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In accounting terms, goodwill refers to an intangible asset with a value equal to the purchase price of a business minus its net asset value at the time of acquisition (Cullinane 60). Goodwill is recognized on the books of a company only when the company acquires part or all of the company and the purchase price is greater than the net amount or the combined fair value of the liabilities assumed and the identifiable intangible and tangible assets. (Cullinane 63).
In addition, goodwill is recorded on the company's balance sheet as a non-current asset and is not amortized. Rather, it could be adversely affected if the present value of future sales of the relevant business segment persists is less than the combined assets of the business segment (Faello 123). The goodwill amount undergoes a goodwill impairment test at least once every year. However, private firms may choose to amortize goodwill over a ten-year period to minimize the complexity and cost involved in impairment testing (Faello 125).
Outside of accounting, goodwill may refer to a value developed within a given company as a result of providing outstanding customer service, teamwork, or unique management. Such goodwill, which is not related to a business combination, is always not reported or recorded on the balance sheet of a company (Cullinane 64).
In my opinion, a company would record good will upon purchasing it and would not record goodwill that it has built up. If a company buys another company entirely and pays more than their fair value, it can assume that goodwill is part of the combination. Goodwill, in that case, is the excess amount paid above the acquired assets' fair value. The company would, therefore, write off goodwill immediately it determines that its value is impaired, to conform to GAAP, by debiting the loss account and crediting goodwill account.
Cullinane, Paul. "The Recording of Financial Intermediation Services Within Sector Accounts." Economic & Labour Market Review 4.6 (2010): 60-64.
Faello, Joseph. "Enhancing the Learning Experience in Intermediate Accounting." Research in Accounting Regulation 28.2 (2016): 123-127.
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