For your benefit, here is just a little background on goodwill in the accounting sense of the word to help expand the meaning of the definition. Goodwill is only recorded when a company purchases another company for an amount that is greater than what the fair market value of the company is decided to be. It is called goodwill because it feels like an amount given freely as it is in excess of what the market would demand for such a purchase. Previously, these amounts were recorded as an asset and then depreciated (expense recorded over time a period of time) over an estimated useful life. Now the generally accepted convention in the US is to continue to record it as an asset, and evaluate it on a regular basis for impairment, writing down the value, but never writing up, based on updated value forecasts.
When
first learning about the concept of goodwill I didn’t really have an issue,
because I was just learning convention and kept being fed answers to goodwill
questions like “that’s just how it is.” But after four years auditing I have
begun to take up issue with the concept. Because for all the reasons we had to
debate what an asset was and what a liability was, and why we had to break
apart anything called an investment and anything that was appraised on a fair
value basis to ensure that nothing was being recorded to the balance sheet that
exceeded fair value, for some reason I found that none of the rules applied to
goodwill. That goodwill was an amount
in excess of fair market value, but this time for some reason it was still
treated as an asset, and for some reason that was ok.
