Accounting for goodwill has always been one of the more controversial issues faced by accountants for many years, explains Steve Collings.
AccountingWEB recently covered the issue concerning goodwill and intangible assets in an earlier article which addressed the accounting requirements for goodwill, as well as intangible assets.
Many accountants will associate goodwill as being the value inherent in the business due to a built upon reputation or the value attributed to a well-known brand or company name. Lord MacNaghten in the case of Commissioners of Inland Revenue v Muller & Co Margarine (1901) AC215 defined goodwill as follows:
“What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connection of the business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. Goodwill is composed as a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element pay preponderate here, and other there.”
Lord MacNaghten merely defined goodwill in his summing up, which is one thing. The challenge for accountants is how such goodwill is valued.
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- Simple multiple approach
- Turnover approach
- Whole company approach