Goodwill in business valuation. Coursework: assessing the value of goodwill (based on materials from Ursa Bank OJSC)

How to evaluate goodwill

Any company has not only material assets, such as buildings, equipment, stocks of raw materials and supplies, cash, etc., but also business reputation, established circle of clients and trusted suppliers, trademarks and brands, fame in the market and other factors that, at first glance , is very difficult to assess. However, when selling a business, when buying an existing company, during mergers and acquisitions, and simply to competently manage the value of a company, you need to know how much the company’s intangible assets are worth. Read about how to evaluate them in our material.

There is no generally accepted definition of the term “goodwill”. This concept is interpreted as reputation, respect, respectability, fame. According to the authors, goodwill is, first of all, public opinion in relation to names, styles, premises, trademarks, logos, designs, products and any other items in the possession or control of the company, as well as relationships with clients and customers. Sources of goodwill can be either a specific master in a beauty salon that people go to, or high-quality cuisine in a restaurant.

In accordance with the BSV-I1 standard adopted in 1988 and amended in 1991 by the American Society of Appraisers (ASA), goodwill is defined as the “good name” of a company and includes the company’s intangible assets, which consist of the prestige of the enterprise, its business reputation, relationships with customers, location, range of products, etc. These factors are not separately identified and are not taken into account in the company’s reporting, but they serve as a real source of profit.

Goodwill is intangible; its presence or absence can only be judged by the practice of the business. For example, if among a number of companies operating under equal conditions (territorial, price, service), one attracts more customers than others, this indicates that its goodwill is more expensive or “stronger.” For business, building brand awareness, brand recognition, and regular clientele is of great importance. Creating strong brands, expanding the clientele, brand recognition requires maintaining strict quality standards and certain behavior towards clients and partners, introducing a bonus system for regular customers, etc. All these actions should contribute to the formation of goodwill.

Why do you need to evaluate goodwill?

When should goodwill be assessed? There are several situations when this is necessary:

Buying (selling) a business;

Mergers and acquisitions;

Acceptance management decisions(when managing company value).

Personal experience

Hamid Mamajanov, chief researcher at the Institute of Certification and Assessment intellectual property and business, doctor of technical. Sci. (Moscow)

First of all, goodwill should be assessed when buying and selling enterprises. Business is not only fixed assets and other property recorded on the balance sheet, but a skillfully organized organizational and economic structure, experience effective management, stable buyers, well-developed product sales channels, established business connections, trained personnel and much more, in total, providing sustainable income. Therefore, the owner of the company is interested in receiving more for his business than the total value of all the assets of the enterprise. And, of course, the buyer will want to check what he is paying for if he knows that the total value of the assets is significantly lower than the price for which the business is being sold.

Evgeniy Neiman, vice president Russian society appraisers, President of the International Academy of Appraisal and Consulting, Ph.D. those. Sci. (Moscow)

I have performed goodwill valuations when it was necessary to determine the amount of compensatory losses caused by the divestment or closure of a business. I can give you a very specific situation. When laying the third transport ring, the building in which the restaurant was located was subject to demolition. The restaurant had a certain circle of visitors, an established reputation, etc. Compensation for the restaurant was set in the amount of the book value of the company's assets, which, of course, did not suit the business owners. In order to justify that the proposed price could not be fair, it was necessary to evaluate goodwill and include it in the cost of the restaurant, as ready-made business. Further resolution of the issue took place as a result of bargaining between the owners and representatives of the administration.

Evgeny Zlatokoltsev, entrepreneur, sold his business (restaurant in Moscow) in 2003

When selling a restaurant, the real value of the business was 50% higher than the cost of the restaurant, calculated as the sum of all costs of its creation. Largely due to the value of goodwill. At the same time, I believed that my restaurant did not have goodwill as such. However, the assessment showed the opposite. This made it possible to sell the restaurant for much more high price.

