Goodwill is generally considered to be the amount paid for a business over its fair market value or its identified assets. Examples of goodwill include the right to use the name of a purchased business and the right to represent that the buyer in a transaction is carrying on the purchased business as carried on by the seller.
Beyond the necessity of including goodwill as an asset category for tax and accounting purposes, however, is recognizing goodwill as representing the synergy among assets used by a business to produce income. In other words, goodwill demonstrates that the whole is greater than the sum of its parts.
Examples of this synergy value include business longevity, exclusive market access, competitive advantages, market share and industry connections. Synergy value is expressed as goodwill in transactions and is assigned a dollar value accordingly.
In the world of accounting, goodwill is considered a type of intangible asset. Intangible assets are those other than financial assets (such as accounts receivable or cash) that lack physical substance. The existence of intangible assets can be demonstrated and their effect is to increase overall business value.
Examples of intangible assets include marketing related assets such as trademarks and domain names, customer-related assets such as customer contracts and databases, as well as technology-related assets such as third party software licenses.
It is important to note that goodwill is listed separately from other intangible assets on a balance sheet because it is treated differently from an accounting perspective. Most intangible assets can be amortized because their useful life is determinable. In contrast, goodwill has an indefinite useful life and is reassessed each year for impairment.
The legal purpose of goodwill, as such, is to allocate value to the synergy value of a businesses and is often identified as a distinct asset category in asset purchase transactions.
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