CPA Clinic 2

Topic 1: Goodwill explained

§  What is goodwill?

Goodwill is an example of intangible asset. An intangible asset is an asset that cannot be seen. Goodwill arises when a company buys another business at a price greater than the value of the net assets. The buyer company is often willing to pay a premium for the benefits arising from the acquisition such as the earnings potential.

§  Why is it important?

The goodwill that is assessed on an acquisition of a company affects the purchase price the buyer is willing to pay on acquisition.

§  An illustration

Goodwill can be simply calculated by purchase price less fair value of the net assets purchased.

Company A pays S$1 million to shareholders of Company B to acquire the business. At the acquisition date, Company B has a net asset value of S$700,000. The goodwill arising from the acquisition of Company B is S$300,000.

§  Who will assess it?

In determining goodwill, the net asset value is usually assessed by professional business valuer.

§  Who does it impact?

Goodwill has impact on management, share-holders and investors. It affects the price of acquisition. Management would be concern with the cash out-flow required when making payment for an acquisition as it affects the acquiring company’s liquidity. Also, shareholders and investors would be concern with what impact an acquisition with significant goodwill on the share price.

For more information, go to the Institute of Certified Public Accountants of Singapore’s website www.icpas.org.sg or visit www.icpasresearch.org.sg for more online resources.

(CPA Clinic is a joint initiative between ICPAS and The Straits Times. It features a monthly column in the Money section dispensing tips and advices relating to small medium enterprises and the financial statement. This joint initiative has run for 2 series starting September 2009. This article was first published in The Straits Times on 14 July 2010.)