Goodwill revaluation: foreign experience

Many foreign companies that have participated in major mergers or acquisitions in recent years are now forced to revaluate goodwill, since the price of such transactions looks too high. Media holding AOL Time Warner has already announced a write-down of $54 billion to reflect the overall decline in its market value. This was largely due to an erroneous assessment of the value of goodwill (based on inflated forecasted income values) during the merger of the Internet operator AOL and the media holding Time Warner. Other major corporations have said they are going to do the same: Clear Channel will write down between $15 and $25 billion, Vivendi Universal between $12.3 and $13.2 billion, Qwest between $20 and $30 billion, World Com from 15 to 20 billion US dollars. Experts estimate that after these processes are completed, more than $100 billion in asset value will simply evaporate. Of course, this will have an adverse effect on stock market.

When managing a company aimed at increasing its value, it is also necessary to evaluate goodwill2.

Personal experience

Khomutov Vladimir, leading consultant of the STEP Consulting Center

When making certain strategic decisions, the owners are guided by what position the company will take in the market. And goodwill, with some degree of assumption, can be called a characteristic of the company’s position in the market. That is, if a company occupies a stable position in the market, this indicates strong goodwill, an unstable position indicates weak goodwill.

How to evaluate goodwill
The entire set of intangible assets at the disposal of the company can be divided into three groups. The first includes intangible assets that are inseparable from the enterprise, such as: the presence of trained personnel; achievements in the field of advertising and promotion of their products; advantages of territorial location; business reputation. Assets in this group generally have an indefinite life and are valued on an aggregate basis. Due to the fact that it is impossible to determine their service life and depreciation rate, such assets are considered non-depreciable.

The second group is intangible assets that are inseparable from an employee of the enterprise. These include the personal reputation and professional skills of the individual employee, including personal know-how, commercial ability, talent in the field of financial transactions, etc. Like the assets of the first group, these intangible assets are inseparable from the employee, do not have a useful life and are not amortized.

The third group is intangible assets that are generally separable from the enterprise, such as brand marks, brand names, trademarks, copyrights, patents, etc. Any asset in this group can be valued separately and most of them have a certain useful life. Such assets are considered depreciable and can be placed on the balance sheet of the enterprise.

Among specialists in the field of assessment there is no consensus regarding which assets are included in goodwill. According to the authors of the article, in the narrow sense of the word, goodwill is only those assets that belong to the first group in the above classification. In what follows in the article, a company’s goodwill refers to assets inseparable from production.

There are several methods for estimating the value of a company's goodwill, which are most widely used in Russian practice:

Valuation of goodwill as an assessment of the difference between the total market value of the enterprise's assets and the value of the entire business;

Valuation of goodwill from the perspective of excess profit;

Valuation of goodwill based on sales volume.

Let's take a closer look at the listed methods for estimating the value of a company's goodwill.

Valuation of goodwill as an assessment of the difference between the value of the company and the market value of all its assets

Valuation of goodwill as the difference between the market value of a ready-made business and the value of the enterprise’s assets can be conditionally divided into two large blocks.

First, you need to calculate the market value of all the company's assets. Determining the market value of a company's total assets is based on the principle of maximum efficient use. That is, the assessment is carried out based on the assumption that the assets are used most in an efficient way, while such use is physically possible, reasonable, justified and legal. On at this stage work, coordinated activities between the appraiser and the accountant are needed. The accountant must determine which of the company's intangible assets can be separated and placed on the balance sheet. The remaining intangible assets will form goodwill.

Secondly, you need to determine the value of the entire business as a whole, using either the comparative or income valuation method. The choice of one approach or another depends on the availability and reliability of the information used in the assessment. If, when conducting an assessment, there is a database of actual sales of similar businesses, then preference will be given to the comparative method of estimating the value of the business; if such information is not available, then the business is primarily perceived as a tool for generating income and is determined by the income method.

After the company’s total assets, including intangible ones, that can be placed on the enterprise’s balance sheet have been assessed, and the company’s market value has been determined, goodwill is determined as the difference between the two assessment results obtained.

