Goodwill

Goodwill is an economic term representing the intangible value of a business over and above its physical assets and net values. This value may encompass a strong brand name, good customer relationships, the expertise of the employees, and other elements that contribute to the business's profit but that cannot be measured directly or recognised on the balance sheet as individual assets. Goodwill often arises in connection with an acquisition, when the purchase price for a business exceeds the combined value of its physical assets and obligations.

How is goodwill calculated?

Goodwill is calculated as the difference between the purchase price for a business and the value of its identifiable net assets (assets less obligations) at the date of acquisition.

Why does goodwill matter?

• An indicator of value. Goodwill can be an indicator that a business has valuable intangible assets that are difficult to copy or replace, which can give the business a competitive advantage.
• Information for investors. When investors assess the value of a business, a high goodwill figure can indicate that the business has strong brands, customer loyalty, or other unique advantages.
• Strategic planning. Understanding the components of goodwill can help management identify and further develop the factors that contribute most to the business's success.

Managing goodwill, and the challenges involved

• Amortisation and impairment. The treatment of goodwill depends on which financial reporting framework the company uses. Under the Norwegian Accounting Act, which most Norwegian small and medium-sized businesses follow, goodwill is to be amortised over its expected useful life, often 5 to 10 years. Under IFRS, which is used by listed companies and certain international groups, goodwill is by contrast not amortised, but tested for impairment at least once a year. Whichever framework applies, goodwill is to be written down if there are indications that its carrying amount no longer reflects its real value, for example following a significant fall in expected future earnings.
• Valuing intangible assets. Putting an accurate value on goodwill can be challenging, since it involves assessing intangible factors such as the strength of the brand and customer relationships.