Goodwill is that intangible asset you pay for when buying a used business. It’s that thing you pay for that isn’t a tangible asset*. The good reputation of the business, brand recognition, licenses, or intellectual property are all examples of goodwill.
(*click here to learn about assets)
What is the dollar value of goodwill? It’s simply the amount left over after accounting for all the tangible assets and liabilities. So, if you pay $100,00 for a business and the assets and liabilities total $80,000, then your goodwill is $20,000. This should be listed as a long-term asset on the balance sheet. (Not every business has goodwill.)
Public companies must perform impairment tests yearly to determine the fair-market value of the goodwill. But this is expensive and time-consuming. Hence, private businesses may choose to amortize goodwill in a straight-line basis over a ten-year period instead. In this case goodwill is $20,000. Therefore, you’d expense $2,000 each year for 10 years. This option makes a lot of sense for most small businesses.
However, private companies may have to perform an impairment test if there is a triggering event. Events that can trigger the requirement are: sustained deterioration in the general economy or the industry that your business operates in; increase in COGS** or operating expenses; a change in management or assets; or a sudden, sustained decline in revenue or profit margins***.
(**click here to learn about COGS) (***click here to learn about profit margins)
Covid-19 has affected various markets differently. These changes may trigger the requirement for an impairment test. Sustained deterioration is hard to define. If you have goodwill on your balance sheet and have been affected by Covid-19 ask your accountant if you need this test.
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