This article will look at various aspects of that one assets that is not quite an asset.

On a personal note; the author has never really understood why this is not immediately expensed, as you are knowingly paying beyond quantifiable value. Instead it is added to the balance sheet as a valuable commodity.

What is it really

If you have a enterprise that holds the loyalty of many a customer, you could consider that customer base an asset; this asset is valued as goodwill. When you sell the company, the buyer pays extra for the regularly returning customers (e.g. goodwill).

Other forms of goodwill include: A special product, reputation, long established name (since 1906 for example), intellectual property and so on. Pretty much anything that does not show directly on the balance sheet, but could realistically be a genuine competitive advantage can be considered goodwill. It is precisely this ambiguity that makes the author not really sure about considering it a asset.

Should be noted that the original company did not have this as a listed asset, but the buyer does, thereby inflating the new balance sheet. Alongside the purchasing price and presumably some form of tax paid over the purchase. That is not to say the original business owner simply adds it to the bill, it does take a lot of work to create something of real value, and we fully understand that additional payment is requested for it.

Comparison with tangible assets

A small case of hypocrisy arises here: When a conglomerate is listed, it is so at reduced asset value, because of the many different aspects which are unlikely to be run properly as one. But when it concerns a network build for a smaller company (also many different aspects) it is deemed to be of value and called goodwill.

This in itself is not an issue, having a network is value adding. The differing method of valuation is somewhat strange as both are about the workings of fixed tangible assets in conjunction with intangible long(er) term assets. A conglomerate is very likely to have all the things listed as possible sources of goodwill, with them it just becomes a sort of minus goodwill.

So this probably is a case where scale does not add value. The likely reason for this inconsistency is that the conglomerate does so for myriad products in several market, where goodwill is usually for a smaller company selling a limited range of products to a single market. All though there are cases of large companies buying each other where goodwill is primarily for brand value and such, not actual moving parts.

Comparison with intangible assets

It fits right in here, a asset that cannot be touched and is tricky to 100% reliably value. However, it is to be considered an asset still. Could be stated that goodwill is actually an intangible asset that never made the cut, for reasons such as it being to difficult to calculate (what is the value of a returning customer?), or virtually impossible to even quantify (brand reputation can be sort of quantified for big corporation, for smaller ones it is very challenging).

Comparison with fixed assets

It quite simply is not a fixed asset, in fact; it is what you pay beyond the value of these. As a fixed asset that cannot, for whatever reason, be considered one. Otherwise, why would you pay that much money?

Tax depreciation

This does make some sense; customer loyalty is not forever and intellectual property expires. Also everything that was build up, needs to be maintained, goodwill is not an exception just because it is intangible. There is the question: Should something be tax deductible that was paid in excess of assets? The author does not believe this to be the case, since the value may partly depend on the joint negotiation skills of buyer and seller. But it could be argued that what the goodwill consists of is value added (the definition of VAT includes just that), so it is relevant to taxes, after all, more VAT and income tax are generated by increases in sales.

There is one thing to consider: Any two parties can agree to a inflated price and accept it because the high price is a tax deductible, so you do get your money back at some point. As such it is a bit of a tax scam, though one that is generally accepted, assuming you don`t go to far.