You're welcome! Goodwill is a fascinating topic. Goodwill impairment (having to write off goodwill) can be very painful for a company, see my video on asset impairment ua-cam.com/video/lWMDdtHF4ZU/v-deo.html or read for example the announcement of General Electric writing off goodwill in 2018 on the Alstom acquisition.
Man your videos are awesome! I have nothing to do with the finance world and was just looking for what depreciation means but your videos were so interesting that I kept on watching more!! Keep up with the good* work and god* bless you
Great to hear that! Thank you for watching and commenting. To learn more about the finance world (that knowledge will help you somewhere along the way!), I think my accounting 101 playlist might be useful: ua-cam.com/video/b93KBmcXanI/v-deo.html Or if you prefer to learn from case studies, then my finance case studies of well-known companies could be good: ua-cam.com/video/PI9X5Ybek_E/v-deo.html
Wow, thanks for the compliment! Very nice to hear that. :-) I have around 150 videos in total on my Finance Storyteller UA-cam channel, hopefully some of the other ones will be helpful for you as well.
@@TheFinanceStoryteller Im not native speaker and its confusing even im my language but i love stock market so i need this info. I plan to watch all your videos after this one theyre really easy to get. Thanks! Martin, Slovakia
You do speak fast but relate the relevant information, specified clearly and succinctly, in real time, which makes it easier to follow conceptually. For people unfamiliar with finance or totally new to the concepts it does move fast but a good explanation to learn. Some of us may have to go through it a few times to catch all the learning points.
Thank you for the feedback. I agree. The more excited I get, the faster I speak. Hard to balance between going too slow (people might drop off while viewing) and going too fast (viewers will have to "rewind" and rewatch a section).
Thanks for making your videos, they present a more relatable top line method of learning opposed to traditionally reading paragraphs of a textbook! Can you please make a video on the benefits and shortcomings of Integrated Reporting? I have seen very biased videos all for integrated reporting, but none of these actually explore a balanced perspective of the good and bad of integrated reporting, before providing their opinion based on the evidence whether it should/should not be implemented further. Reason being, these videos are from the likes of Deloitte, ACCA etc whom are presenting the benefits only to the viewer. Thanks for your time in reading.
Thank you for the kind words, please share my videos! :-) As for your question on Integrated Reporting.... interesting topic, I will need to do some research to get a view of pros and cons, and form an opinion. I will add the topic to my To Do list, am generating videos at a pace of 2 or 3 per week, will make Integrated Reporting one of them. Thank you for the suggestion, I like the intellectual challenge of it.
Great to hear that, Charlotte! Please subscribe to the channel. I think you will like the follow-up video on intangible assets as well, it (amongst others) expands the example of the Microsoft - Linked In acquisition: ua-cam.com/video/-TzaG-VD2GU/v-deo.html
A simple and easy to understand explanation of goodwill. Wondering if goodwill can be created other than M&A? E.g. can marketing expense spent to improve company image and brand awareness be classified as goodwill?
The very simple answer to that is: NO. It would violate the accounting principles of prudence/conservatism, and objectivity. In the Harvard Business Review, or any other MBA type journal, you might find calculations of the "brand value" of various companies, which might carelessly be called goodwill in the sense of "consumers really love us". Those are ballpark estimates, with little rigor around the calculation methods, and might amuse/entertain self-proclaimed "strategists". It's too fluffy to have any meaning in the world of accounting, where criteria for recognizing assets are far more stringent.
Dear Financial Storyteller, I am learning about bookkeeping for the first time. Is there a sequence that I should be studying your videos in? I know some of them go into more advanced business concepts. I am looking for your rudimentary videos on basic accounting practices. Your videos are simple, informative and lead to understanding. The tutorials and texts I have been studying previously left a lot to be desired and I am definitely starting to get these concepts now that I am watching your content, so thank you!
Thank you so much for the kind words, Tifanie! Very nice to hear that. Love to get positive feedback! Hope I can help you get started. I have a playlist called Accounting 101 ua-cam.com/video/b93KBmcXanI/v-deo.html which will take you through the fundamental ideas of the accounting equation, debits and credits, double entry bookkeeping, the income statement and the balance sheet, accruals, prepayments, etc. Once you are through those, my Intermediate Accounting playlist ua-cam.com/video/MvXAljQD4II/v-deo.html takes you to the next level. Or if you feel like "going with the flow", you can click any of the cards that pop up during the videos that suggest related topics, or pick one of the suggestions on the endscreen of a video. Let me know how it goes, and what you think! :-)
Thank you very much! To put the topic of goodwill into context, my video on mergers and acquisitions might be useful: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html And for the accounting side of consolidating an acquisition, the video on ua-cam.com/video/DTFD912ZJQg/v-deo.html
Hello Parth! That is a very good question. Once the amount of goodwill as the result of an acquisition is finalized, it should stay the same (as it is not amortized), or decrease in case of a goodwill impairment. What I have seen happening with accounting for acquisitions in real life, is that companies establish preliminary values for the assets and liabilities assumed, preliminary values for the intangible assets, and therefore a preliminary value for the goodwill. All valuations are still open/pending, while the company needs to book preliminary numbers just to close the books for the quarter or year. In subsequent periods, when more information becomes available, and final valuations are done, the goodwill might be increased or decreased (remember it is the "plug" in the calculation). For some discussion about goodwill impairments, see my video on mergers and acquisitions: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
Great video. I would like to see some adjustments in goodwill in relation to partnerships. How capital might change based on profit ratio among partners and some other examples. I am a creator also and I know how important is to dedicate time to explaining. Again good job!!!
Thank you very much, Jack! Related videos on intangible assets ua-cam.com/video/-TzaG-VD2GU/v-deo.html and mergers and acquisitions ua-cam.com/video/BAFmgPXvlJ8/v-deo.html might also be helpful for you! Please subscribe!
Hi, thank you for the video. I just discovered your channel and appreciate all the topics that you cover and the way you explain things. If I may ask you: How is the goodwill portion taxed vs the tangible/equipment portion of the sale of a small business? Say, the sale price is 100K, with goodwill being 60K and equipment 40K. From what I understand goodwill is considered capital gains.Thanks again!
