Goodwill
A significant intangible asset for many companies that have grown through acquisitions is goodwill. Goodwill arises in an acquisition when the purchase price of the acquired company exceeds the fair value (not the book value) of its net assets. Goodwill represents the value of the business as a going concern, rather than the historic cost of the assets used in the business. U.S. GAAP does not permit goodwill to be generated internally - it can only be recorded as a result of an acquisition.
Under IAS, specifically identifiable intangible assets and goodwill are presumed to have a life of no more than 20 years. Under U.S. GAAP goodwill is carried at historical cost (with no amortization) unless it becomes “impaired.” Impairment means that the undiscounted future cash flows attributable to the goodwill will be less than the amount of goodwill carried on the balance sheet. At the time goodwill is determined to be impaired a charge is taken for the full impairment amount.
For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
