Definition: In accounting, goodwill expresses the prudent value that a company can have beyond its assets, by way of a good reputation and a solid customer base, for example.
Goodwill shows the value of a firm in terms of reputation. If a company has a brand that has a certain reputation and status in the market, this can be measured to have a lesser or greater value. This value is called goodwill. Goodwill is categorized as a fixed asset - something that has value in the company for an extended period.
Goodwill is not something that you can touch or feel, so it can sometimes be difficult to calculate what a company's reputation is worth. This is why goodwill is also an intangible asset in accounting.
Adding to a company's value
In addition to a company’s reputation, there are many other factors that may be valuable when calculating goodwill. One could be if a company has a dedicated and solid customer base. When customers have faith in and respect for a company, they can potentially spread positive word of mouth and recommend the company to others, ultimately bringing more capital to the firm.
A company has run a major advertising campaign; the effect of this can also influence a company’s goodwill. Value can also be added by new agreements, integrations or partners, which are known to bring in new income.
By and large, one can characterize goodwill as something that may generate future returns in the company.
When is goodwill present?
Goodwill is calculated and reported in company accounts. If a company is sold however, goodwill adds a value that a buyer must pay in addition to the overall purchase price – the net value of the other assets and liabilities.
Tax on goodwill
Goodwill is taxed under the same principles as other intangible assets, such as dividend and rental agreements, trademark right, etc.
Badwill
If goodwill is found in the negative form it is called badwill. Badwill is the negative effect felt by a company when shareholders and the investment community find out that is has done something that is not in accordance with good business practices.
Badwill can negatively affect a company in the form of decreased revenue, loss of clients or suppliers, loss of market share and federal indictments for any crimes committed.