Thank you for the kind words, Ras!!!! Tax treatment very much depends on the country you are in, as well as who the owner of the shares is (private person versus a corporation that is holding the shares, which makes it a gain that needs to be taxed in personal income tax vs corporate income tax). So if you want a more specific answer for your situation, consult with a tax advisor in your country. You might also be interested in my discussion of various reasons for doing a deal, and the various types of deals, in my video on mergers and acquisitions: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
@@TheFinanceStoryteller Thank you so very much for the quick response! If only I can have another minute of your attention... Yes, the country is the United States, it's a small S-corporation, all stock belongs to one person. Thank you!
Some questions on Goodwill. 1. Although it occurs on a line in the list, it is calculated answer to force the figures to balance (price with total cost of the asset)? It is the "balancing term" to close the gap between purchase price (an agreed amount between the seller & buyer) and what as accounting treatment reckons the asset value is. Goodwill = agreed purchase price - net asset value (an accounting estimation) - intangible assets (another accounting estimation). It is then inserted into the line where accountants are taught to find it. Non financial people are expecting to find the "answer" at the bottom of the list not inserted in the middle of the list. They don't know the conventions and the thinking behind the layout. 2. What if the purchase price is less than the accounting treatment value of the cost of the assets? This should be a bargain purchase and a real world possibility. 2.1 So do intangible assets and Goodwill become negative values to balance the equation? 2.2 Or must intangible assets logically always be a positive value making the Goodwill smaller (a bigger negative value)?
Hello Kenneth! Your reasoning in question 1 is correct. I found the following sentence in the FASB discussion of goodwill that sums it up very well: "Goodwill is a residual asset calculated after recognizing other (tangible and intangible) assets and liabilities acquired in a business combination". There will be specialized valuation experts involved in the calculation of net asset value and intangible assets, and the calculation/amounts will be audited by the company's audit firm. Regarding your question 2, I must say that I can only partially answer it. It is not something that I would think occurs frequently. The definition of goodwill is the excess cost of an acquired firm over the current fair value of the separately identifiable net assets of the acquired firm. By definition goodwill on the asset side of the balance sheet cannot have a negative value, nor can intangible assets have a negative value. Some sources on the internet claim that in a "bargain purchase" situation, the acquiring firm can therefore recognize a one-time gain (in the income statement) at the time of the purchase. To me, that sounds to be in conflict with the realization principle and the prudence principle. I would argue that in these "bargain purchase" situations with goodwill of zero, a more prudent approach of lowering the valuation of the intangible assets should be taken (which to the acquiring firm has the benefit of lowering the amortization charge of the intangible assets in future years).
The Finance Storyteller thanks for your effort and detailed response which is highly appreciated. I am also interested in the PE ratio which is considered when a price is paid for purchasing a business. As it compares the stock price with earnings per share it applies to listed = public companies. So how long should it take for 'annual EPS to pay for the purchase'. How does it apply to unlisted = private companies and what would be considered a fair PE ratio? Perhaps this topic is sufficient for a video of its own.
You can calculate PE ratio as price-per-share divided by earnings per share, or company value divided by earnings. So if you have the income statement of a private company, you can take the net income of this "target" company, and multiply it by the industry's PE ratio to get to a ballpark company value. Some people use PE ratio, others multiple of EBITDA, or in emerging sectors (software companies) even a multiple of revenues (as in many cases the company is not profitable yet). A more robust approach is to do a discounted cash flow analysis (future earnings, future cash flows, discount factor). None of the methods is fully reliable or perfect, as each of them depends on subjective assumptions. Valuation is as much an art as a science!
I am wondering, why cant we just take over the Equity of the acquired company. Why should I put it as a goodwill, wehen I could just take over the value of the acquired company?
Goodwill is created when using the purchase method of accounting for acquisitions. What you are referring to, I think, is the "pooling of interest" method to account for acquisitions. This "pooling of interest" method is no longer allowed under US GAAP and IFRS, it could be that there are local country GAAP's (for companies not listed on the stock market) that still allow for it.
Thank you! Welcome to the channel. Studied management accounting and strategy, worked in finance for many years in the corporate world, then delivered finance training to companies in all kinds of industries.
Hi Philip, you responded so quickly to previous comments but have not answered the questions regarding Goodwill from a week ago. Please see my previous entry. Q1 is my logic as explained correct and Q2 what if the purchase price is less than evaluation of the assets? Your reply would be appreciated.
My apologies! It's on my list of things to do, I have to read up on the FASB text on that before I can give you a solid answer. Have been delivering classroom training, so not been able to look into it yet. Answer coming soon!
I wouldn't put it that way.... More accurate would be to say it is the premium that the seller receives to recognize the future potential of the company he has built.
Hello Dmitry! How goodwill is accounted for depends on the accounting rules that need to be applied. If you are a listed company (i.e. your equity or debt is publicly traded), then US GAAP (in the US) or IFRS (elsewhere in the world) applies. Under both US GAAP and IFRS, goodwill is added as an asset to the balance sheet, and tested annually for impairment, and not amortized. If a company is not publicly listed, and local country accounting rules apply, then (depending on the specific country rules) goodwill might be deducted from equity straight away, or added to the assets on the balance sheet and amortized over the useful economic life. I have some more discussion about goodwill in my video on intangible assets (including the high-level journal entry for the Microsoft - Linked In deal) ua-cam.com/video/-TzaG-VD2GU/v-deo.html and a broader discussion on mergers and acquisitions (explaining sale of assets vs sale of equity) ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
@@TheFinanceStoryteller Thank you. But you mention here that is "tested annually for impairment" my question, by who? Who will decide if Goodwill will be in removed from Asset side and be removed Equity side of balance sheet?
Primarily the finance/accounting team of the company itself, but this is obviously audited by the company's external accounting firm. I have a discussion about large goodwill impairments that took place in recent years in the second half of my video on mergers and acquisitions, some interesting cases in there: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
fantastic, I love this channel, I appreciate the information you share. If you allow me to make an inquiry, I think that in Japan they allow goodwill amortization, I do not know if I am wrong. Another question is about the effects of eliminating goodwill from the balance sheet whe time past? Does it affect the rest of the financial statements? if passive + Equity = assets, if active decreases, then ... thanks in advance!
