Question

How is good will "acquired"? What future value does this intangible asset represent to the buyer?

Is this asset's value amortized over the duration of these cash flows?

If not, how is the value of Goodwill addressed in the financial statements.

In an M& A, why does the buyer's top management concern itself with the impairment of goodwill?

Answer 1

Goodwill is a miscellaneous category for intangible assets that are harder to be measured directly. Customer loyalty, brand reputation, and other non-measurable assets contributes as goodwill. Goodwill can never be sold, purchased or transferred. It cannot be present independently of the business. Goodwill only shows up on a balance sheet when two companies undergoes and completes a merger or acquisition. When a company buys another firm, anything it pays above and beyond the net value of the target's identifiable assets becomes goodwill on the balance sheet. Key factors that contribute to the creation of business goodwill are:

• Going concern value
• Excess business income
• Expectation of future economic benefits

So, goodwill is acquired through merger and acquisition. Examples of good will includes value of a company’s brand name and brand reputation, solid customer base, good customer relations and customer loyalty, good employee relations, and any patents or proprietary technology.

Future value it represents to the buyer is that buyer expects to earn super profits as compared to profits earned by other firms.Thus, goodwill exists only in case of firms making super profits and not in case of firms earning normal profits or losses.

Goodwill is never amortized. Since goodwill is an intangible asset, it's recorded on the balance sheet as a long-term asset similar to fixed assets like property, plant, and equipment. There are guidelines stipulated by the Financial Accounting Standards Board in determining the value of goodwill for a company.

Buyer is concerned for impairment because management is responsible for valuing goodwill every year and to determine if an impairment is required. If the fair market value goes below historical cost (what goodwill was purchased for), an impairment must be recorded to bring it down to its fair market value. However, an increase in the fair market value would not be accounted for in the financial statements.