Example

Business valuation and goodwill were assessed for largest network beauty salons "Persona Lab". The total asset value of one of the salons is $390 thousand. As a ready-made business, the salon was valued at $920 thousand. High score cost is due to the fact that new owner, by purchasing a salon, you received not only a beauty salon, but the opportunity to use a well-known trademark, streamlined business processes and other obvious competitive advantages. That is, in the case of the Persona Lab company, when purchasing a salon, the new owner first of all acquired its goodwill, which amounted to 530 thousand US dollars (920 thousand US dollars - 390 thousand US dollars)

Accounting aspect

In accordance with Russian standards accounting business reputation (goodwill) is defined as the difference between the purchase price of an organization (as an acquired property complex as a whole) and the cost at balance sheet all its assets and liabilities.

Acquired business reputation is recorded on the balance sheet and amortized over 20 years (but not more than the life of the organization). If the acquired business reputation of a company is negative, it is equally allocated to financial results companies as operating income.

Valuation of goodwill from the perspective of excess profit

The methodology for assessing goodwill, which involves calculating excess profit, is based on the assumption that if one enterprise receives more profit per unit of assets than a similar enterprise in the same industry, this means that it is its goodwill or business reputation that brings additional profit to the enterprise.

The excess earnings method for determining goodwill is based on a concept developed by the Internal Revenue Service and introduced by the U.S. Department of the Treasury in 1920. It was assumed that the assets of all companies generate the same profit. Thus, having determined the standard profit per unit of assets, you need to compare it with the real indicator of profitability of assets and determine the volume of unaccounted assets, that is, goodwill. Instructions tax office US No. 68-609 of 1968 rates of return for tangible and intangible assets were set by policy. For enterprises with a low level of risk, 8% is the rate of return for tangible assets and 15% for intangible ones. For enterprises with a high level of risk – 10% and 20%, respectively.

In Russian practice, there are no fixed profitability ratios of this kind, which, on the one hand, complicates the assessment, and on the other hand, as a result of a careful selection of analogue enterprises, it makes it possible to increase the reliability of the assessment and avoid the assumptions inherent in broad generalizations. When selecting similar enterprises with which profitability can be compared, you need to be guided by the following criteria:

The enterprise produces similar products (works, services);

Located in the same area (region, district);

Has similar production facilities.

The management of Angara CJSC decided to evaluate the company's goodwill using the excess profit method. The company's net assets amounted to $400 thousand, and its annual net profit was $80 thousand. Thus, the return on net assets is 20% (80/400x100%).

As a result of the study, it was determined that the return on assets of similar enterprises averages 15%, that is, the profit of Angara CJSC is 5% higher than the average for similar enterprises. According to the assessment method from the position of excess profit, such a discrepancy arose due to the fact that part of the assets of Angara CJSC was not taken into account, namely goodwill.

Accordingly, to make $80 thousand in profit with a 15% return on assets, the company would need to have assets worth $533 thousand (80/15%). From this we can conclude that the value of the company's goodwill is $133 thousand ($533 thousand - $400 thousand).

Valuation of goodwill based on sales volume

To use the method of estimating goodwill by sales volume, you need to know the industry average profitability ratios. The company's goodwill is calculated using the formula:

GV = (NOI – QfxRq)/Rg, where

GV - goodwill;

NOI is the net operating income from the company's activities. Calculated as gross income minus operating costs and reimbursement expenses (for current repairs);

Rq – industry average coefficient of profitability of product sales;

Rg is the capitalization ratio of intangible assets (the ratio of the company's profit to the value of intangible assets recorded on the balance sheet).

Qf – cost products sold.

The volume of shipped products of the company is 200 thousand US dollars. The company's net operating income is $40 thousand, the return on intangible assets or capitalization ratio is 15%. The company, after conducting research, found that average profitability similar products account for 5%. Based on these data, the company's goodwill was calculated, which amounted to 200 thousand US dollars ((40 thousand US dollars - 200 thousand US dollars * 0.05) / 0.15).

As with the previous method, the main problem in applying the sales volume method is related to the difficulty of obtaining external data, in this case the industry average profitability coefficient. Therefore, the choice of method for assessing goodwill depends, first of all, on the availability of information that the company has.

