Goodwill

When an acquisition occurs, the difference between the Net Assets or Book Value and the Purchase Price Paid is the Goodwill. Goodwill is considered to have infinite economic value.

The value of the Goodwill on the Balance Sheet is expressed in the economic value of the Intangible Assets, assets that cannot be touched. The concept of Goodwill is fairly easy to follow. If an asset or subsidiary or a whole company is purchased, there is a Market Value or Fair Value placed on the Net Assets or Book Value of the acquisition. The difference between the Net Assets and the Purchase Price Paid is the Goodwill, which can be expressed in the following formular.

Goodwill = Price Paid – (Total Assets – Liabilities)

Therefore, the concept of Goodwill exists and it can be a very important component or motivation behind the acquisition. Goodwill represents the value of a Company’s reputation built up over many years as symbolised in a Brand Name or Identity. This can be attributed to several factors. The company’s client base, Copyright Assets, Patents, the Trademarks of a Company, proprietary technology, all represent some reasons why Goodwill exists. Goodwill is considered to have an indefinite economic value. Most other Intangible Assets are considered to have a finite economic value.