Ways to Put a Value on Goodwill

When a company is acquired, the difference between the purchase price and its book value is considered goodwill. There are four recognized methods of accounting for goodwill.

Write-off – Goodwill can be written off immediately against retained earnings. Advocates of this method point out that goodwill is not measurable and has no definitive future value.

Capitalization – Proponents of this approach argue that goodwill is an important asset that belongs on the balance sheet. The main problem with capitalization of goodwill is determining the appropriate amount.

Non-amortization – Capitalization of goodwill without amortization produces the most advantageous financial reporting figures. The company records an asset instead of a decrease in retained earnings, and net income is not reduced thereafter.

Amortization – Amortization enables a company to write down the cost of intangible assets over a period of time following acquisition. If the life of the goodwill asset is indeterminate, it is amortized over a maximum of 40 years.