Personal experience

Vladimir Khomutov

Valuing goodwill requires a significant investment of time, effort and money. Therefore, when choosing methods, one must be guided by the fact that the costs of conducting the assessment will not exceed the value of the information obtained.

The role of goodwill in company value

From the point of view of the influence of goodwill on the value of the company, all small and medium-sized businesses can be divided into three main groups: - goodwill is significant, but not the main component of value;

Goodwill has not yet been established as a profit-generating factor.

The first group includes, for example, the Aspect-Modifier company, a fairly well-known manufacturer of auto chemicals. Experts from the Ready-Made Business Store valued it at $120,000. Back in 1997, the company occupied about 50% of the domestic automotive chemicals market, but by 2001 the company was able to maintain only 8%. The total cost of acquiring assets can be estimated at 130 thousand dollars, but these assets have narrow specialization, which means they are low-liquid and have a low selling price. The final value of the business was largely formed by intangible assets - namely, a trademark recognizable throughout Russia, technological documentation, positive expert opinions from leading research centers. But most importantly, consumers remember how just a few years ago, they literally lined up for products from the Aspect-Modifier company. Taking this into account, potential investors see great development prospects in the company.

The second group includes companies whose goodwill makes up from 25% to 40% of their value. First of all, this includes consulting, evaluation and law firms. Unfortunately, there is no data on their valuation on the market. This group also includes beauty salons, restaurants and other enterprises operating in the service sector. Both companies begin to generate stable profits only if they form a stable clientele and a certain reputation, that is, goodwill. Companies operating in this market segment are among the most sold and purchased. As an example, we can cite one well-known Moscow restaurant, the value of whose tangible assets amounted to 500 thousand dollars, and the liquidity of some of them was questionable. For example, it is not so easy to find a buyer for a sofa covered with pony skin worth 30 thousand dollars. At the same time, the restaurant was valued at $800 thousand. The popularity of the establishment, its elite image, unique for the Russian restaurant market concept. All these factors made it possible to predict a payback period of two years, making the restaurant one of the most attractive investment offers on the market.

The third group is little-known and “unpromoted” companies. Due to the rather inefficiently generated goodwill, their owners cannot expect to receive a high price for their business. An example is the company Daris, which produces chips. Its estimated value was $120,000, $115,000 of which was in tangible assets. At the same time, research shows that the market for snack products, which includes chips, is far from saturated, and companies that have correctly structured their policies and managed to make their brand recognizable can achieve a goodwill value comparable to the value of tangible assets.

Russian features of goodwill assessment

The current state of the market for assessing goodwill and using its results in Russia leaves much to be desired. This comes with a number of problems. Lack of reliable information about the enterprise (assessment carried out on the basis of official financial statements, produces a result several times lower than the real one) complicates the work of appraisers; the acute lack of statistical data on concluded purchase and sale transactions of a ready-made business does not allow any comparative analysis. However, the mistakes made by Western companies in determining goodwill indicate the need to improve valuation methods and put them into practice. The increasing use of goodwill assessment should also be facilitated by the increasing focus of business managers on increasing the value of their companies as one of the main strategic goals.

The value of a company, taken as a single property complex, is different from the total value of its assets and liabilities. There is always a difference between them - goodwill. This indicator has its own nuances when assessed, calculated and reflected in accounting.

The value of a company is influenced by its “business reputation” (a term adopted in the Russian Federation), or goodwill (a term adopted in international practice). Goodwill is the difference between the firm's price and the fair value of all its assets. The task of accounting is to explain the occurrence of this difference, to decompose it into its constituent components. To do this, firstly, they revaluate net assets at fair value. Comparison of amounts representing market valuation and book value of net assets violates the principles of comparability. Secondly, from the resulting difference, intangible assets are identified (for example, private brands, Internet domains, customer lists, etc.) that were not included on the balance sheet of the acquired company, but at the date of purchase have a fair value. Thirdly, if a business combination occurs, then, in accordance with the requirements of IFRS 3 Business Combinations, contingent liabilities are recognized, which also clarify the measurement of goodwill.

