability of intangible assets, it is characterized by the fact that it can be purchased not only on the side, but also created on its own.
Positive goodwill
It is known that the very notion of goodwill determines the additional income arising from the firm as a result of only its inherent advantages. It is accepted to distinguish between positive and negative goodwill. The first arises when the aggregate value of the identifiable assets, as well as the obligations of the purchased organization, is less than the cost of its acquisition.
Negative goodwill
Another type of goodwill is formed when the buyer's share of the fair value of the identifiable assets, contingent liabilities that were acquired in the business combination, exceeds the cost of acquiring it. Negative goodwill is a goodwill arising when the cumulative value of the identifiable assets and liabilities of an entity exceeds the cost of its purchase. It is important that the buyer reviews the approaches to valuation and allocation of identifiable assets, contingent liabilities and to the valuation of the acquisition price.
Goodwill and business reputation
Under the business reputation is understood as an immaterial benefit, which is an assessment of the activities of a physical or legal person in terms of business qualities. This is called the difference between the current price of the organization and its value directly on the balance sheet. If we talk about goodwill, we are talking about an economic term, which is used in accounting to reflect the company's market value without taking into account the value of liabilities and assets. The coefficient of goodwill is attributed to intangible assets.
Goodwill refers to a combination of business reputation factors, a good brand name, profitability of location, brand recognition and others that are not identified separately from the company, which allows making a conclusion about the future increase of the firm's profit in comparison with the average profit of similar competitive companies and enterprises.