Thank you for your comments and questions! Regarding the treatment of goodwill in Japan, I found the following discussion on the official IFRS website www.ifrs.org/news-and-events/2018/08/chairmans-speech-japan-and-ifrs-standards/ "With the adoption of IFRS 3 Business Combinations in 2004 the IASB abolished the amortisation of goodwill, relying instead on the impairment-only approach. In Japanese GAAP, amortisation of goodwill still exists. Many Japanese stakeholders like the conservatism of goodwill amortisation and it is one of the two IFRS modifications in Japanese Modified International Standards." Good thinking from you about what happens if you amortize or fully eliminate goodwill from the assets side of the balance sheet. The offset would be in equity. In case of amortization, the amortization charge hits the Profit & Loss statement, which impacts Net Income, which impacts Retained Earnings in Equity. So in this case, if assets decrease then equity decreases.
@@TheFinanceStoryteller very kind for the quality of your response, I´m grateful for it. I do not know if I'm wrong, but do not amortize goodwill, it gives me the feeling, it facilitates the manipulation of the accounts for companies. I wonder does companies impairtment the goodwill when they want? does it a subjective way? in the end, the impariment impacts on Equity as you said, and when we buy an action, you pay for Equity. For example if you use EV / EBITDA -> 8x for valutation in any sector, then you use (EBITDA x 8 - Debt +/-...) = Equity. Equity / number of shres = the price you pay for the company, the company can decide when they wants to eliminate that goodwill, and then, the next day you elminate this goodwill, the company is cheaper, goodwill can hide the fair value for a company, am i wrong ? thanks for all! best regards
Excellent thinking, Nicolas! I share your concerns. Let me start responding by saying that there are certainly rules and procedures (both in US GAAP and IFRS) around goodwill impairment, but there is always an element of subjectivity involved. That does NOT mean companies can just arbitrarily record goodwill impairments as they please! However, from following and reviewing the earnings releases of several large multinational companies over the years, I would say there is a tendency for companies to "postpone" recording an impairment of goodwill until a point where they suddenly take a "big bath" approach (recording a huge one-time loss in the profit and loss statement, and usually firing the CEO). My videos on asset impairment ua-cam.com/video/lWMDdtHF4ZU/v-deo.html and the one on GAAP vs non-GAAP ua-cam.com/video/ewzlgnGtfmg/v-deo.html could help you build understanding in these areas. There have always been debates on whether or not goodwill should or should not be amortized. Goodwill is no longer amortized under U.S. GAAP (FAS 142). FAS 142 was issued in June 2001. The IFRS "cousin" of that is IFRS 3 Business Combinations (2004). In the days when goodwill was amortized, companies that had done a lot of acquisitions historically were complaining that amortization of goodwill was unfair as their profitability looked lower than the profitability of competing companies that had grown organically and had no amortization of goodwill charge. So it looks like people will be complaining either way (whether goodwill is amortized, or whether it is subject to an impairment test). Therefore it is important to analyze financial statements carefully before you invest, to see if you can get to the "core" of the numbers, as some people call it the "underlying performance". In general, if you want to value a company, you are better off looking at the expectations for the future (estimating future free cash flows ua-cam.com/video/gl3OLtEX2PM/v-deo.html and using discounted cash flow or net present value to calculate company value ua-cam.com/video/Fw5-wccViOM/v-deo.html ). That's because accounting value or book value looks at the past, whereas economic value looks at the future: ua-cam.com/video/uCs9AyGIb3c/v-deo.html Last comment for now: if you value a company based on EBITA or EBITDA, you are already excluding goodwill amortization expense (and amortization of intangible assets) from your calculation! That's what the "A" is in EBITA and EBITDA ;-) ua-cam.com/video/nImp51zYcy4/v-deo.html
@@TheFinanceStoryteller thank you very much for your comment, this is a real master class that I appreciate and the time you have taken to respond with this detail. I do not understand why companies complaining about amortization of goodwill was unfair as their profitability looked lower than the profitability of competing companies that had grown organically. If you pay for any asset, you have to collect it in the financial statements. If you think you are at a disadvantage with respect to competitors that grow organically, do it you too… First of all, I'm not an expert, I'm self-taught, so excuse me if I say something meaningless. In the time that I have been studying the markets, my impression is as follows. The tendency to postpone an impairment of goodwill falls within part the constant manipulation of the enterprise accounting data, applying the losses when it interests the company (majority shareholders that have power over the board of directors), to scare the small investors with bad news encouraging them to sell the shares when stocks are cheap, before going up. In other cases, the company is interested in delaying the application of the losses, and give us good news when the stock value is up to sell to the small investors. Anyway, one thing or another, today data are no reasons to think that the company will do fine or bad in the future. I totally agree with you, that it makes more sense to look to the future than the past or even to the present to value a company, but from my modest opinion, it is not the same to value a growth company than a stable company, where you do not expect much growth but it is cheap today, the valuation method will be different. In my opinion, to value a company you have to analyze the qualitative part of the business well, and understand why it is a good business and its advantages over others. At the same time you analyze the financial statements (balance sheet, income statement and cash flows) to find reasons that help you to reinforce the opinion of buying or not. Within this work, it is interesting to have a reference about the possible value of a company, but in order to know if there is a margin of safety, but you never will know the fair value for the community, you never will know the correct information about the company or sector, at least you are inside of it, at the same time that we are affected by the inefficiencies of the market and the interested narratives Using discounts of flows seems to be very complex, and very far from reality, because neither within the same company know how they can affect elements that even they inside do not know in future years. For us who are not inside, and as I said at first, we have a limited information of reality, it is even more difficult. Using comparable methods with the sector or other companies of the sector seems to me an easy method to have a reference data, and see if there is safety margin. I think it is not important to know the exact price, just have a reference to verify if it is cheap today, or else will be in the future in the case of growth companies. If you use different comparative methods EV/EBIT, EV/EBITDA, EV/FCF ... to have an idea about margin of safety and deepen if there is any disagreement. I understand EBITDA does not include depreciation, but I think it does not matter for the meaning of the idea that I would like to communicate, independently you use EBIT, FCF, etc... If you use EV / FCF using an FCF multiplier x 8 you are calculating EV, which is representative of the company's asset. EV = ASSETS = EQUITY + LIABILITIES = MKT + DEBT + MIN ... it is correct? Goodwill is part of assets, if in the future it is eliminated by impairment, the asset decreases, EV will be lower, and the company get to be cheaper, from one day to another. if you allow me, I suggest, it could be very interesting, a series of videos of the process how to evaluate a company in its entirety, step by step, in different videos, and do the same for different company sectors, I suppose it would be very instructive and appreciated by the followers I apologize for the inconvenience, I hope I have expressed it correctly, and to have contributed something to your channel, I reiterate gratitude for the time in my attention, and thanks for this impressive channel and attitude to provide value that you put in it, best regards
There are many methods that people use to try to "value" a company: based on historical accounting data, strategic analysis, market position, etc. Some of these methods in my view are close to alchemy (trying to turn lead into gold). Each person hopes he has the best method, and in the end the share price one year from now will probably depend more on what happens during the next 365 days (and is therefore unknown to us at present), than on what has happened in the past or what we know today. Some people use multiples of the book value of accounts on the balance sheet, others a multiple of earnings/profitability form the income statement, and yet others discounted cash flow. In short, all 3 financial statements (balance sheet, income statement, cash flow statement) either with historic data or with estimated future data. You are moving in the right direction, but it will take a bit more studying to understand some concepts better. A suggestion: do some reading on "historical cost" versus "fair value" in accounting, and the concepts of "accounting value" versus "economic value".
