Sample consolidating balance sheet
Goodwill now remains on the balance sheet as an asset, with no annual write-offs, unless it is deemed to be impaired.Goodwill impairment testing is complex, and can involve things such as performing a discounted cash flow analysis of expected cash flows from patents, for example, but the idea behind the new goodwill treatment is that the value of an ongoing business, a solid business with a lot of franchise value, rarely declines and, in fact, grows.
Under GAAP accounting rules, goodwill on the balance sheet represents the premium for buying a business for a higher price than that supported by the identifiable assets of that business.As an example of the past goodwill treatment, consider The Hershey Company, which has made generations of investors wealthy.When Hershey bought Reese's in June 1963, Reese's had sales of $14,000,000 per annum. Today, Reese's peanut butter cups alone produce more than $500,000,000 in annual sales.For example, if company ABC acquires XYZ, then the combined income statement cannot include sales from ABC to XYZ, nor can it include payment for services from XYZ to ABC.However, if ABC or XYZ sells to an external business entity, then those revenues are part of the consolidated income statement.In your journey to analyze financial statements, you will need to understand the meaning of goodwill on the balance sheet.
Goodwill is an accounting term that stems from purchase accounting.
Goodwill has undergone a transformation over the past generation.
When a company bought another company, it used to have the option of choosing one of two accounting methods: the pooling of interest method or the purchase method.
Whatever value or part of the purchase price that cannot be allocated to a tangible asset gets added to an account called goodwill.
If companies have intangible value in patents, trademarks, or brand-name equity, this often supports the value of the goodwill number.
When one company buys another, the amount it pays is called the purchase price.