What is the definition of Goodwill?
Goodwill is an intangible asset that mostly appears as the biggest intangible asset on the balance sheet. The Goodwill can only be identified with the business as a whole. Therefore, the goodwill cannot be sold individually in the marketplace, while some other intangible assets can be sold.
Goodwill is not easy to measure, because it includes exceptional management, desirable locations, customer relations, and so on. The determination of the Goodwill is therefore most of the time very subjective.
Companies only record the goodwill when there is an exchange transaction the involves the purchase of an entire business.
When the ...view middle of the document...
The merge occurred at the height of the Internet boom, so the operation was valued at $99 billion (Peers and Angwin, 2003). However, the Internet operation's value quickly collapsed, because of the drop in online advertising, taking the combined companies' stock price with it. The annual report (2002) of AOL Time Warner Inc. showed a loss of $98.7 billion, reflecting the falling value of its Internet units (Sander, 2003). This mistake was a result of a wrong writing-down of the AOL’s assets estimated at $45.5 billion in the end of a long financial news release (Peers and Angwin, 2003).
Facebook taking over Whatsapp in 2014.
Facobook took over Whatsapp for 19 billion dollars in 2014.With this Facebook wanted to purchase Whatsapp to enlarge Facebooks social media dominance.
With this take over came 18,1 billion dollars of goodwill.
That makes that Facebooks goodwill and intangible assets rose from 1,67 billion to 19,77 billion dollars (Doorn, 2014).
Another example is the take over of Beats electronic (know for beats by Dr. Dre ) by apple. Apple wanted Beats because of its popularity as a pop culture brand, just like apple itself (McCorvey, n.d)
Apple paid 3,2 billion for the company, of which around 60% is said to be goodwill, other intangibles and the brand (Ausick, 2014).
Goodwill turn up in the balance sheet under the name ''Goodwill'' on the Debit side.
What can be said about valuation of the asset?
Goodwill is an intangible asset which needs years to be built. It involves organization’s corporate identity, supported by corporate image and optimal demographic location. The value of goodwill is realized after an organization have been sold, as it have an impact on the organization’s selling price, which can be higher that its net worth in case it have a valuable goodwill. Moreover, the goodwill of big and well developed organizations can be more valuable than their tangible assets (Goodwill, n.d.).
The most common way of measuring the value of goodwill is to first measure the total value of the whole business. The goodwill’s value is considered to be the difference between this and the fair market value of all determined assets of a business (Business Goodwill, n.d.).
Goodwill booking in the balance sheet
According to Harold Averkamp (2015), Goodwill is reported on the balance sheet as a noncurrent asset.
Since 2001, U.S. companies are no longer required/allowed to amortize the recorded amount of goodwill.
“In accounting we use the word amortization to mean the systematic allocation of a balance sheet item to expense (or revenue) on the income statement.”
Harold Averkamp (2015)
The amortization of an asset means that a company is allowed to split the value of the...