Goodwill can be half the value of the enterprise or more (for example, for a television company).

Let's determine the value of goodwill using the following example:

ü 10% of receivables will not be collected;

ü 5% of inventory is obsolete and can only be sold for 10% of its nominal value;

ü according to the conclusion of a real estate appraiser, the land and building cost 2,500 thousand rubles;

ü according to the conclusion of the equipment appraiser, the equipment costs 1,600 thousand rubles;

ü according to the business assessment, the cost of investment in the company is 450 thousand rubles;

ü the average return on equity in the industry was 14%;

ü normalized net profit 600 thousand rubles;

ü capitalization ratio 30%.

There is a past balance sheet (Table 6.11).

Table 6.11

Past Balance Sheet

The calculation of the excess profits method is carried out in stages.

At the first stage an economic balance is built in which assets are given at market value, that is, at the value that can be obtained for them on the market today. This is also called adjusted cost calculation. The only item on the balance sheet that is not adjusted is cash. However, if the bank in which the company has deposited money in its current account is in receivership or has simply disappeared, the corresponding amount of funds is reset to zero. In our example, the bank is functioning normally, everything is in order at the cash desk, so the amount of funds remains unchanged.

According to the problem, 10% of receivables will not be collected, which means that the adjusted cost is 180, the adjustment is 20. The assessment of receivables is carried out in 3 main stages: drawing up a calendar schedule for the repayment of receivables, identifying overdue debts in this schedule, highlighting the amounts of bad debts in overdue debts. Bad debt is not included in the economic balance sheet.

When assessing inventory, a complete inventory must be carried out at current market prices. In our example, 5% of inventory (i.e. inventory worth 50) is obsolete and could be sold for 10% of face value (i.e. 5 monetary units), so the adjusted inventory value would be:

(1000 – 50) + 50 * 0,1 = 955.

The adjusted value of the land and building is 2,500, the equipment is 1,600. An appraiser specializing in the valuation of securities has determined that the value of the investment in ABC Company is 450. Next, we find the adjusted value of all assets. It is equal to 6,060.

Appraisers never calculate liabilities, but make the assumption that the value of liabilities on the economic balance sheet is equal to the adjusted value of assets (6,060). Liabilities are the sum of equity (this is the value of the enterprise) and liabilities. The amount of liabilities remains unchanged (3,000), so the adjusted cost of equity is:

6 060 – 3 000 = 3 060.

On second stage of calculations Form No. 2 (profit and loss statement) is being normalized and, accordingly, the balance sheet is being normalized on a pre-tax basis . To do this, the following calculations are carried out:

ü tax payments are added to net profit (according to the financial income statement), one-time or non-operating expenses or income are added (expenses are added, income is deducted);

ü the result is normalized profit before taxes;

ü Taxes payable on the basis of normalized taxable income are subtracted from normalized profit before tax deduction. These are the taxes that the company would pay in the absence of unusual income and expenses;

ü the result is a normalized net profit, that is, the result of the second stage of calculating the value of goodwill using the excess profit method

In our problem, the normalized net profit according to the condition is 600 thousand rubles.

On T third stage The average industry return on assets (or on equity capital) is found, that is, the ratio of profit to assets or equity capital for enterprises on the industry average. This indicator can be found in industry magazines, Expert and Money magazines.

On fourth stage The calculation determines the expected profit. This is the profit that our enterprise would receive if it operated the way the average enterprise in this industry operates. To do this, you need to multiply the adjusted cost of equity capital (or assets) by the industry average return on equity capital (assets). In our problem, the average return on equity is known. Therefore, the expected profit is:

3 060 * 0,14 = 428,4.

On fifth stage excess profit is determined. To do this, the expected profit is subtracted from the normalized net profit:

600 – 428,4 = 171,6.

There can only be goodwill if there is excess profit. An enterprise receives excess profit, which means it works better than enterprises on average in the industry, and has some advantages, which are united by the concept of “goodwill.”

If excess earnings are negative, then goodwill is negative. But enterprises do not place orders for the assessment of negative goodwill, since the services of appraisers are expensive.

