What is goodwill
Goodwill is an intangible but invaluable aspect of a company that doesn’t find a clear place in financial statements but significantly influences its worth. Comprising elements such as reputation, customer satisfaction, and potential, goodwill plays a crucial role in shaping a company’s future financial prospects.
Building goodwill involves actions that enhance a company’s value. Satisfied customers who vocalize their positive experiences can attract new clientele, contributing to the goodwill. The size and type of customer base also influence goodwill, making customer satisfaction a powerful tool for advertising.
Engaging in charitable activities, creating a positive media image, and running engaging social media campaigns all contribute to increasing a company’s value. A positive working environment, with satisfied colleagues and employees, also plays a pivotal role in shaping a company’s trust and reputation.
Measuring goodwill is challenging as it’s not continuously recorded.
While its value is often intangible, it becomes part of a company’s assets when acquired through a third party, such as during the purchase of another company. From an accounting perspective, goodwill is considered a fixed asset, akin to buildings or office equipment, with the crucial difference that it only appears in financial statements during ownership changes.
Goodwill in accounting
Generally not accounted for in regular purchases, goodwill is recorded when acquiring another company.
If the acquisition cost exceeds the target company’s book value, the surplus is acknowledged as “purchased goodwill” in the buyer’s balance sheet.
In Australia, goodwill is generally not depreciated. However, acquired intangible assets, such as goodwill, do not have taxable effective lives and cannot be depreciated.
When goodwill becomes negative
Goodwill becomes subject to taxation upon realization through sales or purchases. Gains are taxed at 25%, and losses are deductible. Conversely, “badwill” or “negative goodwill” occurs when a company is purchased for less than the total value of its assets, resulting in a bargain purchase. In such cases, the seller may be eligible for a tax deduction for the incurred loss.