1. avatar says

    Thank you very very much Sir Mike. I understood now. Very well explained. Words are short to explain how well you have been explaining the concepts. At the highest, I have only thank you to say.
    Because of your explanations, i am motivated to ask more doubts and study!!

    Thank you for being such a good tutor. I thank God for this.

      • Profile photo of MikeLittle says

        Goodwill is an asset of the subsidiary. It is sometimes defined as “the value of old established customers returning” During the day-to-day existence of a company the directors and employees are trying to win more business and they do so by building a reputation in their market.

        And then along comes a predator in the form of another company that wants to take over the existing company with its good reputation.

        But that good reputation is not reflected by any figure or line item within the financial statements. The company knows it exists and the auditors know it exists. The bank knows it’s there and the taxman knows all about it. The shareholders and the buying company are fully aware that the good reputation exists. But there’s no amount shown in the financial statements.

        It is, therefore, and unrecognised intangible asset of the subsidiary.

        And the predator is going to buy the shares of the subsidiary from the subsidiary’s shareholders. But to make it an attractive offer that the shareholders will find difficult to refuse, the predator says:

        “We’ll offer buy your shares and we’ll not just pay you the market price nor the asset valuation per share amount. NO! We’ll pay you a premium over that asset value, a surplus above that market value. And why? Because we recognise the fact that your company has a good reputation and that reputation is not reflected within your financial statements. So we shall offer to buy that unrecognised intangible asset at the same time that we are offering to buy the right to control all the other assets”

        And the shareholders (or shareholders holding a majority of the subsidiary’s voting power) are impressed with this offer and sell their shares to the predator.

        Now, how does the predator reflect the fact in the predator’s own financial records?

        Debit various assets and credit the liabilities taken over (say debit net assets) of $5million in made up round figures and credit cash with say $6million ie the amount actually paid

        But that’s a double entry that doesn’t balance – we’re missing a $1million debit representing the extra payment to buy the “good reputation”

        And that “extra” amount has bought “Goodwill” and that’s why goodwill is an asset


  2. avatar says

    hi Mike sir
    This is a basic question but would like to ask you however.
    how come positive goodwill is an asset? the co. pays higher than it should and it is certainly not an asset. Please clarify.

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