Hi Jonny! I don't think "believe" is the best word here, but have trouble finding a better one. ;-) Goodwill represents the potential for "excess profit" from the deal. In my view, goodwill is the result of a calculation. The company decides to make an offer for another company that it wants to acquire (hopefully after extensive analysis of the potential value of the target based on expected free cash flow, board approval on the offer amount, and solid due diligence), and then if the deal is agreed the purchase price minus net assets becomes goodwill.
@@TheFinanceStoryteller gotcha so it's essentially what they believe it is worth and eventually bring to their company once purchased. Just finished reading Warren Buffet and the Interpretation of Financial Statements so trying to wrap my head around it.
@@Jonnynot1plate Agree. I think the best way to understand both the strategic and financial side of acquisitions (and the resulting goodwill) is to study a few cases of companies you are interested in. What I normally do is to read the press release of the deal announcement (including the description of strategic rationale and synergies), listen to or view the press conference, follow the regulatory approval process (this can take a couple of quarters), and then watch out for any updates afterwards (the worst of which could be an announcement of goodwill impairment, i.e. write-down of the value of the acquisition versus what was paid). I find the Microsoft - Linked In deal fascinating. Come to think of it, I have covered more of it in my video on Intangible Assets including how the accounting journal entries work ua-cam.com/video/-TzaG-VD2GU/v-deo.html Another fascinating example is General Electric - Alstom, a deal that did not turn out well and led to a $23 billion (!) writedown. I think the Wall Street Journal once published some research that 70% of all M&A deals fail to generate shareholder value for the acquiring company.
It's an accounting convention. When agreeing on the US GAAP and the IFRS rules, the respective committees preparing the accounting principles and rules judged that the most appropriate way to record acquisition premiums is for them to become an asset on the balance sheet that is not amortized. To stay with the example early on in the video, with a purchase price of $3B and net assets of $2B, the journal entry is debit net assets $2B, debit goodwill $1B, credit cash $3B. Conceptually, an alternative would be to take the $1B as a loss at the moment of closing the acquisition, or deduct goodwill from equity without having it go through the income statement. These alternatives were not the road that was chosen.
It's the job of finance and accounting people to provide a fair and accurate representation of the financial situation of a company...... In case of an acquisition at a very high valuation (for example in the software industry), the gap between the market value (purchase price) in the transaction and the book value (equity value based on historical financial results of the company) can be huge. That difference between market value and book value in the acquisition transaction has to be recorded somewhere, and goodwill is the place! More explanation and examples in my video on market value vs book value ua-cam.com/video/uCs9AyGIb3c/v-deo.html and the one on mergers and acquisitions ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
Thank you for the suggestion! Will do. For starters, I have the topic of "dividend yield" on my To Do list. Keep checking back on my channel, I am producing a lot of new content.
Done! Here's the link to my video on "Dividend Yield", the first in a series on how to invest in the stock market. ua-cam.com/video/WaVuP4MRL-o/v-deo.html
![[UA] NAVI проти G2 Esports | Blast Premier Fall Final](http://i.ytimg.com/vi/QWlIm4FGESQ/mqdefault.jpg)
Enjoyed the video? Then subscribe to the channel, and as a next video watch my review of Intangible Assets ua-cam.com/video/-TzaG-VD2GU/v-deo.html
thanks for bringing in actual examples - makes it so much more easier to understnd
You're welcome! Goodwill is a fascinating topic. Goodwill impairment (having to write off goodwill) can be very painful for a company, see my video on asset impairment ua-cam.com/video/lWMDdtHF4ZU/v-deo.html or read for example the announcement of General Electric writing off goodwill in 2018 on the Alstom acquisition.
Extremely good work. Please go on creating such invaluable content.
Thank you, Sarath! I will! :-)
Man your videos are awesome!
I have nothing to do with the finance world and was just looking for what depreciation means but your videos were so interesting that I kept on watching more!!
Keep up with the good* work and god* bless you
Great to hear that! Thank you for watching and commenting. To learn more about the finance world (that knowledge will help you somewhere along the way!), I think my accounting 101 playlist might be useful: ua-cam.com/video/b93KBmcXanI/v-deo.html Or if you prefer to learn from case studies, then my finance case studies of well-known companies could be good: ua-cam.com/video/PI9X5Ybek_E/v-deo.html
This was most understandable accounting video i ever saw
Wow, thanks for the compliment! Very nice to hear that. :-) I have around 150 videos in total on my Finance Storyteller UA-cam channel, hopefully some of the other ones will be helpful for you as well.