At the sixth stage of calculation The value of goodwill is determined by the formula:

where I ( incom, income) is excess profit; R – capitalization ratio.

In our task

When calculating goodwill, the main thing is to correctly calculate the capitalization rate. In our problem it is given, but the evaluators calculate it. The value of goodwill almost entirely depends on the number that the appraiser puts as the capitalization ratio, and the value of the business depends on the value of goodwill.

The appraiser can process different income streams: cash flow or net income. Different discount rates and capitalization rates apply to these flows. At discounting cash flow or net profit, firstly, income streams are processed for several forecast years, and secondly, these flows are unequal in size. At capitalization the flow is processed for one time period (per year), these flows are equal in size or differ with a small amplitude of fluctuations (in the latter case, the numerator of the formula contains the arithmetic mean of the annual flow value).

The conversion of one rate to another is carried out using the following transformations. We determine the discount rate for net cash flow (that is, cash flow based on normalized net income) using either a capital asset pricing model or a cumulative construction model. Net profit cannot be processed using this bet. We conventionally assume that the discount rate for net cash flow is 23%.

We convert the discount rate for net cash flow (NCF) into the capitalization rate for NCF using the formula:

R to NDP = R d NDP – g,

where R to NDP is the capitalization ratio of net cash flow; R d NDP – discount rate of net cash flow; g is the expected growth rate of the company in the post-forecast period.

Conditionally we accept g = 5%, then

R to NPV = 23 – 5 = 18%.

Next, we convert the company’s normalized net profit into net cash flow. According to the condition, normalized net profit is 30,000, depreciation is 8,600, capital investments are 15,000, the increase in working capital is 6,500, the increase in long-term debt is 7,500. Then

NPV = 30,000 + 8,600 – 15,000 – 6,500 + 7,500 = 24,600 thousand rubles.

We determine the discount rate for net profit. First, you need to divide normalized net income by net cash flow:

Then this result must be multiplied by the capitalization ratio of net cash flow, we obtain the capitalization ratio of net profit (forecast net profit, that is, the capitalization ratio for future periods):

R to PE = 1.22 * 18 = 22%.

By subtracting the net cash flow capitalization ratio from the net profit capitalization ratio, we obtain the conversion percentage:

22 – 18 = 4 %.

To determine the discount rate for net profit, it is necessary to add the conversion percentage to the discount rate for net cash flow:

R d PE = 23 + 4 = 27%.

We determine the capitalization ratio of net profit for the current year (this is what is used to capitalize excess profit when finding goodwill):

R to state of emergency of the current year = .

This formula is used to calculate the capitalization ratio for both open and joint stock companies. The second method of calculating the coefficient has limited application - only for an open joint-stock company (OJSC), the shares of which are actively traded on the stock exchange:

R to state of emergency of the current year = ,

where E is net profit per share; P – share price. That is, R to the current year’s emergency is the inverse value of the multiplier, which is given in analytical materials about the stock market.

Let's return to our example. We fill in the column “Reasonable market value” (see Table 6.10), that is, we rewrite the adjusted value of all elements of assets, including goodwill. The total assets are 6632 thousand rubles. We transfer this amount to the total liabilities. Liabilities remain at the same level, therefore, equity including goodwill is equal to:

6,632 – 3,000 = 3,632 thousand rubles.

Goodwill is a business reputation. In IFRS, this is a specific type of intangible asset that cannot be measured directly. When assessing business reputation, financiers often encounter difficulties. Let's figure it out.

What is goodwill in simple words

Goodwill is a term meaning the business reputation, image, and business connections of a company that have a value assessment.

In IFRS, goodwill is a special type of intangible asset that appears in the financial statements as a result of a business combination. The basic requirements for recording these transactions are governed by IFRS 3 Business Combinations.

From an economic point of view, goodwill – These are the potential benefits of a business combination that may include future synergies from economies of scale, cost savings, increased market share, potential customer contracts, access to specialized labor, and other unique resources that cannot be allocated separately. That is, in the future, the buyer of the business expects to receive a certain amount of excess profit.

