Goodwill - what is it? Determining the value of goodwill

How often do we apply for those or services to various companies that our acquaintances advised us? Why do we buy products that are most actively advertised? It's not just that producers spend a lot of money to raise their own reputation, bother with its evaluation, and resell to other owners, deliberately inflating its value? We will talk about goodwill and the specifics of its accounting in the article below.

Goodwill as an integral part of a successful business

Goodwill - what is it? If literally, then "business reputation". But now we are not talking about this. What is necessary for an entrepreneur to operate his own business? What is needed so that it is in demand and bring profit? Undoubtedly, a positive evaluation from outside organizations. At present, this aspect of business increasingly affects the minds and behavior of the population. Since, as statistics show in recent years, this is exactly what our legal entities are trying to justify in court.

Therefore, if some information that discredits the good name of the business entity has become public, then it has full civil law in a legally established procedure to challenge the lawfulness of what happened. Business reputation, although it is a concept rather abstract, but, nevertheless, is a fairly valuable intangible asset of the enterprise.

Goodwill: definition of the concept

Entrepreneurs invest a huge amount of investment in the development of the brand and its advertising. Goodwill, or, as it is also called, goodwill (not to be confused with a goodwill filter) costs the business entities quite expensive, and therefore they appreciate it at the appropriate level.

So, what is this concept? Let's consider the question step by step:

• At the core should always be a strong team of good advertisers and a well-developed strategy for promoting the brand;
• Further, the work carried out at the highest level to promote the company;
• As a result, the company must be distinguished by its good corporate culture and established relationships with counterparties.

In other words, goodwill is a general assessment of business activity, which as a result - due to its reputation - allows you to increase your own working capital, because people want to consume this product and no other. It is interesting that many business entities have the ability to exaggerate their own importance, and this is quite fruitful for them - the value of the company is growing noticeably.

Interpretations of goodwill in economic theory

With the course of time and the dynamics of business change, the interpretation of this concept changed depending on external circumstances. For example, did you hear from your parents, and especially from grandparents who lived, say, under Stalin, about a term like goodwill? Nobody knew what it was like in the Soviet Union. This concept simply did not exist. In the theoretical aspect, the term "business reputation" was used, but it had rather a certain psychological definition. It could be designated as the aggregate opinion of consumers about a particular company, but it did not even mention goodwill as a valuable intangible asset. This is understandable - in the regime of the planned economy of that time, there was simply no need to expand this concept.

The term "goodwill" came to us from the United States, and there even a hundred years ago it meant some established value of business contacts, which could subsequently lead to an increase in profits by several points. In other words, in America this intangible asset always had a value expression.

How is it different from other assets

What is goodwill in accordance with accounting standards? This is a special intangible asset, which has a number of specific features that distinguish it from others:

• Under no circumstances can a business reputation exist independently from a particular company;
• He is immaterial, which means that his absence as such can not be noticed;
• Goodwill does not have an initial introductory or operating cost, and in some reporting samples it is valued at a symbolic amount of several dollars;
• If the value of other intangible assets in value terms is distributed according to the volume of output, the amount of goodwill can be repaid at any time, and thus, as such, it will not disappear.

Goodwill as an economic category

Goodwill - what is it? This is a complex concept, which can be classified according to several criteria. For example, by how it can influence the financial statements of a business entity:

• Positive - when we use it, we also get a good income;
• Negative - accordingly, it not only does not bring profit, but also underestimates the estimated value of the enterprise as such.

Or in the form of existence of goodwill happens:

• Created - developed over the years, through the implementation of a competent marketing policy;
• Accounting - is purchased for a certain cost in money terms and is included in the financial statements.

It can also be classified according to the documented method of reflecting in the given characteristics of the company:

• Market - when in the procedure for assessing its value is involved not only the purchase price, but also the profit received;
• Normative - in determining its value takes into account also the auction value in the market.

Profitable methods of evaluation

Often, the valuation method of goodwill is to determine the profit that it can bring to the enterprise. So, there are two income methods for determining its value.

For example, you can estimate goodwill as a residual value between the difference in the total expressed value of an enterprise's assets and its full price. It is clear that with the first subtracted problems will not be - just something you need to summarize all the indicators. With regard to the value of the business itself, it should be approached in a comprehensive way: either apply a comparative analysis, or be based on indicators of profitability.