@@TheFinanceStoryteller Im not native speaker and its confusing even im my language but i love stock market so i need this info. I plan to watch all your videos after this one theyre really easy to get. Thanks! Martin, Slovakia
Great! You can switch on the English subtitles, that might make it easier for you. Best regards, Philip, The Netherlands.
Knowledgeable vid thank you bud!❤
My pleasure! Have a look at the related video on mergers and acquisitions as well: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
Thank you so much. This cleared up so much confusion. You explained it a very good way. Again, thank you sir.
You're welcome! Happy to help.
Where did you come across the accounting term "goodwill"? Let me know by commenting below. Would love to hear your examples of goodwill.
Kraft-Heinz goodwill impairment 2019
Balance sheet of financial accounting.
You do speak fast but relate the relevant information, specified clearly and succinctly, in real time, which makes it easier to follow conceptually. For people unfamiliar with finance or totally new to the concepts it does move fast but a good explanation to learn. Some of us may have to go through it a few times to catch all the learning points.
Thank you for the feedback. I agree. The more excited I get, the faster I speak. Hard to balance between going too slow (people might drop off while viewing) and going too fast (viewers will have to "rewind" and rewatch a section).
Thanks for making your videos, they present a more relatable top line method of learning opposed to traditionally reading paragraphs of a textbook!
Can you please make a video on the benefits and shortcomings of Integrated Reporting? I have seen very biased videos all for integrated reporting, but none of these actually explore a balanced perspective of the good and bad of integrated reporting, before providing their opinion based on the evidence whether it should/should not be implemented further. Reason being, these videos are from the likes of Deloitte, ACCA etc whom are presenting the benefits only to the viewer.
Thanks for your time in reading.
Thank you for the kind words, please share my videos! :-)
As for your question on Integrated Reporting.... interesting topic, I will need to do some research to get a view of pros and cons, and form an opinion. I will add the topic to my To Do list, am generating videos at a pace of 2 or 3 per week, will make Integrated Reporting one of them. Thank you for the suggestion, I like the intellectual challenge of it.
This is a very helpful explanation. Thank you.
Great to hear that, Charlotte! Please subscribe to the channel. I think you will like the follow-up video on intangible assets as well, it (amongst others) expands the example of the Microsoft - Linked In acquisition: ua-cam.com/video/-TzaG-VD2GU/v-deo.html
Thank you for understanding me 👍
You're welcome, Suraj!
A simple and easy to understand explanation of goodwill. Wondering if goodwill can be created other than M&A? E.g. can marketing expense spent to improve company image and brand awareness be classified as goodwill?
The very simple answer to that is: NO. It would violate the accounting principles of prudence/conservatism, and objectivity. In the Harvard Business Review, or any other MBA type journal, you might find calculations of the "brand value" of various companies, which might carelessly be called goodwill in the sense of "consumers really love us". Those are ballpark estimates, with little rigor around the calculation methods, and might amuse/entertain self-proclaimed "strategists". It's too fluffy to have any meaning in the world of accounting, where criteria for recognizing assets are far more stringent.
Thanks, Dad!
You're welcome!
many thanks
You are welcome! 😀
Thanks!
Welcome!
Dear Financial Storyteller,
I am learning about bookkeeping for the first time.
Is there a sequence that I should be studying your videos in?
I know some of them go into more advanced business concepts. I am looking for your rudimentary videos on basic accounting practices.
Your videos are simple, informative and lead to understanding. The tutorials and texts I have been studying previously left a lot to be desired and I am definitely starting to get these concepts now that I am watching your content, so thank you!
Thank you so much for the kind words, Tifanie! Very nice to hear that. Love to get positive feedback! Hope I can help you get started. I have a playlist called Accounting 101 ua-cam.com/video/b93KBmcXanI/v-deo.html which will take you through the fundamental ideas of the accounting equation, debits and credits, double entry bookkeeping, the income statement and the balance sheet, accruals, prepayments, etc. Once you are through those, my Intermediate Accounting playlist ua-cam.com/video/MvXAljQD4II/v-deo.html takes you to the next level. Or if you feel like "going with the flow", you can click any of the cards that pop up during the videos that suggest related topics, or pick one of the suggestions on the endscreen of a video. Let me know how it goes, and what you think! :-)
nice video
Thank you very much! To put the topic of goodwill into context, my video on mergers and acquisitions might be useful: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html And for the accounting side of consolidating an acquisition, the video on ua-cam.com/video/DTFD912ZJQg/v-deo.html
Tks man!!! Great explanation..
Happy to help!!! I think you might enjoy the related video on mergers and acquisitions as well: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
this is really helpful. Thank you
You're very welcome, Maria! 🙂
Can the goodwill value increase for years after the acquisition? Or just decrease or stay the same. Please explain!
Hello Parth! That is a very good question. Once the amount of goodwill as the result of an acquisition is finalized, it should stay the same (as it is not amortized), or decrease in case of a goodwill impairment. What I have seen happening with accounting for acquisitions in real life, is that companies establish preliminary values for the assets and liabilities assumed, preliminary values for the intangible assets, and therefore a preliminary value for the goodwill. All valuations are still open/pending, while the company needs to book preliminary numbers just to close the books for the quarter or year. In subsequent periods, when more information becomes available, and final valuations are done, the goodwill might be increased or decreased (remember it is the "plug" in the calculation). For some discussion about goodwill impairments, see my video on mergers and acquisitions: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
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nice
Thanks!!!
Great video. I would like to see some adjustments in goodwill in relation to partnerships. How capital might change based on profit ratio among partners and some other examples. I am a creator also and I know how important is to dedicate time to explaining. Again good job!!!
Hello! Thanks for the suggestion for a new topic, but that's not something I have expertise on.
Amazing help!!!!
Thank you very much, Jack! Related videos on intangible assets ua-cam.com/video/-TzaG-VD2GU/v-deo.html and mergers and acquisitions ua-cam.com/video/BAFmgPXvlJ8/v-deo.html might also be helpful for you! Please subscribe!
Hi, thank you for the video. I just discovered your channel and appreciate all the topics that you cover and the way you explain things. If I may ask you: How is the goodwill portion taxed vs the tangible/equipment portion of the sale of a small business? Say, the sale price is 100K, with goodwill being 60K and equipment 40K. From what I understand goodwill is considered capital gains.Thanks again!
