What does goodwill mean on a balance sheet

what does goodwill mean on a balance sheet

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What Is Goodwill Asset

An organization lists goodwill as an intangible asset on its balance sheet. The acquiring company will also list the goodwill of the purchased company as an asset on a separate line item of the balance sheet. Accountants commonly use the goodwill figure as a sum to balance the difference between the purchase price and the actual market value for the purchased entity.

Negative Goodwill

In mergers and acquisitions, two possible scenarios can result in negative goodwill. First negative goodwill may result from a bargain purchase, often the result of a distress sale. Additionally, negative goodwill can result from a reduction in the sale price designed to take account of future costs or losses not currently recognized as liabilities during the purchase. Negative goodwill is more than the fair value of nonmonetary assets, and the organization must recognize the negative goodwill in the profit and loss account.

Recognized As Income

Accountants recognize negative goodwill as

income when the negative goodwill relates to expected losses and expenses in the future. Additionally, accountants may recognize negative goodwill as income when recognizing monetary assets as income immediately. However, accountants will recognize negative goodwill as income during the life of the purchased depreciable and amortizable asset in the case of identifiable, nonmonetary assets currently valued less than the market value of the purchased asset.

Accounting for Negative Goodwill

The accounting process involving negative goodwill has several stops. First, the accountant must add the value of all the noncurrent assets and subtract the total value of all current assets from the purchase price. Next the account must subtract the total noncurrent assets from the value recorded on the financial statements. Finally, the accountant must figure out the relative weight of each type of asset that is noncurrent and enter this weight into the reporting journal for the acquisition. The account will repeat this process for every asset that is noncurrent until the goodwill balance reaches zero.

Source: ehow.com

Category: Forex

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