What is goodwill ? | Facts of Goodwill
What is Goodwill: When one company buys another it usually pays more than the actual net book value of its acquisition the difference between the purchase price and the acquisitions equity is called goodwill.
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What is goodwill ? | Facts of Goodwill |
Goodwill is a premium paid by the buyer to reflect items not carried in the purchased company's accounts. This includes its
reputation brand geographic location and patents as well as employee commitment
and the synergies. The buyer expects to get from the acquisition.
This situation
is totally normal because buyers hope to boost the future results of the companies.
They acquire but some time those results do not live up to expectations. Perhaps
due to changes in economic conditions International Accounting Standards
require the buyer. Now the owner of the company to check the value of its
acquisition every year if the expected financial benefits fall short of
expectations do no has to write down some or all of the goodwill a process
known as impairment. The impaired amount is irreversible.
Let's
look at an example, in the banking sector goodwill impairment as a negative
impact on during a bank's results but no effect whatsoever on its solvency this
is because. Solvency is measured on the basis of shareholders equity- goodwill
deducted in full at the outset. In other words if goodwill is impaired the bank
solvency ratio is not affected the bank remains solid and its capacity to carry
on its business as a financial intermediaries unscathed naturally this is very
reassuring for customers.
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