The purpose of this paper is to examine the nature of "goodwill" in business, and to look at how it is measured. Also, we will examine the problems of "goodwill" and analyze the price of goodwill when a business is purchased.
Normally, goodwill is seen in an annual report. The term there means an intangible asset. Goodwill of suppliers, workers, customers, is listed in the category of intangibles, but recently this term has been much abused. In annual reports of major companies, the amounts assigned in this category often appear to be arbitrary. If the value "goodwill" listed is as much as 20 percent to 30 percent of the total assets, this could be a signal that the company is short of "tangible" assets or long on liabilities. This has happened to many companies, in the mergers and acquisitions period of the 1980s (Howard, 1990, p. 113).
With Congress nearing final action on a bailout of troubled savings and loans, many thrifts might feel fortunate to have made it this far. Instead, hundreds of arguably healthy savings institutions now find that the only thing between them and further regulation is a seemingly obscure accounting issue.
The controversy currently stewing in Washington centers on whether the thrifts should be allowed to continue to supply intangible assets, assumed largely as the result,of the industry's merger and acquisition spree--which was actually encouraged by the federal government--toward satisfying minimum capital requirements.
The decisions Congress and the President make could have dramatic import. Among the nation's nearly 3,000 savings and loans, 749 institutions carry $19.7 billion of intangible assets, or goodwill, on their books. That represents nearly 35 percent of the industry's total capital.
Which makes this an especially appropriate time to review goodwill--what it is, and why it is causing such a stir, not only in the savings and loan business but throughout industry in t...