Acquisition of goodwill

Business ‘goodwill’  February 27, 2010 – 09:16 am
DISCLOSEABLE TRANSACTION :: PROPOSED ACQUISITION OF GOODWILL ORIGINS SDN

The word “goodwill” has a broad meaning for business entrepreneurs. Some entrepreneurs equate goodwill with their own trade name. There is some truth to this. Some businesses have been around for 50-75 years and this does create an image in the mind of the public.

The accounting definition of goodwill is different:

Goodwill is the excess of the acquisition price of an asset over its fair market value. This excess (premium) is capitalized as an intangible asset on the balance sheet of a company. The accounting treatment of good will used to be  straightforward. The cost was written off on a diminishing balance basis at 7% of the un-depreciated capital cost (UCC). This has changed as  external accountants perform an impairment test to determine if the goodwill balance is still valid.

Technically speaking, the acquisition of goodwill means that the acquiror should see profits grow (accrete) because increased earnings potential is implicit in goodwill being capitalized.

It is not always the case. Remember the “dot-com” days when tech companies were being acquired for ridiculous multiples and massive amounts of goodwill were artificially padding balance sheets? After a couple of years all of this goodwill was written down to mere fractions of the former balance. The new term for this period was the “dot-bomb” era.

Source: Ottawa Bizz2Bizz Blog

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