Goodwill is the value of a firm’s reputation and its good brand name in the market. A firm earns goodwill through its hard work. Goodwill helps a firm in winning the trust and faith of the customers by fulfilling their demands in both qualitative and quantitative aspects. It can be said that the goodwill of a firm is a result of the past efforts made by it which helps a firm to earn higher profits in present and in the future as well. In other words, positive goodwill helps a firm to earn supernormal profits as compared to the other firms that earn only normal profits. Goodwill is considered an intangible asset of the firm. It means it cannot be seen or touched like other assets of the firm. It plays a very crucial role for any firm to survive and compete in the market. The Nature of Goodwill is discussed below
Nature of Goodwill
By the very definition of Goodwill, we can figure out that it is something that cannot be touched, seen, or felt but has the potential to generate enormous returns for the firm by creating a positive image in the minds of customers and attracting them. Thus we can classify goodwill as an intangible asset just like patents, trademarks, etc. It, therefore, doesn’t depreciate (i.e. reduce in value due to gradual wear and tear) but rather amortizes over its useful life which is to say that a certain portion of goodwill is written off every year depending on the value derived out of it during the year.
For example, 1/5th of the goodwill is to be written off this year. The accounting treatment of goodwill is covered under Accounting Standard 26(AS-26) according to which, goodwill should not be recorded in the books of accounts unless consideration is paid for it. Also, if goodwill is computed for oneself then such self-generated goodwill should not be recorded because its value cannot be justified by way of the cost incurred to acquire such an asset. Lastly, just like a tangible asset, goodwill can be sold but it happens along with the sale of the business.
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