After identifying the components, an indivisible amount remains, which is goodwill.

According to IFRS 3, at the date of acquisition of a company, the buyer must:

• recognize goodwill resulting from a business combination as an asset;
• value goodwill at actual cost.

The resulting difference can be either positive or negative. Positive goodwill is viewed as a price premium paid by the buyer in anticipation of future economic benefits, while negative goodwill is considered a discount on the price when a company is sold for less than market value. Negative goodwill should be recognized immediately in the income statement.

Let's consider methods for calculating the difference between the price of a company and the fair value of all its assets, as well as the subsequent assessment of goodwill and the procedure for disclosing information about it in accounting.

Methods for calculating goodwill

There are several methods for determining the value of goodwill when purchasing a company. "Proportional" method. Traditionally, goodwill arising at the time of acquisition subsidiary company, is considered (and calculated) as the excess of the fair value of the consideration transferred by the controlling shareholder over its share of the fair value of the subsidiary's net assets.

The value of goodwill is determined as the difference between the fair value of the investment (FV inv.) and the investor's share of the fair value of the acquired identified net assets on the date of the transaction (purchase date) (DFA on d.p.):

Goodwill = CC inv. - DSSCHA on d.p.

The share of the fair value of net assets at the date of purchase (FAV on d.p.) is determined as the difference between the cost of acquired identifiable assets (FA act.) and the amount of liabilities and contingent liabilities controlled company(SS oblig.) (see examples below):

DSSCHA on d.p. = SS act. - SS oblig.

Example

The parent company Aktiv LLC acquires 60% of the subsidiary Passive LLC for 252,000 USD. f. The fair value of the subsidiary's identifiable net assets at the acquisition date is CU 280,000. e. 40% of the shares of the subsidiary are traded on the stock exchange, their fair value is 160,000 USD. e.

To calculate goodwill, we determine the investor's share of the fair value of the acquired identifiable net assets as of the date of purchase:

DVA on d.p. = 280,000 USD. e. × 60% = 168,000 USD e.

Based on this, the value of goodwill at the date of purchase will be:

252,000 – 168,000 = 84,000 USD e.

In case of acquisition of control over LLC Passiv by favorable price When the fair value of the acquisition of the net assets exceeds the cost of the business combination, the investor entity should recognize a one-time gain in the income statement happy shopping(badwill).

Example

The parent company Aktiv LLC acquires 60% of the subsidiary Passive LLC for 152,000 USD. e. The parent company's share of the fair value of the subsidiary's identifiable net assets at the acquisition date is CU 180,000. e.

In this case, the investor company entered into a profitable transaction - a business combination, as a result of which, on the date of acquisition, it received income from a successful purchase (badwill) in the amount of:

180,000 – 152,000 = 28,000 USD e.

This method of calculating goodwill is usually called “proportional”.

As can be seen from the example, the “proportional” method takes into account only goodwill attributable to the controlling shareholder.

The "full goodwill" method. IFRS 3 introduces the concept of “full goodwill”. Its essence boils down to the fact that in business combination transactions it is necessary to calculate the amount of goodwill as it would be calculated if the acquiring company bought out the entire package of voting rights of the acquired company. This approach is based on the fact that in a business combination transaction, the acquiring company gains control over all the assets of the acquired company, including goodwill (and not over the part of the assets corresponding to the share of acquired voting rights), and, accordingly, must fully reflect them in a consolidated financial statements. The "whole goodwill" method of calculation means that goodwill arising in a business combination is recognized for both the parent's equity interest and the non-controlling interest.

In accordance with IFRS 3, goodwill is calculated as the difference between the fair value of the acquired business as a whole (FV of the business) and the fair value of all its net assets (NAV per d.p.) at the date of purchase:

Goodwill = CV of business - NAV per d.p.