Thank you for the kind words, Ras!!!! Tax treatment very much depends on the country you are in, as well as who the owner of the shares is (private person versus a corporation that is holding the shares, which makes it a gain that needs to be taxed in personal income tax vs corporate income tax). So if you want a more specific answer for your situation, consult with a tax advisor in your country.
You might also be interested in my discussion of various reasons for doing a deal, and the various types of deals, in my video on mergers and acquisitions: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
@@TheFinanceStoryteller Thank you so very much for the quick response! If only I can have another minute of your attention... Yes, the country is the United States, it's a small S-corporation, all stock belongs to one person. Thank you!
Hello again! That's where I cannot help you, as I do not have the specific knowledge on US taxation.
Some questions on Goodwill.
1. Although it occurs on a line in the list, it is calculated answer to force the figures to balance (price with total cost of the asset)?
It is the "balancing term" to close the gap between purchase price (an agreed amount between the seller & buyer) and what as accounting treatment reckons the asset value is. Goodwill = agreed purchase price - net asset value (an accounting estimation) - intangible assets (another accounting estimation).
It is then inserted into the line where accountants are taught to find it. Non financial people are expecting to find the "answer" at the bottom of the list not inserted in the middle of the list. They don't know the conventions and the thinking behind the layout.
2. What if the purchase price is less than the accounting treatment value of the cost of the assets? This should be a bargain purchase and a real world possibility.
2.1 So do intangible assets and Goodwill become negative values to balance the equation?
2.2 Or must intangible assets logically always be a positive value making the Goodwill smaller (a bigger negative value)?
Hello Kenneth!
Your reasoning in question 1 is correct. I found the following sentence in the FASB discussion of goodwill that sums it up very well: "Goodwill is a residual asset calculated after recognizing other (tangible and intangible) assets and liabilities acquired in a business combination". There will be specialized valuation experts involved in the calculation of net asset value and intangible assets, and the calculation/amounts will be audited by the company's audit firm.
Regarding your question 2, I must say that I can only partially answer it. It is not something that I would think occurs frequently. The definition of goodwill is the excess cost of an acquired firm over the current fair value of the separately identifiable net assets of the acquired firm. By definition goodwill on the asset side of the balance sheet cannot have a negative value, nor can intangible assets have a negative value. Some sources on the internet claim that in a "bargain purchase" situation, the acquiring firm can therefore recognize a one-time gain (in the income statement) at the time of the purchase. To me, that sounds to be in conflict with the realization principle and the prudence principle. I would argue that in these "bargain purchase" situations with goodwill of zero, a more prudent approach of lowering the valuation of the intangible assets should be taken (which to the acquiring firm has the benefit of lowering the amortization charge of the intangible assets in future years).
The Finance Storyteller thanks for your effort and detailed response which is highly appreciated.
I am also interested in the PE ratio which is considered when a price is paid for purchasing a business. As it compares the stock price with earnings per share it applies to listed = public companies. So how long should it take for 'annual EPS to pay for the purchase'.
How does it apply to unlisted = private companies and what would be considered a fair PE ratio?
Perhaps this topic is sufficient for a video of its own.
You can calculate PE ratio as price-per-share divided by earnings per share, or company value divided by earnings. So if you have the income statement of a private company, you can take the net income of this "target" company, and multiply it by the industry's PE ratio to get to a ballpark company value. Some people use PE ratio, others multiple of EBITDA, or in emerging sectors (software companies) even a multiple of revenues (as in many cases the company is not profitable yet). A more robust approach is to do a discounted cash flow analysis (future earnings, future cash flows, discount factor). None of the methods is fully reliable or perfect, as each of them depends on subjective assumptions. Valuation is as much an art as a science!
I am wondering, why cant we just take over the Equity of the acquired company. Why should I put it as a goodwill, wehen I could just take over the value of the acquired company?
Goodwill is created when using the purchase method of accounting for acquisitions. What you are referring to, I think, is the "pooling of interest" method to account for acquisitions. This "pooling of interest" method is no longer allowed under US GAAP and IFRS, it could be that there are local country GAAP's (for companies not listed on the stock market) that still allow for it.
Amazing stuff man! Just started watching your videos, may I ask what's your back ground and experience in finance at?
Thank you! Welcome to the channel. Studied management accounting and strategy, worked in finance for many years in the corporate world, then delivered finance training to companies in all kinds of industries.
Thanks
you are awesome!!! neatly explained.
Thanks a lot 😊
Hi Philip, you responded so quickly to previous comments but have not answered the questions regarding Goodwill from a week ago. Please see my previous entry. Q1 is my logic as explained correct and Q2 what if the purchase price is less than evaluation of the assets? Your reply would be appreciated.
My apologies! It's on my list of things to do, I have to read up on the FASB text on that before I can give you a solid answer. Have been delivering classroom training, so not been able to look into it yet. Answer coming soon!
so can we say that goodwill is the money the owner can get as profit after selling the company ? please explain sir
I wouldn't put it that way.... More accurate would be to say it is the premium that the seller receives to recognize the future potential of the company he has built.
So it is up to the company to decide where Goodwill will be in Asset side or in Equity side, with reasonable explanation, correct?
Hello Dmitry! How goodwill is accounted for depends on the accounting rules that need to be applied. If you are a listed company (i.e. your equity or debt is publicly traded), then US GAAP (in the US) or IFRS (elsewhere in the world) applies. Under both US GAAP and IFRS, goodwill is added as an asset to the balance sheet, and tested annually for impairment, and not amortized. If a company is not publicly listed, and local country accounting rules apply, then (depending on the specific country rules) goodwill might be deducted from equity straight away, or added to the assets on the balance sheet and amortized over the useful economic life. I have some more discussion about goodwill in my video on intangible assets (including the high-level journal entry for the Microsoft - Linked In deal) ua-cam.com/video/-TzaG-VD2GU/v-deo.html and a broader discussion on mergers and acquisitions (explaining sale of assets vs sale of equity) ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
@@TheFinanceStoryteller Thank you. But you mention here that is "tested annually for impairment" my question, by who? Who will decide if Goodwill will be in removed from Asset side and be removed Equity side of balance sheet?
