Goodwill

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For the nonprofit organization see Goodwill Industries.

Goodwill means simply to have the will to do good in a community, or, to simply try to help people who are in need (for example, serving at a soup kitchen or at a homeless shelter).

Accounting

Goodwill is also an important accounting concept that describes the value of a business entity not directly attributable to its tangible assets and liabilities.

For example, a software company may have physical assets of some desktop PCs, servers, office equipment etc valued at $1 million, but the company's overall value (including brand, customer, intellectual capital) is valued at $10 million. Anybody buying that company would show $10 million total assets comprising $1 million physical assets, and $9 million in goodwill.

However the value of goodwill is very difficult to assess especially in cases where personal contact is important. An accountant who sells his practice would not be able to guarantee that all of his clients would transfer to the buyer. When purchasing a business of this nature it is very important to be sure that provisions are made for an adjustment in the sales price after an initial trial period to see if the client base has eroded.

Goodwill is often included on a balance sheet as an asset, but its valuation may be suspected if supporting evidence like an independent survey is missing. Goodwill is forced onto the balance sheet when a company is purchased for more than the sum of the value of the assets of the company. The difference between the purchase price and the sum of the assets is by definition the value of the "goodwill" of the company.

For example:

• A quality provider of goods or services builds up a good reputation (IBM, L.L. Bean).
• A brand name controlled by the business becomes recognizable by a large part of the population (Tide, Cheerios).

Goodwill is no longer amortized under U.S. generally accepted accounting principles (GAAP) (FAS 142). As of January 1st, 2005, it is also forbidden under International Accounting Standards. Goodwill can now only be impaired (impairment-only approach).

Since, in general, intellectual property (IP) is part of goodwill, one of the most important assets of knowledge-based companies does not appear at all on formal balance sheets. As for these companies it is the IP that generates profit, not the buildings or the cash they hold, this may lead to a misleading valuation, discouraging investors who do not understand the company's true value. However, as this intangible asset is hard to value in the first place, this is perhaps a good thing; over-valuation due to goodwill was one of the biggest factors of the dot-com bust.

There are many preferences to leaving goodwill unamortized and instead testing for impairment annually. First of all, when you are amortizing an intangible asset, you compare its fair value (often determined through present value of future cash flows) and its book value. While it is easy to grab the number for the book value of goodwill, it can be quite difficult to predict future cash flows associated with goodwill. For example if under the assumption that goodwill has an indefinite life, how can we come up with a limit of when those cash flows will cease? It is more appropriate to consider the business as a whole yearly. By first looking at the fair value vs. book value of the entire business, we can then better understand how to value goodwill.

Social Capital

In sociology and public health studies, the goodwill of social groups is called social capital, which replaces the need for financial capital or control of other capital assets. With high goodwill you can charge more for the same service or spend less attracting the same number of clients. Likewise, with high social capital you do not need to own things because you can access them without having to own them. This is simply goodwill on a much larger scale.da:Goodwill de:Geschäfts- oder Firmenwert fr:Goodwill no:Goodwill ja:のれん代