Question

Regarding GE's acquisition and how they overstated the goodwill, do you have any recommendations for how this can be mediated in the future? Should companies seek oversight to ensure better estimations of goodwill?

Answer 1

Goodwill is an intangible asset associated with the purchase of one company by another. Goodwill represents assets that are not separately identifiable. Goodwill does not include identifiable assets that are capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability regardless of whether the entity intends to do so. Goodwill also does not include contractual or other legal rights regardless of whether those are transferable or separable from the entity or other rights and obligations.

In order to calculate goodwill, the fair market value of identifiable assets and liabilities of the company acquired is deducted from the purchase price. For instance, if company A acquired 100% of company B, but paid more than the net market value of company B, a goodwill occurs. In order to calculate goodwill, it is necessary to have a list of all of company B's assets and liabilities at fair market value.

Fair market value

Accounts Receivable $10

Inventory $5

Accounts payable $6

-------------------------

Total Net assets = $10 + $5 - $6

= $9

In order to acquire company B, company A paid $20. Hence, goodwill would be $11 ($20 - $9).

Goodwill in accounting is created by the amount of money paid for an acquisition in excess of the fair value of the net assets acquired. Customers like your brand. And that has value, even if it’s intangible. But goodwill requires annual re-evaluation from a GAAP (Generally Accepted Accounting Principles) standpoint.

Goodwill is usually associated with mergers and acquisitions (M&A). When one company is purchased by another, it is common for the buyer to pay more than the market value of the target business’s identifiable assets and liabilities.

Yess the company would have to oversight to ensure better estimation of goodwill

During a business acquisition, it is therefore important to consider factors such as brand identity, customer relations, customer loyalty, and staff satisfaction to ensure purchases are made at a fair price.