Goodwill Remains a Key Factor When Selling or Buying a Company
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Goodwill, besides being a line item on a company's balance sheet, truly is more of a reflection of the hard work and effort put into developing a name. If a company were being sold, this is likely how the seller might view things. From a buyer's perspective, however, goodwill is the difference between the tangible assets and the purchase price of the company.

Goodwill value should not be confused with goingconcern value, for though they are related, they are distinctly different things. Going-concern value is the "operating value" of a venture, as compared to the value of a liquidation of the company's tangible assets. So in other words, goodwill is a part of the going-concern value of a company.

The M&A Dictionary defines goodwill as: "An intangible fixed asset that is carried as an asset on the balance sheet, such as a recognizable company or product name or strong reputation." When one company pays more than the net book value for another, the former is typically paying for goodwill.

Goodwill is often viewed as an approximation of the value of a company's brand names, reputation, or long-term relationships that cannot otherwise be represented financially. The way in which goodwill is treated by FASB has changed drastically in the recent years. Under the rules implemented by FASB in 2001, goodwill may not have to be amortized after an acquisition by another company, unless it is carried at a value in excess of its real value. The newer standards require that companies have their intangible assets, including goodwill, valued by an outside expert on an annual basis. The updated rules basically define the difference between goodwill and other intangible assets, and how they are treated from an accounting and tax standpoint.

What this all amounts to is that the definition of goodwill has become more complicated and requires additional procedures to properly be identified from a tax standpoint. Prior to acquiring a business or placing your business on the market, you should definitely consult your accounting professional at Talley & Company.

If you have further questions on this issue, please contact our offices.