When to value goodwill

When should goodwill be measured? Here are a few situations when this is necessary:

• buying (selling) a business;
• ;
• making management decisions (when managing the value of the company).

Assessment of business reputation in RAS

According to PBU 14/2007 “Accounting for intangible assets”, this group includes not only works of art, inventions and trademarks, but also business reputation. Moreover, PBU 14/2007 considers both positive and negative business reputation.

Thus, for accounting purposes, the value of acquired business reputation is determined by calculation. As the difference between the purchase price paid to the seller when acquiring all or part of a company and the sum of all assets and liabilities on the balance sheet on the date of purchase.

The positive business reputation of an organization should be considered as a premium to the price paid by the buyer in anticipation of future economic benefits, and taken into account as a separate inventory item of intangible assets (clause 43 of PBU 14/2007). See more about accounting of intangible assets in RAS.

And a negative business reputation is considered as a discount on the price that is provided to the buyer. The reason for such an asset cost may be the lack of stable buyers, low quality of the product, lack of marketing skills and business connections, as well as low qualifications of personnel.

We also note that the company has the right to amortize acquired business reputation over 20 years (but not more than the life of the organization) in a straight-line manner (clause 44 of PBU 14/2007). As for negative business reputation, it is fully attributed to the company’s financial results as other income in full, and not evenly, as required by the Regulations in the previous edition. The standards of PBU 14/2007 regarding accounting for negative business reputation are close to IFRS.

How to account for goodwill

• Business owners typically do not sell a company at a price that reflects the value of its assets and liabilities. As a result, such a specific type of asset as goodwill appears in the consolidated statements of companies. At the same time, the complexity of assessing goodwill is a key problem when reflecting it in financial statements. Read in the magazine “IFRS in Practice” how to account for goodwill >>>

How to evaluate goodwill in IFRS

Goodwill – This is an asset that cannot be assessed directly, so it is determined on a residual basis. In particular, the standard defines its amount as the excess of point 1 over point 2:

Clause 1. Sum of the following quantities:

• the fair value of the consideration transferred at the acquisition date;
• the amount of non-controlling interest in the acquired enterprise;
• the fair value of the interest that the acquirer already owned in the acquired business.

Item 2. The amount at the acquisition date of identifiable assets less liabilities, measured in accordance with IFRS 3.

Goodwill can be calculated either in full (full goodwill method) or only in part attributable to the controlling interest (proportional method). The ability to choose its accounting (full or partial) is included in IFRS 3 as part of the convergence project IFRS and US GAAP .

How to test goodwill for impairment

Calculation example

The Alpha company acquired an 80 percent stake in the Beta company for a cash consideration of RUB 1,000 million. The fair value of Beta's net assets at the acquisition date is RUB 1,100 million. Market value - 20 percent of shares owned by non-controlling shareholders is RUB 245 million. The procedure for calculating goodwill using various methods is presented in Table 2.

Table 1. Goodwill calculation

In the situation under consideration, full goodwill differs from partial goodwill by 25 million rubles. (145 million rubles – 120 million rubles). This difference is an indicator related to the uncontrollable share.

In January 2010, the Alpha company acquired a 20 percent stake in the Beta company for RUB 300 million. This share allows Alpha to significantly influence Beta. A year later, in January 2011, Alpha additionally acquired 40 percent of Beta shares for 1,000 million rubles. and gained control over it. As of this date, the fair value of Beta's net assets amounted to RUB 2,100 million, and the existing share of 20 percent was RUB 500 million. The fair value of the non-controlling interest (40%) is RUB 900 million. The calculation procedure is given in Table 2.

Profit from the revaluation of the participation interest in Beta in the amount of RUB 200 million. (500 – 300) are recognized in the income statement. If the original investment had been classified as available for sale, then under IAS 39 it would have been accounted for at fair value with changes in value recognized in other comprehensive income. At the date of acquisition of the business (January 2011), the change in the fair value of the investment (RUB 200 million) would have to be reclassified from equity to profit or loss.