The fair value of the acquired business is determined as the sum of the fair value of the investment (FV inv.) and the fair value of shares of the acquired business owned by a non-controlling interest (FV NCD):

SS business = SS inv. + SS NKD

The amount of “full goodwill”, according to IFRS 3, should be distributed between goodwill attributable to the investor's interest (Goodwill inv.) and goodwill attributable to the non-controlling interest (Goodwill NCD). The first is defined as the difference between the fair value of the investment (FV inv.) and the investor's share of the fair value of net assets at the date of purchase (FAV per d.p.), which corresponds to the “proportional” method of calculating goodwill. The second is equal to the difference between “total goodwill” and goodwill attributable to the investor.

Goodwill inv. = SS inv. - DSSCHA on d.p.

Goodwill NKD = Goodwill - Goodwill inv.

Example

Let's use the conditions of the first example (see p. 104) and define “full goodwill” in accordance with IFRS 3. Let's calculate the fair value of the business as a whole:

SS business = 252,000 + 160,000 = 412,000. e.

Based on this, the value of “full goodwill” will be:

Goodwill = 412,000 – 280,000 = 132,000. e.

“Full” goodwill must be allocated among the goodwill attributable to the investor's interest:

252,000 USD e. – 280,000 USD e. × 60% = 84,000 USD e.,

and goodwill attributable to non-controlling interest:

132,000 – 84,000 = 48,000 USD e.

Note that changing the method of assessing goodwill affects the procedure for calculating the non-controlling interest. According to the “proportional” method of calculation, its value is determined as the product of the fair value of the net assets of the controlled company at the reporting date (NAV as of the reporting date) and the share of shares not controlled by the investor organization (parent company) (Yes):

NKD = SSNA on d.o. × Yes

When using the "full goodwill" method of calculating the non-controlling interest, the non-controlling interest must be increased by the amount of goodwill attributable to the non-controlling interest:

NKD = SSNA on d.o. × Yes + Goodwill NKD

Example

The parent company Aktiv LLC owns 65% of the shares of Passive LLC. The fair value of the net assets of Passiv LLC as of the reporting date (NAV as of the reporting date) is CU 160,000. e. “Full” goodwill is 45,000 USD. e., including:

• goodwill attributable to the investor (Goodwill inv.) - 30,000 USD. e.;
• goodwill attributable to non-controlling interest (Goodwill NCD) - 15,000 c.u. e.

Let's determine the non-controlling interest (NCA) in accordance with the method of proportional calculation of goodwill. Share of shares not controlled by the investor organization (parent company) (Yes), in in this example is equal to:

100 – 65 = 35%

Therefore, the value of the NKD is:

160,000 USD e. × 35% = 56,000 USD e.

When calculating total goodwill, the value of the non-controlling income will increase by the amount of goodwill attributable to the non-controlling share:

NKD = 160,000 USD. e. × 35% + 15,000 c.u. e. = 71,000 USD e.

We also note that when calculating “full goodwill”, the problem of valuing the non-controlling interest at fair value arises. Typically, the fair value of a business (FV of a business) can be determined by the fair value of the company's publicly traded shares. To calculate the fair value of shares in circulation, it is necessary to find the product of the number of shares in circulation (Number of shares) by the fair value of one share (SS share):

SS of business = Number of shares × SS of shares

Therefore, when calculating “total goodwill,” there is an increase in the amount of net assets reported in the parent company's consolidated financial statements.

Subsequent assessment of goodwill

In accordance with IFRS 3, after initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized but is tested for impairment in accordance with IAS 36 Impairment of Assets annually (regardless of whether there is evidence of impairment) or more frequently (if there is evidence of impairment).

Previously, for many years, the most common option in the world for subsequent valuation of goodwill was its depreciation. However, this method was the subject of constant criticism, which was based mainly on two significant arguments - complexity and subjectivity in determining the depreciation period and choosing the depreciation method. The depreciation period for goodwill varies from 5 to 40 years or more (for example, in Russia the depreciation period for goodwill can be 20 years or more, in the USA for a long time, until 2001, this period was 40 years).