Or, a business reputation can be determined on the basis of surplus profits. In this case, the main thing is to determine the planned profitability without using goodwill in business, and after calculating the amount of money it can bring.

Other goodwill valuation techniques

Business reputation can be assessed based on data on the operating activities of the business entity. For example, the cost of goodwill is calculated based on the volume of products sold:

(Net income from operating activities received - level of profitability by industry * Total value of goods that were sold) / Capitalization index of other intangible assets.

You can also attract cost for the evaluation of business reputation. Such a calculation of goodwill is somewhat similar to the way in which excess profits are calculated, but now we do not assess the dynamics of changes in the latter, but how the application of the concept we are considering affects the total cost price.

And the last, the least often used, is the qualimetric one. In this technique, we estimate the overall utility of the business entity and compare it with the magnitude of direct goodwill.

Features of goodwill in different countries

So, as we have already found out, the term "goodwill" in Soviet Russia itself did not exist, but nevertheless, if we recall the tsarist times, then the authority of this concept was still present, though behind the scenes. Imagine how local traders would manage without having a good business reputation in the circle of neighbors and residents of the surrounding areas. And in our time, despite the active application of this concept in business, there are no statutory documents that determine the status of goodwill. But still now in Russia professional appraisers of business reputation are gaining wide popularity, which not only will select the best way to calculate its value, but will also conduct all necessary calculations.

But in the US, on the contrary, goodwill is not only actively taken into account when developing its own business, but it is regulated by the legislation of the Ministry of Finance and the Internal Revenue Service.

The need to assess goodwill

The determination of the value of goodwill often has good reasons, since this procedure is quite expensive and complicated. As a rule, it is carried out in the event that the business is planned to be sold or bought in the near future.

Undoubtedly, the value of the company's tangible assets is a very important factor of influence, but no less important is the reputation that the producer has earned over the years of his activity, how much he is trusted by consumers, and how popular his goods are. After all, as already mentioned above, it is these factors that can significantly raise the cost of business.

Also, goodwill is valued by mergers or acquisitions, since it is also important to understand what kind of things go hand in hand. After all, if in an intangible aspect the transaction is not profitable for one of the parties, so why conclude it?

How to prepare for the assessment of business reputation

What is Goodwill? This is primarily an intangible asset, therefore it is necessary to assess it accordingly. So, for the procedure of determining the value of business reputation, the following documents are needed:

• Full financial reporting in the context of the last three years;
• If any, audit opinions;
• A complete inventory of the material assets available in the company's domain;
• Other decoded and explained information about the property of the economic entity;
• Information on accounts receivable in the context of contracts;
• If there are subsidiaries, then their full financial statements.

Every year the service industry is becoming wider and wider: we are offered legal and accounting advice, and hairdressing salons and beauty salons are so numerous that they can be stumbled upon at every step! But this does not mean that each of these institutions brings its owner an unprecedented profit. First you need to earn a decent reputation, gain an impressive client base. In this, all is the goodwill of the enterprise.

Goodwill is especially needed

Since there are not so many material assets on the balance sheet of such economic entities, but in order to set a proper price on a property in the form of a cafe or a nail salon, it is necessary to offer the buyer a mark of due level. It is business reputation in this case that will take almost half of the enterprise's cost.

Accounting for goodwill in the Russian Federation

Taking into account that many enterprises successfully pass to the International Financial Reporting Standards (IFRS), we will consider accounting for business reputation in this aspect.

According to postulate No. 38, goodwill can be reflected only when buying or selling an enterprise, but in no other way. Since it is incorrect to assess an asset that is essentially nonexistent, and to award it with any par value based on subjective considerations is very wrong.

Moreover, in accordance with the standard number 22, after the sale transaction, the reflected cost of goodwill must be allocated to some non-current assets. Since the value itself is paid, it follows that it needs to be backed up by something material. Often, the latter is the main means, having a certain level of wear.

What if a goodwill is negative

Goodwill - what is it? This is an intangible asset, which is not customary to identify and acquire separately from the business entity.

Sometimes there are situations when for a particular enterprise the funds are paid, which in fact are less than the estimated value of all business assets. In this case, it follows that goodwill played a decisive role here, and the deal was at a loss to the seller. Therefore, if the positive business reputation as an intangible asset is further distributed according to the value of the fixed assets available at the enterprise, the negative, in turn, will be reflected in the balance sheet of the business entity under account No. 192. And something to do with it, alas, is not Will be obtained before the conclusion of the next transaction.