What is goodwill?

Goodwill represents the value of a company's reputation, brands, and clientele — factors that cannot be directly measured in money but have a significant impact on the company's success. Goodwill, in other words, is classified as an intangible asset and is thus that slightly more abstract value that makes a company more valuable than just its physical assets and book values.

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Goodwill in practice

Since goodwill by nature is “invisible”, it cannot be taken and squeezed, nor is it simply measured. However, in the context of business acquisitions, it becomes more visible and measurable. At least in cases where a company is bought for more than its book value. In these cases, the difference between the price paid and the book values of the purchased company is often attributed to goodwill.

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For example, let's assume that a company's balance sheet shows assets worth 200 million, but the purchase price when it is bought up is 300 million. Here, a goodwill of 100 million arises, reflecting factors such as the company's market position, brand strength, expected synergies and other intangible factors that make the company attractive to buyers.

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How is goodwill recognised?

When it comes to accounting for goodwill, it is considered an intangible fixed asset and is handled in the same way as, for example, patents, trademarks or customer records.

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Goodwill in K3

In Sweden, companies write as follows K3 Accounting Regulatory Framework usually out of goodwill over a five-year period. This means that companies do not have to carry out annual impairment tests, but only when there are signs that the original assessments are no longer correct. Signs of this may include the entry of new competitors, worse sales than expected, or the departure of important employees from the organization.

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Goodwill in IRFS

However, since 2005 listed companies in Europe are not allowed to write off goodwill under K3. Instead, International Financial Reporting Standards (IRFS) must be applied, meaning assets must be valued at their fair value.

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This means that the goodwill is not written off automatically. Instead, the value must undergo an annual impairment test in conjunction with the financial statements. This trial often involves discounting the future cash flows that may be linked to the company's goodwill. If the value does not meet the previous book value, it must be written down, which means that the value of the company as a whole decreases, something to be recognized in the income statement.

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3 types of goodwill

There are different types of goodwill, which depend on how the corporate structure and transactions have been designed.

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1. Concerngoodwill: Occurs when one company buys another and a group of companies is formed. Group goodwill is managed in the consolidated financial statements.

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2. Collateral Goodwill: Occurs when a company purchases only the assets and liabilities of another company. Goodwill receivables are managed in the company's own accounts.

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3. Merger Goodwill: Occurs when several companies are merged into one group and the original group goodwill is transferred to the corporate level. Merger goodwill is managed in the companies' own books.

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Negative goodwill or badwill

The opposite of goodwill is negative goodwill or badwill. Negative goodwill simply arises when the relationship is the opposite of what has been previously described. Thus, should the purchase price be less than the book value of the assets, we would be dealing with negative goodwill.

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The rules around negative goodwill are strict and require careful scrutiny that we really counted right. In cases where we are really dealing with negative goodwill, the difference between the purchase price and the value of the booked assets should be recognised as income, which means that negative goodwill is never visible on the balance sheet.

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Do you have questions about goodwill and intangible assets?

Goodwill and intangible assets place high demands on accounting. If you need help, or want to raise questions about goodwill in your company or group, do not hesitate to contact us at Saldo. Our experienced accounting consultants are ready to assist you with any type of accounting related to goodwill and other intangible assets in your company.

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