Goodwill is an intangible asset of a company but also considered as a fixed asset. Although it can be an internally developed asset, goodwill is most often derived from the acquisition of a business by another business at a higher value. The term “goodwill” can include things such as a company’s customer list, the value associated with a brand name, strong customer relationships, loyal employees, and proprietary technology.
Key points to remember
- Goodwill is an intangible asset, but also a fixed asset.
- The value of goodwill refers to the amount relative to the book value that one company pays when acquiring another.
- Goodwill is classified as a capital asset because it provides a continuous benefit of income generation for a period that extends beyond one year.
- Goodwill can include items such as customer relationships or proprietary technology.
- Fixed assets are assets that are not regularly sold in the course of a company’s ordinary business operations, but which are held because of their ability to help the business generate profits.
As goodwill is not physical, such as a building or equipment, it is considered an intangible asset and is recorded as such on the balance sheet. Generally, the value of goodwill refers to or coincides with the amount greater than the carrying amount that one company pays when acquiring another.
In the event that a company pays less than book value when acquiring a company, it is considered to have participated in a distress sale, and to have acquired negative goodwill.
Since goodwill is an intangible asset, it is very difficult to assign a precise value or price to it. However, it can be assumed, at a minimum, that it represents some increase in the value of a business. The nature of goodwill, the components of which have subjective values, presents a potential risk of overvaluation. In the event of an acquisition, for the shareholders of the acquiring company, an overvalued goodwill may lead to a decrease in the value of the shares.
According to international financial reporting standards (IFRS), the inaccuracy of the value of goodwill means that it cannot be amortized, but that it must be reassessed each year by the management of the company. If the fair market value becomes less than the historical cost (or the cost at which it was purchased), an impairment should be recorded to indicate the reduction in the fair market value of the goodwill. An increase in fair market value, however, does not have to be documented in a company’s financial statements. The calculation of goodwill deducts the fair market value of the assets and liabilities of the acquired company from the amount for which the company was purchased.
Understanding fixed assets
A fixed asset is an asset that is not regularly sold in the course of the ordinary business operations of a business, but which is owned and maintained because of its ability to help the business generate profits. Capital assets are expected to help a business generate additional profit or benefit it for a period of more than a year. In a company’s balance sheet, a tangible fixed asset is usually included in the figure representing factories, tangible fixed assets.
What is considered a capital asset can depend largely on the type of business where the asset is used. For some businesses, fixed assets represent the overwhelming majority of the company’s total assets.
Goodwill is invariably classified as a fixed asset because it meets the basic requirement for fixed assets – it provides an ongoing income generation benefit for a period that extends beyond one year. .