Goodwill (reputation, overvalue) - the excess profitability of a company and the ability to generate above average profits of the business entities. This is one of the items included in the balance sheet called: intangible assets. Goodwill (the name of a company's brand) becomes a component of the value of the company, being fairly estimated surplus value operator - including the ability to generate profits in the future. Goodwill is defined as the sum or value of the non-asset, non-material items.
Goodwill may be combined with the synergy that arises within the company and, consequently, contributes to the growth of the market value of the entire enterprise.
Valuation of goodwill
In many companies, especially those with well-known, widely recognizable brand and a long tradition, the greatest value of the intangible asset is goodwill. Often its value largely deviates from the value of tangible assets of the company. Due to the fact that the goodwill lacks many features that are attributed to the definition of assets (including traceability and individuality), valuation of goodwill becomes a complex problem, and managers devote much attention to it.
There are three main approaches to the valuation of goodwill:
- The valuation of favorable attitudes toward the company.
- By the present discounted value of expected future profits of the surplus over and above those considered normal, the average total return on investment - if goodwill were not taken into account.
- The valuation of the main account - surplus value over valuation of each individual item of tangible and intangible net assets
Due to the often high value and importance of goodwill, the valuation of companies apply a differentiated approach into valuation of reputation. Among the mixed methods of valuation, which take into account both assets and income of the company, among others there can be distinguished: German method, method of UEC, annual purchase method and the others.
Issues in goodwill reporting
Highly developed countries in their accounting systems recognize the elusive, hard to measure value of goodwill. The solutions adopted by them are characterized by great diversity, which concerns the recognition of goodwill as an asset, the valuation of goodwill on consolidation of financial statements in mergers and acquisitions of companies, depreciation methods and amortization periods, the possibility or not of a single write-down of goodwill in the burden of capital reserves during acquisitions of companies.
- Dore, R. (1983). Goodwill and the spirit of market capitalism. The British Journal of Sociology, 34(4), 459-482.