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How is Goodwill calculated?

In accounting, goodwill is an asset. The goodwill concept is applied when a firm wants to acquire another business and is ready to pay the price even its higher than the market value of the company’s net assets.

In other words, the meaning of goodwill can be explained as intangible assets, such as client base, good reputation, skilful workforce, brand identity and recognition, and proprietary technology.

These things the company’s valuable assets, but are non-tangible assets, and cannot be precisely quantified.

Steps for Calculating Goodwill

  1. Book Value of Assets – First in the balance sheet, prepare book value of all assets. It should include non-current assets, fixed assets, current assets, and intangible assets mentioned in the firm’s current financial statements.
  2. Fair Value of Assets – In this step, account must be prepared to get the fair value of the assets. Though it’s subjective, a firm can still evaluate and analysis the report to confirm a fair current market value of each asset.
  3. Adjustments –  Here, the calculation of the change starts by taking the difference between the book value of each asset and the fair value.
  4. Excess Purchase Price – Now, calculate the excess purchase price by taking the difference between the net book value of the firm’s assets and the actual price paid to own the target company.
  5. Calculate Goodwill – Once all the figures mentioned above are estimated, the last step would be to take the excess purchase price and then minus the fair value adjustments. The last calculated amount is the goodwill that will be on the balance sheet of the acquirer when the deal concludes.

Features of Goodwill

The following are the features of goodwill.

  • It is an intangible asset
  • It is inseparable from the company. Therefore, it is not saleable like other assets
  • The goodwill value cannot be compared to the cost incurred or amount invested in building the business

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