Definition of goodwill
Goodwill is an accounting concept meaning the value of an asset owned that is intangible but has a quantifiable "prudent value" in a business for example a reputation the firm enjoyed with its clients.
Examples of goodwill in the following topics:
- Intangible assets like goodwill are shown in the balance sheet at imaginary figures, which may bear no relationship to the market value.
- Therefore, there is a disconnect–goodwill from acquisitions can be booked, since it is derived from a market or purchase valuation.
- Total Book Value vs Tangible Book Value Technically, P/B can be calculated either including or excluding intangible assets and goodwill.
- When intangible assets and goodwill are excluded, the ratio is often specified to be "price to tangible book value" or "price to tangible book".
- It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').
- Numbers are usually reported as a GAAP EPS number (which means it is computed using mutually agreed upon accounting rules) and a Pro Forma EPS figure (income is adjusted to exclude any one time items as well as some non-cash items like amortization of goodwill or stock option expenses). 2.
- However, because of very common irregularities in balance sheets (due to things like goodwill, write-offs, discontinuations, etc.) this ratio is not always a good indicator of the company's potential.
- The intangible asset "goodwill" reflects the difference between the firm's net assets and its market value; the amount is first recorded at time of acquisition.
- Goodwill must be tested for impairment on an annual basis and adjusted if the firm's market value has changed.
- The assets of an entity includes both tangible and intangible items, such as brand names and reputation or goodwill.