his era of merger and acquisitions.
The existence of intangible items on a company's ledgers is the direct result of its acquisitions of another firm's assets. often, companies pay more to acquire certain assets than the net value of the assets themselves. That most frequently occurs when the company being purchased has something of inherent value: an efficient labor force, for instance, or a reputation for quality service or products. The acquirer justifies payment of a premium price above the assets' book value by assigning a dollar value to those intangibles.
Beginning in 1970, generally accepted accounting principles mandated -that a company reflect on its balance sheet, under the title "goodwill," the excess paid to acquire those intangible assets, after the tangible assets are revalued from their historic level to current market value. For example, assume Company A has on its balance sheet $300 million in assets, valued at cost, $200 million of liabilities and $100 million of stockholder equity. Company B then agrees to buy firm A for $300 million cash. At the time of the transaction, B determines that the current market value of A's assets, including real estate and certain investments, is actually $400 million. When B transfers the assets to its own balance sheet, they are marked up to current value. The purchase price of $300 million st
...