Goodwill explained

What is goodwill? How to calculate goodwill? We will discuss the definition of the finance and accounting term goodwill, and go through an example of goodwill by discussing one of the largest technology acquisitions in recent history: the acquisition of social network Linked In by Microsoft. We will review the calculation of goodwill for that headline-grabbing deal, which is a great example of how to record goodwill on the balance sheet.

⏱️TIMESTAMPS⏱️
0:00 Introduction to goodwill
0:37 Definition of goodwill
2:09 Goodwill example
3:12 Accounting for goodwill
5:13 Purchase price allocation
6:10 Goodwill and intangible assets
7:47 Goodwill impairment test

For some companies, goodwill is in the top 3 of largest categories of assets on their balance sheet. If you want to make sense of a company’s financial statements, then a basic understanding of the concept of goodwill is invaluable.

Goodwill is the excess of the purchase price paid for an acquired firm, over the fair value of its separately identifiable net assets.
A definition of goodwill in simpler terms: goodwill is the difference between what a company pays to buy an acquisition target, and what that acquired company is worth “on paper”.

Goodwill is recognized only in a business combination, and goodwill is not amortized.

Why would any acquiring company pay a premium for an acquisition target above what that company’s net assets are worth? Goodwill reflects the perceived superior earnings capacity of the business combination.

Companies have to perform an annual impairment test to both goodwill and intangible assets. What that impairment test does is basically to assess whether the carrying value of goodwill and intangible assets is recoverable. In simple terms: if the financial results and future prospects of the business you acquired are dramatically dropping, you need to write off all or part of the goodwill and intangible assets.

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[alee]

thanks for bringing in actual examples - makes it so much more easier to understnd

[roboticsresources]

Extremely good work. Please go on creating such invaluable content.

[vypmnoo]

Man your videos are awesome!
I have nothing to do with the finance world and was just looking for what depreciation means but your videos were so interesting that I kept on watching more!!
Keep up with the good* work and god* bless you

[Piggy]

This was most understandable accounting video i ever saw

[tunzofunzo]

Thank you so much. This cleared up so much confusion. You explained it a very good way. Again, thank you sir.

[charlottelombardo]

This is a very helpful explanation. Thank you.

[bribripants]

Thanks for making your videos, they present a more relatable top line method of learning opposed to traditionally reading paragraphs of a textbook!
Can you please make a video on the benefits and shortcomings of Integrated Reporting? I have seen very biased videos all for integrated reporting, but none of these actually explore a balanced perspective of the good and bad of integrated reporting, before providing their opinion based on the evidence whether it should/should not be implemented further. Reason being, these videos are from the likes of Deloitte, ACCA etc whom are presenting the benefits only to the viewer.
Thanks for your time in reading.

[parth]

Can the goodwill value increase for years after the acquisition? Or just decrease or stay the same. Please explain!

[tifaniedunn]

Dear Financial Storyteller,

I am learning about bookkeeping for the first time.

Is there a sequence that I should be studying your videos in?

I know some of them go into more advanced business concepts. I am looking for your rudimentary videos on basic accounting practices.

Your videos are simple, informative and lead to understanding. The tutorials and texts I have been studying previously left a lot to be desired and I am definitely starting to get these concepts now that I am watching your content, so thank you!

[hkuhkuhkuhku]

A simple and easy to understand explanation of goodwill. Wondering if goodwill can be created other than M&A? E.g. can marketing expense spent to improve company image and brand awareness be classified as goodwill?

[kennethbeard]

You do speak fast but relate the relevant information, specified clearly and succinctly, in real time, which makes it easier to follow conceptually. For people unfamiliar with finance or totally new to the concepts it does move fast but a good explanation to learn. Some of us may have to go through it a few times to catch all the learning points.

[kennethbeard]

Some questions on Goodwill.

1. Although it occurs on a line in the list, it is calculated answer to force the figures to balance (price with total cost of the asset)?
It is the "balancing term" to close the gap between purchase price (an agreed amount between the seller & buyer) and what as accounting treatment reckons the asset value is. Goodwill = agreed purchase price - net asset value (an accounting estimation) - intangible assets (another accounting estimation).

It is then inserted into the line where accountants are taught to find it. Non financial people are expecting to find the "answer" at the bottom of the list not inserted in the middle of the list. They don't know the conventions and the thinking behind the layout.

2. What if the purchase price is less than the accounting treatment value of the cost of the assets? This should be a bargain purchase and a real world possibility.
2.1 So do intangible assets and Goodwill become negative values to balance the equation?
2.2 Or must intangible assets logically always be a positive value making the Goodwill smaller (a bigger negative value)?

[LocoCocoJorge]

Hi, thank you for the video. I just discovered your channel and appreciate all the topics that you cover and the way you explain things. If I may ask you: How is the goodwill portion taxed vs the tangible/equipment portion of the sale of a small business? Say, the sale price is 100K, with goodwill being 60K and equipment 40K. From what I understand goodwill is considered capital gains.Thanks again!

[holdened]

Amazing stuff man! Just started watching your videos, may I ask what's your back ground and experience in finance at?

[Fxchaos]

Great video. I would like to see some adjustments in goodwill in relation to partnerships. How capital might change based on profit ratio among partners and some other examples. I am a creator also and I know how important is to dedicate time to explaining. Again good job!!!

[QualitativeInvestor]

So it is up to the company to decide where Goodwill will be in Asset side or in Equity side, with reasonable explanation, correct?

[nicolassuarezblog]

fantastic, I love this channel, I appreciate the information you share. If you allow me to make an inquiry, I think that in Japan they allow goodwill amortization, I do not know if I am wrong. Another question is about the effects of eliminating goodwill from the balance sheet whe time past? Does it affect the rest of the financial statements? if passive + Equity = assets, if active decreases, then ... thanks in advance!

[JUNNARKARNAHUSHGANDHAR]

so can we say that goodwill is the money the owner can get as profit after selling the company ? please explain sir

[mariajauslin]

I am wondering, why cant we just take over the Equity of the acquired company. Why should I put it as a goodwill, wehen I could just take over the value of the acquired company?

[RohanKumaar]

So for example, if my company costs 11 billion for sale, the extra 1 billion is goodwill right ?