Study Surgery

A: Goodwill is an intangible fixed asset; unlike tangible assets (for example, fixtures and fittings) it does not have a physical form. Basically, goodwill represents the amount paid over and above the fair value of a business’s assets (usually the net assets) to acquire that business (or a share in that business). If a prospective buyer pays £50,000 for a business with assets valued at £35,000, goodwill is said to be £15,000. Typically, the buyer is paying for the reputation or customer base of the existing business, often acquired during many years.

At the intermediate stage, goodwill is usually associated with partnership accounts; specifically, with the admission or retirement of a partner. When a new partner joins an existing partnership, they buy into that partnership. Goodwill will be valued at time of admission. The accounting treatment can be illustrated by this example:

On 1 January 2007, Carl introduces capital of £17,000 to join the established partnership of Ahmed and Ben. Goodwill is valued at £60,000, with Ahmed and Ben sharing profits 2:1. With Carl’s admission, profits will be shared as Ahmed 5: Ben 3: Carl 2. Goodwill is not maintained in the accounts.

Step 1: Show capital introduced by the incoming partner

Step 2: Write ‘up’ goodwill in the old profit sharing ratio (ie, Ahmed and Ben)

Step 3: Write ‘down’ goodwill in the new partnership ratio (ie, including Carl)

Key learning points: Adjustments, in respect of partnership goodwill, are effectively made through the partners’ capital accounts. Where it is stated (as in the above example) that goodwill will not to be maintained in the accounts, that – alas – does not mean that it is ignored, but that you need to carry out the adjustments as indicated.

Simon Deane BA ACA is Managing Director of a private training provider

Accounting Technician - September 2007 - Page 25