What is Goodwill ? This concept is important for business people, because Goodwill helps to get a good business direction.
Economic, financial and monetary issues are important factors that many people need to pay attention to today. If you invest in a suitable field, it will likely bring you success. For people who do business and finance, it is very necessary to understand clearly what the concept of Goodwill is. This is considered a specialized term that plays an important role for people operating in this field.
1. Learn about Goodwill
Currently, the financial, management and economic sectors always attract the attention of investors. Therefore, it is very important to understand the terms related to this field. In particular, what is Goodwill is the question that many people are searching for on social networks recently. Goodwill is considered an important term for the business field.
The concept of Goodewill
1.1 What is the definition of Goodwill?
Answers to questions about What is Goodwill? In English, Goodwill is translated as goodwill. To put it simply, Goodwill is the profit earned by a brand from a company or business. For this type of brand the actual value of the brand cannot be accurately assessed. Therefore, if the investor wants to make a profit from the brand, the investor must also pay a cost to be able to buy the company outright.
1.2 What is the definition of Goodwill based on accounting standards
So you can know what Goodwill is? Then how is Goodwill in accounting standards to be understood? In fact, according to accounting standards, Goodwill is also understood as goodwill. Accordingly, this part of goodwill is generated by merging into the enterprise with the nature of acquisition. This goodwill is expressed as a payment by the buyer to the company, that business can earn long-term profits. Accordingly, Goodwill can be considered as an intangible fixed asset.
Also based on accounting standards, this part of the intangible fixed value emerges from the merger into the company. It can be understood that one unit buys from another. We can also simply understand that goodwill is the difference between the amount that a company spends to be able to buy another company with the net asset value of the acquired company.
2. Goodwill’s meaning to business activities
With the concept of what Goodwill is that we provide above, the meaning of goodwill for businesses includes:
- Enhance the valuation of the business beyond its actual value and net worth when reselling to another business.
- Helping businesses receive higher value in terms of sales, compensate for losses when going downhill and when other businesses buy back.
3. What is the formula for calculating goodwill?
If you want to have an accurate calculation of Goodwill, you can immediately apply the following formula:
Goodwill (Goodwill) = P-(A+L)
- P: Target company’s purchase price
- A: The market price of the asset
- L: Market price of debt
Formula for calculating Goodwill
Usually, goodwill will only arise during an acquisition when the acquirer purchases any target company. The difference between the amount paid by the buyer to the book value of the target company will be called the goodwill value. This value can be positive or negative. Because the value of goodwill is negative, this may be the value of proprietary technology, copyright, etc. It also means that the buyer has bought the target company at a bargain price.
Goodwill is an intangible asset when presented on the acquirer’s balance sheet as long-term assets. Because it is not the same as physical assets (machinery, equipment, buildings, etc.)
3. When does Goodwill appear?
Goodwill (Goodwill) will only appear if another individual, company or organization fully acquires and acquires another company at a price smaller than the market price. This only occurs when a target company does not perform or cannot negotiate to receive a fair price. If goodwill is negative, it will appear on the balance sheet of the acquirer of another company.
When does Goodwill appear?
The components that make up goodwill include those of subjective value, which in turn entails significant risks. Usually, whether the valuation is high or low will depend a lot on the acquiring company.
In case of high commercial valuation, this will certainly be bad news for shareholders of the acquiring company because the value of shares at this time often drops sharply. Reality has proven this, specifically it appeared in the merger of AOL – Time in 2001.
4. So, is commercial advantage an advantage or a burden for businesses?
Usually, if a company spends money to buy another business, it will charge a higher cost than book value. They see this as an investment to buy back the company’s potential. And always hope that the upcoming strategic directions will help you get a higher profit.
But the business will also have to record a large goodwill and with that comes pressures related to profit targets from the time of acquisition of that company.
What is Goodwill is both an advantage and a burden for businesses by:
According to the content shared above, in addition to receiving commercial advantages, it is the expectations of future profits that will put pressure on businesses.
In case if the previous company has acquired that company but has not made a profit and has to compensate for the goodwill depreciation of each period, then the company will have to record it as an expense.
And periodically, when the parent company assesses the loss of goodwill with the subsidiary and provides evidence that the goodwill has been lost, it will then be allocated according to what the goodwill is. trade loss in the period in which it is incurred.