Difficulties in determining the amortization period arise primarily because goodwill represents future economic benefits from synergies, that is, from assets that can only be considered in interaction. Only if goodwill is associated with an identifiable asset can it be reasonably expected that it will provide a benefit to the buyer over a period equal to the life of the asset. However, as a rule, goodwill is associated not with one specific asset, but with a whole group of closely interrelated assets.

Difficulties in choosing a depreciation method are due to the fact that the value of goodwill is subject to significant and uneven fluctuations, and therefore a proportional reduction in its value by calculating linear depreciation (as is done in most cases) does not reflect the economic essence of the processes taking place.

The only way out of this situation can be periodic revaluation, the methodology of which is proposed by IFRS.

Testing for impairment of goodwill

Testing goodwill for impairment involves comparing the recoverable amount of acquired goodwill to its carrying amount. Recoverable amount is the higher of an asset's fair value less costs to sell or its value in use. Fair value, or net realizable price, is the amount that would be obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties. Value in use is the current discounted value of estimated future flows cash that are expected to arise from the use of an asset and its disposal at the end of its useful life.

Obviously, testing for impairment of goodwill at on an individual basis(i.e., determining the recoverable amount of goodwill) is not possible. To address this issue, IAS 36 introduces the concept of a cash-generating unit (CGU) and testing of goodwill is carried out on the basis of such units.

For purposes of impairment testing, goodwill acquired in a business combination must be allocated to the CGUs that benefit from the purchase. Acquired goodwill represents an entity's payment in anticipation of future economic benefits from assets that cannot be identified and recognized separately. In other words, goodwill does not generate cash flows independently of other assets and often has a positive impact on the cash flows of multiple units. This is why the recoverable amount of goodwill as a separate asset cannot be determined. If there are indications that goodwill may be impaired, the recoverable amount of the cash-generating unit to which the goodwill relates will be determined rather than its recoverable amount.

In accordance with IAS 36, a CGU to which goodwill is allocated must be tested for impairment annually, regardless of the presence of indicators indicating impairment. Testing involves the following algorithm of actions:

• Stage 1. Distribution of goodwill between CGUs.
• Step 2. Comparison of the recoverable amount of the unit (RU) with the carrying amount (BCe).

If BCe exceeds BCe, then no further action is required, since no impairment of goodwill was detected for the period under review. If BSE turns out to be greater than the estimated BSE, the company must recognize an impairment loss. It reduces the profit of the reporting period.

An impairment loss should reduce the carrying amount of a firm's assets in the following order:

• the carrying amount of goodwill allocated to that unit is reduced;
• the book value of the assets included in the unit is proportionally reduced.

When allocating an impairment loss, the carrying amount of the asset must not be less than highest value from three indicators:

• the net selling price of the asset, if it can be determined;
• the value in use of the asset, if it can be determined;
• zero.

Companies should not have “freedom of choice” when assigning goodwill to units of accounting. According to IFRS, such an allocation must be “reasonable and acceptable”. If goodwill is allocated to a weak unit, it may have to be written off immediately or fairly soon. Goodwill allocated to a highly profitable unit has every chance of never being written off. When choosing accounting units, management must assess whether the enterprise will grow, make a profit, develop cyclically, whether sudden changes are possible in the near future, etc.

Example

Aktiv LLC is the buyer of Passive LLC. The acquired goodwill amounted to RUB 2,800,000. and was distributed into two generating units - transport and marketing segments in a ratio of 1200:1600.

A year later, Aktiv LLC tested a cash-generating unit engaged in transport business, for impairment and received the following results: the recoverable value (ALL) of the unit was RUB 9,600,000, and the balance sheet value (BCe) was RUB 10,000,000. (including the book value of assets: fixed assets - 4,000,000 rubles, intangible assets - 4,000,000 rubles and accounts receivable - 2,000,000 rubles). Let's determine the impairment loss (calculated data are presented in Table 1).

Table 1. Calculation of impairment loss

	At the beginning of the month, thousand rubles.	Depreciation, thousand rubles	At the end of the month, thousand rubles.
Goodwill
Assets
Total

The amount of impairment loss is calculated in several stages:

1. Determination of the book value of a cash-generating unit as the sum of the book value of all assets and goodwill (BCe + goodwill):

4,000,000 + 4,000,000 + 2,000,000 + 1,200,000 = 11,200,000 rub.