Primarily the finance/accounting team of the company itself, but this is obviously audited by the company's external accounting firm. I have a discussion about large goodwill impairments that took place in recent years in the second half of my video on mergers and acquisitions, some interesting cases in there: ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
@@TheFinanceStoryteller Thanks. Definitely will watch it.
Thanks for the vid. Your accent sounds Dutch.
You're welcome! And you get bonus points for figuring out the accent! :-)
fantastic, I love this channel, I appreciate the information you share. If you allow me to make an inquiry, I think that in Japan they allow goodwill amortization, I do not know if I am wrong. Another question is about the effects of eliminating goodwill from the balance sheet whe time past? Does it affect the rest of the financial statements? if passive + Equity = assets, if active decreases, then ... thanks in advance!
Thank you for your comments and questions! Regarding the treatment of goodwill in Japan, I found the following discussion on the official IFRS website www.ifrs.org/news-and-events/2018/08/chairmans-speech-japan-and-ifrs-standards/
"With the adoption of IFRS 3 Business Combinations in 2004 the IASB abolished the amortisation of goodwill, relying instead on the impairment-only approach. In Japanese GAAP, amortisation of goodwill still exists. Many Japanese stakeholders like the conservatism of goodwill amortisation and it is one of the two IFRS modifications in Japanese Modified International Standards."
Good thinking from you about what happens if you amortize or fully eliminate goodwill from the assets side of the balance sheet. The offset would be in equity. In case of amortization, the amortization charge hits the Profit & Loss statement, which impacts Net Income, which impacts Retained Earnings in Equity. So in this case, if assets decrease then equity decreases.
@@TheFinanceStoryteller very kind for the quality of your response, I´m grateful for it. I do not know if I'm wrong, but do not amortize goodwill, it gives me the feeling, it facilitates the manipulation of the accounts for companies. I wonder does companies impairtment the goodwill when they want? does it a subjective way? in the end, the impariment impacts on Equity as you said, and when we buy an action, you pay for Equity. For example if you use EV / EBITDA -> 8x for valutation in any sector, then you use (EBITDA x 8 - Debt +/-...) = Equity. Equity / number of shres = the price you pay for the company, the company can decide when they wants to eliminate that goodwill, and then, the next day you elminate this goodwill, the company is cheaper, goodwill can hide the fair value for a company, am i wrong ? thanks for all! best regards
Excellent thinking, Nicolas! I share your concerns. Let me start responding by saying that there are certainly rules and procedures (both in US GAAP and IFRS) around goodwill impairment, but there is always an element of subjectivity involved. That does NOT mean companies can just arbitrarily record goodwill impairments as they please! However, from following and reviewing the earnings releases of several large multinational companies over the years, I would say there is a tendency for companies to "postpone" recording an impairment of goodwill until a point where they suddenly take a "big bath" approach (recording a huge one-time loss in the profit and loss statement, and usually firing the CEO). My videos on asset impairment ua-cam.com/video/lWMDdtHF4ZU/v-deo.html and the one on GAAP vs non-GAAP ua-cam.com/video/ewzlgnGtfmg/v-deo.html could help you build understanding in these areas.
There have always been debates on whether or not goodwill should or should not be amortized. Goodwill is no longer amortized under U.S. GAAP (FAS 142). FAS 142 was issued in June 2001. The IFRS "cousin" of that is IFRS 3 Business Combinations (2004). In the days when goodwill was amortized, companies that had done a lot of acquisitions historically were complaining that amortization of goodwill was unfair as their profitability looked lower than the profitability of competing companies that had grown organically and had no amortization of goodwill charge. So it looks like people will be complaining either way (whether goodwill is amortized, or whether it is subject to an impairment test). Therefore it is important to analyze financial statements carefully before you invest, to see if you can get to the "core" of the numbers, as some people call it the "underlying performance".
In general, if you want to value a company, you are better off looking at the expectations for the future (estimating future free cash flows ua-cam.com/video/gl3OLtEX2PM/v-deo.html and using discounted cash flow or net present value to calculate company value ua-cam.com/video/Fw5-wccViOM/v-deo.html ). That's because accounting value or book value looks at the past, whereas economic value looks at the future: ua-cam.com/video/uCs9AyGIb3c/v-deo.html
Last comment for now: if you value a company based on EBITA or EBITDA, you are already excluding goodwill amortization expense (and amortization of intangible assets) from your calculation! That's what the "A" is in EBITA and EBITDA ;-) ua-cam.com/video/nImp51zYcy4/v-deo.html
@@TheFinanceStoryteller thank you very much for your comment, this is a real master class that I appreciate and the time you have taken to respond with this detail.
I do not understand why companies complaining about amortization of goodwill was unfair as their profitability looked lower than the profitability of competing companies that had grown organically. If you pay for any asset, you have to collect it in the financial statements. If you think you are at a disadvantage with respect to competitors that grow organically, do it you too…
First of all, I'm not an expert, I'm self-taught, so excuse me if I say something meaningless. In the time that I have been studying the markets, my impression is as follows.
The tendency to postpone an impairment of goodwill falls within part the constant manipulation of the enterprise accounting data, applying the losses when it interests the company (majority shareholders that have power over the board of directors), to scare the small investors with bad news encouraging them to sell the shares when stocks are cheap, before going up. In other cases, the company is interested in delaying the application of the losses, and give us good news when the stock value is up to sell to the small investors. Anyway, one thing or another, today data are no reasons to think that the company will do fine or bad in the future.
I totally agree with you, that it makes more sense to look to the future than the past or even to the present to value a company, but from my modest opinion, it is not the same to value a growth company than a stable company, where you do not expect much growth but it is cheap today, the valuation method will be different.
In my opinion, to value a company you have to analyze the qualitative part of the business well, and understand why it is a good business and its advantages over others. At the same time you analyze the financial statements (balance sheet, income statement and cash flows) to find reasons that help you to reinforce the opinion of buying or not. Within this work, it is interesting to have a reference about the possible value of a company, but in order to know if there is a margin of safety, but you never will know the fair value for the community, you never will know the correct information about the company or sector, at least you are inside of it, at the same time that we are affected by the inefficiencies of the market and the interested narratives
Using discounts of flows seems to be very complex, and very far from reality, because neither within the same company know how they can affect elements that even they inside do not know in future years. For us who are not inside, and as I said at first, we have a limited information of reality, it is even more difficult.
