GoodwillWe are not talking about magnanimity but the accounting definition. Goodwill is the difference between what a business pays for another business and the deemed valuation of the assets in that business. For example, say we agree to buy XY Co Ltd for £5m and the value we place on the fixed assets (land and buildings, plant and machinery, fixtures and fittings, office equipment) and the net current assets (cash, stock and debtors less liabilities) comes to £4.5m. The accounting entries would be credit cash, or some other funding method, and debit the asset categories. But what about the gap of £0.5m? Plonk it in Goodwill .
Goodwill is what it says on the tin. Accountants call it an "intangible" asset. Definition number 2 in the Collins Dictionary is "capable of being clearly grasped by the mind". That is precisely right in the converse. If you cannot quite grasp why you paid that extra £0.5m, pretend it really was worth it and create an asset called Goodwill. Joe ordinary bloke will be hoodwinked. It will look really good all presented nice and clean and standing proud at the head of the real assets.
Once we have created our Goodwill, what to do with it? This is beautiful, you will like this one. Let’s write it off in equal instalments over twenty years. That way old Joe will just think our blue sky was just another bit of the regular depreciation or, if we want to be posh, amortisation. Now, if Goodwill created on a purchase is just a few pence, who cares?
Yesterday the Treasury Select Committee of UK MP’s grilled the former bosses of RBS on the purchase of ABN Amro. Did they overpay? The ex-Chairman or RBS replied "Whatever we paid, we overpaid". In hindsight, whatever the figure of Goodwill struck at the time, think of a number. Think of a big number. What about £5bn to £7.5bn? In fact, when the accounts came out, the write-off of Goodwill was £16bn. Now that is what I call intangible.
jgs-2009
