Glossary
Goodwill
The extra value of a business above its net assets, from reputation, customers and location.
What it means
An intangible asset representing the amount by which the value of a business exceeds the fair value of its identifiable net assets.
Example
A business with RM100,000 net assets sold for RM130,000 carries RM30,000 of goodwill.
Why it matters
It is recorded only when a business is bought for more than the fair value of its net assets.
In practice
Goodwill is an intangible non-current asset. It appears at the top of the assets section of the statement of financial position, above the tangible items, but only when it has been purchased. It is measured as the price paid for a business less the fair value of its identifiable net assets.
If a buyer pays RM90,000 for a firm whose net assets are worth RM70,000, the extra RM20,000 is recorded as goodwill. It reflects the loyal customers and established reputation being bought.
Goodwill that a business builds up itself over time is not recorded, because its value cannot be measured reliably and could be overstated. Goodwill is often linked to a partner joining or leaving. However, the Cambridge and OxfordAQA pages on this site say that admission or departure of a partner is not examined. Check your own board's wording before you spend time on it. Do not confuse goodwill with other intangibles such as patents. Goodwill has no separate existence and cannot be sold on its own, only as part of the whole business.
If goodwill adjustments in partnership questions are a worry, one of our teachers can work through a change of partners with you step by step. Book a trial class.
Related terms
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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