Negative goodwill

In practice, when purchasing a company, it may turn out that the difference between the transaction price and the buyer's share of the fair value of the acquired assets and liabilities will be negative (negative goodwill). In this case, we are talking about a profitable purchase. Then the assessment of business reputation or goodwill is included in other income.

The IASB considers such transactions to be unusual. The fact is that business owners generally do not sell a company for less than fair value. However, sometimes there are profitable acquisition deals. This could be the case, for example, if the seller is acting under duress. If an excess is observed, the standard requires checking all components that affect goodwill. That is, the buyer must ensure that:

1. Fair values ​​of assets are not overstated. The first step is to check the assumptions used in the valuation models. Especially with estimation methods with a high degree of subjectivity of data, based on unobservable data. For recognized intangible assets, it is necessary to check whether the identifiability criteria, etc. are met.
2. The price is determined correctly. If the transaction contains contingent, deferred elements, you need to check the approach to determining the fair value of these components.
3. Non-controlling interests and available interests (for incremental acquisitions) are stated at fair value.

This group of methods is applicable for assessing a specific intangible asset, which is goodwill.

Accounting method. The essence of the method used when purchasing an enterprise (business) is that all assets are taken into account in the accounting documents - both tangible and intangible. The latter are accounted for at acquisition cost. If the purchase price of a business exceeds the value of the assets, the difference is attributed to the value of goodwill. In other words, the value of goodwill is assumed to be equal to the difference between the purchase price and the total value of all other assets - tangible and intangible - less estimated liabilities.

Method of American tax authorities. The essence of the method is that, based on the rate of profit, which is considered standard for enterprises of a certain type, profit is calculated on the average annual market value of the enterprise’s tangible assets minus liabilities (here there is an analogy with the “imputed income” we sometimes use). Then, after taxation of the enterprise's income, the profit amount is subtracted from the average annual income. If a positive balance appears, it is attributed to the average annual income from intangible assets of the enterprise. This balance is capitalized (reduced to current value), and the result is taken as the value of the enterprise's goodwill. (The implicit assumption that goodwill is equivalent to intangible assets is controversial).

Statistical method. In Russia, an expert system has been created with which you can estimate the value of goodwill (as well as the value of a trademark) based on data contained in accounting documents for the last 2-3 years of the enterprise’s operation. This expert system is based on the results of statistical processing of more than 10 thousand balance sheets. When automatically calculating the value of goodwill (as well as a trademark), more than 120 indicators characterizing the activities of the enterprise are taken into account.

There are many ways to evaluate goodwill, which can be divided into direct and indirect methods. Direct methods are based on a combination of property valuation and assessment of the profitability of the enterprise. Indirect methods take this combination into account using a weighted average.

The value of goodwill is the difference between the market value of the operating enterprise and the tangible and intangible identified assets of the enterprise.

Goodwill can be valued, but it cannot be sold or transferred separately from the entity because it is not alienable and does not belong to the entity.

In many cases, goodwill constitutes a determining part of the value of a business. Such enterprises are worth many times more than the totality of their assets. A classic example is the acquisition by Ford of the Jaguar trademark for $1 billion 600 million, of which $1 billion was paid for the intangible component of the value - goodwill. Nestle acquired Rowntry for $2.55 billion, more than five times the firm's book value; and the Morris Corporation bought Craft in October 1988 for nearly $13 billion, four times the firm's book value. Basically, the situation when the market value of enterprises far exceeds the value of all assets reflected in the financial statements of the enterprise applies to information and consulting enterprises, which, without having large material assets and having a relatively small book value, generate significant financial flows E. Brooking. "Intellectual capital". - St. Petersburg: Peter, 2001..

It should be noted that the value of goodwill is often conditional. It is easy to lose it due to mistakes made by the management of the enterprise or due to other circumstances.

Goodwill in accounting and in the practice of expert appraisal differs significantly. In accounting, all operations related to calculating the value of goodwill for the purpose of putting it on the balance sheet are carried out after the purchase of one enterprise by another. An expert assessment is carried out before the transaction in order to calculate the real market price of the additional profit generated by the enterprise’s goodwill.

