Goodwill

Question: Buildings, equipment, patents, databases, and the like all have costs that will be assigned to expense

over an expected life as they help generate revenues. Goodwill is a different type of asset. It either represents a

subsidiary attribute (such as customer loyalty) that is too nebulous to be recognized specifically as an intangible

asset or an extra payment made by the parent as a result of the negotiation process. What happens to a cost

labeled as goodwill after the date a subsidiary is acquired? How does Microsoft or Yahoo! account for their

large goodwill balances over time? Is this asset like land that simply continues to be reported at historical cost

potentially forever or, possibly, like equipment that is depreciated systematically over some anticipated useful life?

Answer: Because goodwill is the one asset on a balance sheet that is not tied to an identifiable benefit, no attempt

is made to determine an anticipated life. Consequently, unlike most intangibles, the assigned cost is not amortized

to expense. A goodwill balance can remain unchanged for decades after a subsidiary is purchased. However, the

reported figure is reduced immediately if the value is ever judged to be impaired. Attributes such as customer

loyalty or a talented workforce might continue in place for years or disappear in a short period of time. If goodwill

is merely a premium paid to acquire a subsidiary, the justification for that excess amount could vanish quickly

through poor management decisions or environmental factors. The value of all assets is tentative but probably

none is more so than goodwill.