Using comparable methods with the sector or other companies of the sector seems to me an easy method to have a reference data, and see if there is safety margin. I think it is not important to know the exact price, just have a reference to verify if it is cheap today, or else will be in the future in the case of growth companies. If you use different comparative methods EV/EBIT, EV/EBITDA, EV/FCF ... to have an idea about margin of safety and deepen if there is any disagreement. I understand EBITDA does not include depreciation, but I think it does not matter for the meaning of the idea that I would like to communicate, independently you use EBIT, FCF, etc... If you use EV / FCF using an FCF multiplier x 8 you are calculating EV, which is representative of the company's asset. EV = ASSETS = EQUITY + LIABILITIES = MKT + DEBT + MIN ... it is correct?
Goodwill is part of assets, if in the future it is eliminated by impairment, the asset decreases, EV will be lower, and the company get to be cheaper, from one day to another.
if you allow me, I suggest, it could be very interesting, a series of videos of the process how to evaluate a company in its entirety, step by step, in different videos, and do the same for different company sectors, I suppose it would be very instructive and appreciated by the followers
I apologize for the inconvenience, I hope I have expressed it correctly, and to have contributed something to your channel, I reiterate gratitude for the time in my attention, and thanks for this impressive channel and attitude to provide value that you put in it, best regards
There are many methods that people use to try to "value" a company: based on historical accounting data, strategic analysis, market position, etc. Some of these methods in my view are close to alchemy (trying to turn lead into gold). Each person hopes he has the best method, and in the end the share price one year from now will probably depend more on what happens during the next 365 days (and is therefore unknown to us at present), than on what has happened in the past or what we know today.
Some people use multiples of the book value of accounts on the balance sheet, others a multiple of earnings/profitability form the income statement, and yet others discounted cash flow. In short, all 3 financial statements (balance sheet, income statement, cash flow statement) either with historic data or with estimated future data.
You are moving in the right direction, but it will take a bit more studying to understand some concepts better. A suggestion: do some reading on "historical cost" versus "fair value" in accounting, and the concepts of "accounting value" versus "economic value".
So good will is what a company believes is can make back with all its newly acquiref assestd and intangible assets?
Hi Jonny! I don't think "believe" is the best word here, but have trouble finding a better one. ;-) Goodwill represents the potential for "excess profit" from the deal. In my view, goodwill is the result of a calculation. The company decides to make an offer for another company that it wants to acquire (hopefully after extensive analysis of the potential value of the target based on expected free cash flow, board approval on the offer amount, and solid due diligence), and then if the deal is agreed the purchase price minus net assets becomes goodwill.
@@TheFinanceStoryteller gotcha so it's essentially what they believe it is worth and eventually bring to their company once purchased. Just finished reading Warren Buffet and the Interpretation of Financial Statements so trying to wrap my head around it.
@@Jonnynot1plate Agree. I think the best way to understand both the strategic and financial side of acquisitions (and the resulting goodwill) is to study a few cases of companies you are interested in. What I normally do is to read the press release of the deal announcement (including the description of strategic rationale and synergies), listen to or view the press conference, follow the regulatory approval process (this can take a couple of quarters), and then watch out for any updates afterwards (the worst of which could be an announcement of goodwill impairment, i.e. write-down of the value of the acquisition versus what was paid). I find the Microsoft - Linked In deal fascinating. Come to think of it, I have covered more of it in my video on Intangible Assets including how the accounting journal entries work ua-cam.com/video/-TzaG-VD2GU/v-deo.html Another fascinating example is General Electric - Alstom, a deal that did not turn out well and led to a $23 billion (!) writedown. I think the Wall Street Journal once published some research that 70% of all M&A deals fail to generate shareholder value for the acquiring company.
So for example, if my company costs 11 billion for sale, the extra 1 billion is goodwill right ?
If the book value is 10 billion, then yes.
@@TheFinanceStoryteller Thank you so much
how goodwill is in balance sheet
It's an accounting convention. When agreeing on the US GAAP and the IFRS rules, the respective committees preparing the accounting principles and rules judged that the most appropriate way to record acquisition premiums is for them to become an asset on the balance sheet that is not amortized. To stay with the example early on in the video, with a purchase price of $3B and net assets of $2B, the journal entry is debit net assets $2B, debit goodwill $1B, credit cash $3B. Conceptually, an alternative would be to take the $1B as a loss at the moment of closing the acquisition, or deduct goodwill from equity without having it go through the income statement. These alternatives were not the road that was chosen.
Can we generate goodwill?
Please give me ans in yes or no.
Thanks
Goodwill in accounting can arise in a business combination.
@@TheFinanceStoryteller that's means it can not be generated??
No, it cannot be generated "autonomously" in the world of accounting.
and here i am thinking that this was somehow related to good will hunting
hahahahahah
William James sides inspired movie??
hahaha me too
Great movie! :-) But very different topic.
Being a programmer, I just dont get it. Accounting people keep inventing voodoo magics to keep the balance sheet balanced. :/
It's the job of finance and accounting people to provide a fair and accurate representation of the financial situation of a company...... In case of an acquisition at a very high valuation (for example in the software industry), the gap between the market value (purchase price) in the transaction and the book value (equity value based on historical financial results of the company) can be huge. That difference between market value and book value in the acquisition transaction has to be recorded somewhere, and goodwill is the place! More explanation and examples in my video on market value vs book value ua-cam.com/video/uCs9AyGIb3c/v-deo.html and the one on mergers and acquisitions ua-cam.com/video/BAFmgPXvlJ8/v-deo.html
Please make a video on shares and dividends
Thank you for the suggestion! Will do. For starters, I have the topic of "dividend yield" on my To Do list. Keep checking back on my channel, I am producing a lot of new content.
Done! Here's the link to my video on "Dividend Yield", the first in a series on how to invest in the stock market. ua-cam.com/video/WaVuP4MRL-o/v-deo.html
Wait this isn't about the store
Correct. This is about the accounting concept.
Yeah I was so confused
Om shanti de I