Direct methods for valuing goodwill

Among direct methods, synthetic methods are most widespread. These methods are aimed at the overall assessment of goodwill using indicators of business activity or financial performance.

Valuation of goodwill using business activity indicator. Typically, this indicator is sales volume (SA) (most often the average sales volume over the last three years), adjusted by the multiplier k (GW = k × CA / 100%). This method is most often used to estimate the value of business organizations, where goodwill is considered primarily as an indicator characterizing the ability to achieve a certain volume of sales or orders. The k indicator was calculated based on a number of sample studies and the assessment scale of tax authorities (Table 1).

Table 1 - Some values ​​of the statistical indicator k Colossus Bernard. "Business Management". - M.: 2001

The main advantage of this method is its simplicity. But valuing business assets based on sales alone can be subject to significant uncertainty, so the valuation often requires consideration of financial results.

In accordance with the “Procedure for expert assessment of intangible assets,” an expert assessment of the value of intangible assets, including goodwill, not reflected in the balance sheet, can be carried out as follows:

Snma = Bpr/Sk - Scik

where, Snma - the value of intangible assets not reflected in the balance sheet;

Bpr - the balance sheet profit of the enterprise after subtracting income tax;

Sk - capitalization rate;

Scyck is the value of the entire property complex according to the balance sheet.

This method, used to evaluate intangible assets not reflected in the balance sheet, is based on determining the value of the enterprise by the method of direct capitalization of income income minus the value of the enterprise on the balance sheet.

How often do we apply for certain services to various companies that were recommended to us by friends? Why do we buy products that are most actively advertised? It’s not just that manufacturers spend a lot of money to improve their own reputation, bother with its assessment, and resell it to other owners, deliberately inflating its value? We will talk about goodwill and the features of its accounting in the article below.

how to run a successful business

Goodwill - what is it? Literally, “business reputation.” But we’re not talking about that now. What does an entrepreneur need to run his own business? What is needed for it to be in demand and make a profit? Undoubtedly, positive evaluation from third parties. Currently, this aspect of business is increasingly influencing the minds and behavior of the population. Because, as statistics show in recent years, this is exactly what our legal entities are trying to justify in court.

Therefore, if any information discrediting the good name of a business entity becomes public, then he has the full civil right to challenge the legality of what happened in the manner prescribed by law. Business reputation, although a rather abstract concept, nevertheless represents a rather valuable intangible asset of an enterprise.

Goodwill: definition of the concept

Entrepreneurs invest a huge amount of investment in brand development and advertising. Business reputation, or, as it is also called, goodwill (not to be confused with filter goodwill), is quite expensive for business entities, which is why it is valued at the appropriate level.

So, what is this concept? Let's consider the question step by step:

• it should always be based on a strong team of good advertisers and a well-developed brand promotion strategy;
• further, the work carried out at the highest level to promote the company is necessary;
• As a result, the company must be distinguished by its good corporate culture and established relationships with contractors.

In other words, goodwill is a general assessment of business activity, which as a result - due to its reputation - allows you to increase the volume of your own working capital, since people want to consume this particular product and no other. It is interesting that many business entities tend to exaggerate their own importance, and this works out quite fruitfully for them - the value of the company increases noticeably.

Interpretations of goodwill in economic theory

With the passage of time and the dynamics of business changes, the interpretation of this concept has changed depending on external circumstances. For example, have you heard from your parents, and even more so from your grandparents who lived, say, under Stalin, about such a term as goodwill? No one in the Soviet Union knew what it was. This concept simply did not exist. In the theoretical aspect, the term “business reputation” was included, but it rather had a certain psychological definition. It could be defined as the aggregate opinion of consumers about a particular company, but there was no mention of goodwill as a most valuable intangible asset. This is understandable - in the planned economy regime of that time, the need to expand this concept simply did not exist.

The term “goodwill” came to us from the USA, and there even a hundred years ago it meant a certain established value of business contacts, which could subsequently lead to an increase in profits by several points. In other words, in America this intangible asset has always had a value expression.

How is it different from other assets?

