Goodwill Valuation: An Investigation

Businessmen universally recognize the importance of goodwill. They understand that these intangibles of management, labor skills, technical know-how, brand-names, marketing relationships, competitive position, and others, are vital to the profitability of the enterprise. They consider them valuable to the extent that they will produce future earnings at desirable levels. They place a value on these future earnings by paying a price for securities which exceeds the sum of net tangible assets. These values create accounting problems, however, when the business enterprise spends money to create or maintain goodwill or when it enters into merger transactions to acquire the existing goodwill of others. Most individuals who are involved with business profit have strong opinions regarding the treatment of goodwill. The result is a wide range of views on how to value it, or more basically, how to define it. The purpose of this thesis is to present a broad overview of the goodwill concept and the problems pertaining to it. First, theoretical ideas are presented regarding the nature, classification and accounting principles for intangible assets in general. Next, a review is made of the problem areas associated with goodwill, such as definitions, nature, concepts, valuation, consolidated, partnership, amortization, and reporting of requirements. Lastly, attention is directed to the utilization of resources which generated goodwill