Question

Explain types of goodwill

Answer 1

Goodwill (accounting) Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business. Examples of identifiable assets that are not goodwill include a company's brand name, customer relationships, artistic intangible assets, and any patents or proprietary technology.

Answer 2

a) Purchased goodwill; and

(b) Non-Purchased or Inherent goodwill.

(а) Purchased Goodwilll

Purchased goodwill arises when a business concern is purchased and the purchase consideration paid exceeds the fair value of the separable net assets acquired. The purchased goodwill is shown on the assets side of the Balance sheet. Para 36 of AS-10 ‘Accounting for fixed assets’ states that only purchased goodwill should be recognized in the books of accounts.

(b) Non-Purchased Goodwill/Inherent Goodwill:

Inherent goodwill is the value of business in excess of the fair value of its separable net assets. It is referred to as internally generated goodwill and it arises over a period of time due to good reputation of a business. The value of goodwill may be positive or negative. Positive goodwill arises when the value of business as a whole is more than the fair value of its net assets. It is negative when the value of the business is less than the value of its net assets.