A company’s employee expertise, brand and reputation are assets that accountants term goodwill.
When a company is sold, goodwill is the difference between the value of the firm’s tangible assets – things like machinery and buildings – and its sale price. In other words, a company’s intangible assets – such as its staff’s know-how – comprise its goodwill.
Once a company is purchased, the value of its goodwill is normally amortised over a period of time, typically 20 years.
But, under Financial Reporting Standard 102, which comes into force in January 2015, accountants will have to calculate the value of goodwill to a business every year.
If accountants are unable to make what IFRS calls a “reliable estimate” they will have to write off the value of the goodwill after just five years.There is likely to be robust debate within the sector about what qualifies as a reliable estimate.
AAT is consulting on proposed amendments for smaller businesses. Read more here.
And finally watch our video explaining goodwill here with voice over by Past President and AAT Tax Policy Adviser, Brian Palmer.
Ben Walker is the former editor of Accounting Technician.