What is goodwill?

Definition

Goodwill is the extra you pay when you buy a whole business, above the fair value of the assets and liabilities you can identify. On the books, this is a long-lived asset, not an expense and not a cash reserve.

You record it only in a purchase of a business. You do not record a homegrown reputation, because that spending already hit the P&L as you built the shop.

The amount sits on the Balance Sheet until it is impaired or the business is sold. Under US GAAP it is not written off a little each year.

Identifiable net assets are the docks, equipment, receivables, and similar items you can price, minus the payables and other obligations you take on. Anything paid above that net amount is this premium.

Where it shows up

Balance Sheet: Located with the long-lived assets, below current assets.

P&L: Related to an impairment charge if the premium later fails, not to routine amortization.

Cash flow: Increases in this account, reported cash from investing activities decreases.

See also: Intangible Assets · Asset Impairment · Non-Current Assets

When you look at your Balance Sheet, goodwill sits with the non-current assets, below current assets. It appears only after you have bought another business.

A high total means you paid material premiums on acquisitions. A zero total means you have not bought a business, or that a later write-down already removed the premium.

The Income Statement does not list goodwill as a line in ordinary years. There is no routine amortization charge under US GAAP.

Buying the business spends cash from investing activities on the Statement of Cash Flows. A later impairment is added back, because that charge does not move cash.

How it works

A purchase price is split between what you can identify and the leftover premium. Appraise the docks, equipment, and other rights at fair value, subtract the obligations assumed, and the rest is goodwill.

The debit hits this account for that leftover amount. The credit is cash, or a note, for the same leftover piece of the price.

This account does not grow from marketing spend, five-star reviews, or a loyal crew you hired yourself. Only a business combination puts an amount here.

Each year you look for signs the premium is still supported. A drop in slip rentals, a lost fuel dock, or a failed expansion can trigger a test.

If the remaining amount is no longer recoverable, you write it down. The debit is an impairment loss; the credit is goodwill, or a contra against it.

US GAAP does not amortize this premium. You leave the amount on the Balance Sheet unless a test says it is impaired.

When you sell the purchased business, you remove the remaining goodwill tied to it. Any leftover premium becomes part of the gain or loss on that sale.

Keep a file that shows the purchase price, the identifiable values, and the leftover premium. That file is what a reviewer uses when they ask why this line exists.

Do not spread this balance a little each year the way you would a finite-lived right. The model here is impairment only.

Example

A marina buys a smaller dock operation for $120,000 cash. The docks, equipment, and customer contracts are worth $90,000, and no extra liabilities come with the deal.

Of the $120,000 paid, $90,000 is recorded to those identifiable assets. The extra $30,000 is the premium:

Debit: Goodwill $30,000

Credit: Cash $30,000

Goodwill sits at $30,000 with the long-lived assets. The P&L does not take a $30,000 expense that day.

Two years later slip demand falls, and the purchased docks will not support the premium. The marina writes it down:

Debit: Impairment loss $30,000

Credit: Goodwill $30,000

The premium is now zero on the Balance Sheet. The $30,000 charge hits the P&L, and cash does not move.

Common mix-ups

Goodwill is not the same as other intangible assets. Software, patents, and lists are identified and usually amortized; this premium is the leftover and is not amortized under US GAAP.

Goodwill is not a brand you built yourself. Homegrown reputation never lands on this line.

Goodwill is not a little expense each year. Under US GAAP you leave it alone until a test says the premium failed.

Related terms

• Intangible Assets: Non-physical assets such as software, patents, and customer lists carried on the balance sheet.
• Asset Impairment: Writing an asset down when its carrying value exceeds what it can actually earn.
• Non-Current Assets: Assets the business expects to hold and use for more than a year.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Consolidation: Combining multiple entities into one set of financial statements.
• Book Value: The equity value carried on the balance sheet rather than a market value.
• Equity: The owners' residual claim on the business after liabilities are subtracted from assets.
• Accumulated Amortization: The contra-asset account holding amortization recorded against intangible assets.