What is goodwill according to This is a special intangible asset that has a number of specific features that distinguish it from others:

• under no circumstances can goodwill exist independently of a specifically linked company;
• it is immaterial, which means that its absence as such may not be noticed;
• goodwill has no initial cost or operating cost and is valued at a symbolic amount of a few dollars in some reporting examples;
• if the value of other intangible assets in monetary terms is distributed according to the volume of output, then the amount of goodwill can be repaid at any time, and at the same time it will not disappear as such.

Goodwill as an economic category

Goodwill - what is it? This is a complex concept that can be classified according to several criteria. For example, by how it can affect the financial statements of a business entity:

• positive - when we use it, we also get a good income;
• negative - accordingly, it not only does not bring profit, but also underestimates the estimated value of the enterprise as such.

Or, according to the form of existence, goodwill can be:

• created - developed over the years, through the implementation of a competent marketing policy;
• accounting - purchased for a certain cost in monetary terms and included in the financial statements.

It can also be classified according to the documentary method of reflecting the company’s characteristics in these data:

• market - when the procedure for assessing its value involves not only the purchase price, but also the profit received;
• normative - when determining its value, the auction value on the market is also taken into account.

Income valuation methods

Often, the valuation method for goodwill is to determine the profit that it can bring to the enterprise. So, there are two income methods for determining its value.

For example, goodwill can be assessed as the residual value between the difference in the total expressed value of the enterprise's assets and its full price. It is clear that there will be no problems with the first subtraction - you just need to sum up all the indicators. As for the cost of the business itself, you should approach it comprehensively: either use comparative analysis or be based on profitability indicators.

Or business reputation can be determined based on available excess profits. In this case, the main thing is to determine the planned profitability without using goodwill in the business, and then calculate how much it can bring.

Other methods for assessing goodwill

Business reputation can be assessed based on data about the business entity. For example, the value of goodwill is calculated based on the volume of products sold:

(Net income received from operating activities - level of profitability by industry * Total cost of goods that were sold)/Indicator of capitalization of other intangible assets.

You can also use cost to assess business reputation. This calculation of goodwill is somewhat similar to the method of calculating excess profit, but now we are assessing not the dynamics of changes in the latter, but how the application of the concept we are considering affects the total cost.

And the last, least often used one is qualimetric. In this methodology, we evaluate the overall usefulness of the business entity’s activities and compare it with the value of direct goodwill.

Features of goodwill in different countries

So, as we have already found out, the term “goodwill” itself did not exist in Soviet Russia, but nevertheless, if we remember the tsarist times, the authority of this concept was still present, albeit unspoken. Imagine how local merchants would cope if they did not have a good business reputation among their neighbors and residents of the surrounding areas. And in our time, despite the active use of this concept in business, there are no legally regulated documents defining the status of goodwill. But still, professional business reputation appraisers are now gaining wide popularity in Russia, who will not only select the optimal way to calculate its value, but will also carry out all the necessary calculations.

But in the USA, on the contrary, goodwill is not only actively taken into account when developing one’s own business, but is also regulated by law by the Ministry of Finance and the Internal Revenue Service.

The need to assess goodwill

Determining the value of goodwill often has good reasons, since this procedure is quite expensive and complex. As a rule, it is carried out if the business is planned to be sold or bought in the near future.

Undoubtedly, the value of the company’s material assets is a very important influencing factor, but no less important is what reputation the manufacturer has earned over the years of its activity, how much consumers trust it, and how popular its product is. After all, as mentioned above, it is these factors that can significantly increase the value of a business.

Also, goodwill assessment is carried out during a merger or acquisition, since here it is also important to understand what kind of business is going on. After all, if in the intangible aspect the deal is not profitable enough for one of the parties, then why conclude it?

How to prepare for a business reputation assessment

What is goodwill? This is primarily an intangible asset, so it must be valued accordingly. Thus, to carry out the procedure for determining the value of business reputation, the following documents are required:

• complete financial statements for the last three years;
• if any, auditor's reports;
• a complete inventory of the material assets available in the company's possessions;
• other deciphered and explained information about the property of a business entity;
• information on accounts receivable by agreement;
• if available, their full financial statements.

