Question

 1. Problem 6.1: In section 6.2.3, we made the comment “Perception is reality". How does this play in the valuation of a tangible versus intangible asset?

 2. Problem 6.5: What is goodwill and how is it distinctively different from other intangible assets?

Answer 1

1. (Problem 6.1)
While tangible assets are physical in nature, e.g. - machines, equipments, goods, inventory, etc. , the role of human perception in valuation of tangible assets is limited or to an extent not needed. Since, these physical/tangible assets have a fixed value and a life span it is easier to value them. On the other hand, in case of intangible or non-physical assets like patents, trademarks, goodwill, etc. , their valuation is completely dependent on how people/consumers perceive or mentally interpret them to be, e.g. brand value being intangible is hard to be quantified without a consumer's perception of how much value the brand provides.

2.(Problem 6.5)
When an existing business is acquired by another organization or buyer, the non-physical assets that cannot be identified separately for the existing business accounts for the goodwill of that organization. Therefore, goodwill is an intangible asset.
The distinction between other intangible assets and goodwill is that goodwill cannot be separately exchanged as it is an extra surcharge paid by a buyer greater than the specified valuation of other assets when a business is bought , whereas other intangible assets (e.g.- patents) can be exchanged. The other difference is the fact that goodwill has a useful life which is unspecified while other intangible assets have a specified useful life.