Goodwill in Business

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.

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(of which there is usually plenty) must be recognized as goodwill. When Time Inc. early in 1989 unveiled its plan to merge with Warner Communications Inc., the management of both companies pointed out that no debt would need to be assumed to swing the deal and hence no goodwill could be booked. No goodwill and no new debt, they claimed, would mean higher profits. But Paramount Communications Inc. spoiled this plan, making an outright cash offer for Time. In turn, Time decided to purchase Warner rather than pool its interest, and said it would borrow billions of dollars to do so. One thing is certain. When Warner succeeded in the deal it booked a huge amount of goodwill that will affect reported profits for the next four decades. Goodwill affects only reported profits, hence only companies required to publicly file financial statements. The numerous companies that have gone private in multi-billion dollar leveraged buyouts are relieved of that reporting duty. Also not affected by goodwill, at least to the same extent as U.S. companies, are foreign concerns that buy American assets. While non-U.S. accounting practices might require recognition of goodwill, they also often allow the charge to be deducted from taxable in

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