Every year the service sector becomes wider and wider: we are offered legal and accounting advice, and there are so many hairdressers and beauty salons that you can stumble upon them literally at every step! But this does not mean at all that each of these establishments brings unprecedented profits to its owner. First, you need to earn a decent reputation and gain an impressive client base. This is where the goodwill of the enterprise lies.

Who needs goodwill the most?

Since there are not so many tangible assets on the balance sheet of such business entities, and in order to set a decent price for property in the form of a cafe or nail salon, it is necessary to offer the buyer a brand of the required level. It is business reputation in this case that will take up almost half of the value of the enterprise.

Accounting for goodwill in the Russian Federation

Taking into account the fact that many enterprises are successfully switching to International Financial Reporting Standards (IFRS), we will consider accounting for goodwill in this aspect.

According to postulate No. 38, goodwill can only be recognized when a company is purchased or sold, but not otherwise. Because it is incorrect to evaluate an asset that, in fact, practically is not such, and it is very incorrect to reward it based on subjective considerations.

Moreover, in accordance with Standard No. 22, after a purchase and sale transaction is completed, the recorded value of goodwill must be allocated to certain non-current assets. Since value as such has been paid for, it follows that it needs to be backed up with something material. Often the latter are fixed assets that have their own level of wear and tear.

What to do if goodwill is negative

Goodwill - what is it? This is an intangible asset that is not usually identified and acquired separately from the business entity.

Sometimes situations arise when funds are paid for a particular enterprise, which in fact are less than the estimated value of all business assets suggests. In this case, the conclusion follows that goodwill played a decisive role here, and the transaction was completed at a loss to the seller.

Therefore, if a positive business reputation as an intangible asset is subsequently distributed according to the value of the fixed assets available at the enterprise, then the negative one, in turn, will be reflected on the balance sheet of the business entity under account No. 192. And, alas, nothing can be done with it will work out before the next deal is concluded.

To be competitive in the market, it is important for entrepreneurs and managers of various enterprises to pay attention to the business reputation of the brand. At the same time, the popular concept of goodwill plays an important role here. We suggest finding out what goodwill is in accounting, what types of goodwill there are and how they differ from each other.

What is goodwill?

In an accounting sense, goodwill is a 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 can be positive or negative. Literally from English good will means “good will” and in this context means favor, disposition, goodwill.

How to calculate goodwill?

Determining the goodwill ratio is not that difficult. To do this you need:

1. At the current market value, evaluate the entire set of assets available to the acquired enterprise as if they were purchased separately.
2. Determine the net asset indicator.
3. Compare two quantities.

The resulting difference can be called goodwill or negative goodwill. When compared with other intangible assets, it is usually classified as an unidentifiable intangible asset. As for the identifiability of intangible assets, it is characterized by the fact that it can be acquired not only externally, but also created on its own.

Positive goodwill

It is known that the very concept of goodwill determines the additional income that arises for a company as a result of its inherent advantages. It is customary to distinguish between positive and negative goodwill. The first occurs when the total value of the identifiable assets and liabilities of the acquired entity is less than the cost of its acquisition.

Negative goodwill

Another type of goodwill occurs when the acquirer's interest in the fair value of the identifiable assets and contingent liabilities acquired as part of a business combination exceeds its cost of acquisition. Negative goodwill is goodwill that arises when the total value of an entity's identifiable assets and liabilities exceeds its purchase price. It is important that the acquirer reconsiders the valuation and allocation of identifiable assets, contingent liabilities and the acquisition price assessment.

Business reputation is usually understood as an intangible benefit, which is an assessment of the activities of an individual or legal entity from the point of view of business qualities. This is also the name for the difference between the current price of an organization and its value directly on the balance sheet. If we talk about goodwill, then we are talking about an economic term that is used in accounting to reflect the market value of a company without taking into account the value of liabilities and assets. The goodwill ratio is attributed to intangible assets.

Goodwill is a combination of factors, good brand name, advantageous location, brand recognition and others that are not identified separately from the company, which allows us to make a conclusion about the future increase in the company's profit in comparison with the average profit of similar competitive companies and enterprises.