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Question on Goodwill
Posted on 5/12/11 at 2:21 pm
Posted on 5/12/11 at 2:21 pm
Lets say company A writes down $10 overpayment on an asset it purchased for $100. How was it determined that the asset is only worth $90 and therefore a ($10) goodwill is added to the balance sheet?
1
Posted on 5/12/11 at 2:32 pm to GumboPot
It's done as part of the purchase accounting at acquisition - basically a team of accountants and valuation specialists will determine the fair value of the company's identifiable assets, and the difference goes to goodwill.
This post was edited on 5/12/11 at 2:33 pm
Posted on 5/12/11 at 3:08 pm to sneakytiger
quote:
basically a team of accountants and valuation specialists will determine the fair value of the company's identifiable assets, and the difference goes to goodwill.
I guess I don't quite understand the valuation process. Especially if an asset gets purchased through a bidding process and the team of accountants come in subsequent to the acquisition and the asset is valued by the accountants lower than the purchase price. It would seem that the true market value of the asset was realized through the bidding process.
Posted on 5/12/11 at 3:15 pm to GumboPot
Goodwill only comes up when you buy, for lack of a better term, a group of assets. For instance, a business. If you buy a single asset, like a building, there is no goodwill added. You bought it what you bought it for and it gets booked at that.
Posted on 5/12/11 at 3:29 pm to kfizzle85
The key though is that you're purchasing an active company or a part of it.
If I buy an abandoned building and the equipment or fixtures inside of it, I don't have goodwill. I simply allocate the purchase price to the items I bought (hopefully in a manner that allows me to depreciate them as quickly as I can).
But if I buy an active factory, then I'm buying something that is "greater than the sum of its parts" (as it has the potential for continued, if not enhanced, revenue). This is where goodwill comes in.
If I buy an abandoned building and the equipment or fixtures inside of it, I don't have goodwill. I simply allocate the purchase price to the items I bought (hopefully in a manner that allows me to depreciate them as quickly as I can).
But if I buy an active factory, then I'm buying something that is "greater than the sum of its parts" (as it has the potential for continued, if not enhanced, revenue). This is where goodwill comes in.
Posted on 5/12/11 at 3:32 pm to Quidam65
I'm not sure how that is different from what I said? I was working under the assumption that its not abandoned. If it was or wasn't, it wouldn't make a difference. If you buy an abandoned factory, you're not booking any goodwill. If you buy a working factory, you're still not booking any goodwill. The only time you're booking goodwill is if you buy a definable business segment.
This post was edited on 5/12/11 at 3:36 pm
Posted on 5/12/11 at 3:57 pm to Quidam65
quote:
But if I buy an active factory, then I'm buying something that is "greater than the sum of its parts" (as it has the potential for continued, if not enhanced, revenue). This is where goodwill comes in.
I think I understand now. So if bidder A buys a factory for a higher price than bidder B because bidder A wants, lets say a competitive advantage in the market that only bidder A can realize due to the factory's location, that premium that bidder A pays is marked down as goodwill, right?
Posted on 5/12/11 at 4:02 pm to GumboPot
For the sake of simplicity, yes. Its just a way to record whatever premium is paid.
Posted on 5/12/11 at 8:12 pm to kfizzle85
quote:
For the sake of simplicity, yes. Its just a way to record whatever premium is paid.
With that, I could see where the determination of goodwill could be highly nuanced.
Posted on 5/12/11 at 9:00 pm to GumboPot
We just did it and it is a bunch of BS hocus pocus accounting. We allocated purchase price above the value of working capital to customer relations, trade names and inventory with the additional excess going to goodwill. PwC agreed on amortizing customer relations over 10 years. All other working capital assets were pretty much left at net book value. Luckily for us, the Company we acquired had almost no fixed assets or you would have to get appraisals on those and write them up to fair value.
Yes that is right, the finished inventory that you purchase will get marked to fair value and when you eventually sell it, you will have almost no margin on it. That sucks until you get it turned.
It is pretty involved stuff and not something that most traditional accountants/cpa know how to do properly. We outsourced it and then will use that same firm to do the annual impairment testing.
Yes that is right, the finished inventory that you purchase will get marked to fair value and when you eventually sell it, you will have almost no margin on it. That sucks until you get it turned.
It is pretty involved stuff and not something that most traditional accountants/cpa know how to do properly. We outsourced it and then will use that same firm to do the annual impairment testing.
Posted on 5/12/11 at 9:22 pm to gpttigers
Goodwill is awful. From an analytical standpoint and from a theoretical standpoint, I absolutely despise its existence.
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