2. Comparison of the carrying amount and recoverable value of the cash-generating unit (BCe + goodwill) and Vse:

9,600,000 – 11,200,000 = – 1,600,000 rub. (impairment loss).

3. Distribution of impairment loss:

a) reducing the amount of goodwill to zero:

DEBIT Profit and Loss CREDIT Goodwill

– RUB 1,200,000;

b) distribution of the remaining amount of 400,000 rubles. (1,600,000 – 1,200,000) between other assets of the unit:

DEBIT “Profit and loss” CREDIT “Fixed assets”

DEBIT “Profit and loss” CREDIT “Intangible assets”

– 160,000 rub. - (400,000: 10,000,000 × 4,000,000);

DEBIT “Profit and loss” CREDIT “Provision for impairment of accounts receivable”

Reversal of impairment loss

If in subsequent years after recognition of an impairment loss there is a significant increase in goodwill (associated with an increase in the value of the company’s name, development client base and other factors that are capable of generating profit), this fact indicates that the impairment loss recognized in previous years has decreased or no longer exists. However, IFRS does not allow for the reversal of an impairment loss on goodwill, since any subsequent increase in the recoverable amount of goodwill will be an increase in internally generated goodwill. And internally generated goodwill does not meet the criteria for recognition in financial statements.

Example

Let's use the data from the previous example. It is assumed that at the next reporting date Aktiv LLC has every reason to believe that the impairment loss on the cash-generating unit can be reversed. The recoverable cost of the unit was determined as of this date in the amount of RUB 10,200,000. The corresponding calculated data are given in Table 2.

Table 2. Loss reversal

	At the beginning of the month, thousand rubles.	Reversal of impairment loss, thousand rubles.	At the end of the month, thousand rubles.
Goodwill
Assets
Total

Distribution of the loss recovery amount among the assets of the unit:

DEBIT “Fixed Assets” CREDIT “Profit and Loss”

– 160,000 rub. - (400,000: 10,000,000 × 4,000,000);

DEBIT “Intangible assets” CREDIT “Profit and loss”

– 160,000 rub. - (400,000: 10,000,000 × 4,000,000);

DEBIT “Provision for impairment of accounts receivable” CREDIT “Profit and loss”

– 80,000 rub. - (400,000: 10,000,000 × 2,000,000).

The balance is 200,000 rubles. (10,200,000 – 10,000,000) will not be reflected in accounting, since it accounts for internally generated goodwill.

Disclosure in financial statements

Financial statements must provide disclosures that enable users to assess changes in the carrying value of goodwill during the reporting period. This is the information:

• about the factors that influenced the increase in the value of goodwill upon its recognition, that is, a description of each intangible asset that was not recognized separately from goodwill, and an explanation of why the fair value of this asset cannot be measured reliably;
• the gross value of goodwill and accumulated impairment losses;
• goodwill included in the group of assets intended for disposal;
• impairment losses recognized during the reporting period;
• amounts recognized in the income statement as negative goodwill.

Thus, for a potential investor, goodwill valuation is a powerful tool that gives an idea of ​​what part of the market value of an enterprise is expressed by its real assets, and what part is expressed by goodwill, which contributes to a more accurate representation of the degree of risk of investing in companies. For many firms, goodwill serves as the most significant asset, which is not identifiable and isolable. This is what helps the company extract more profit per unit of assets than that of the same type of average company. Essentially, it is something intangible that may be inseparable from the company, but can significantly change the value of the business.

A good business reputation is possible when the company produces goods (performs work, provides services) high quality, has a strong management team developed marketing strategy. Also important is the presence of a permanent customer base, established relationships with suppliers, high credit indicators, a favorable location and an established corporate culture.

To be competitive in the market, entrepreneurs and managers various enterprises, it is important for a company to pay attention to the business reputation of the brand. At the same time, the popular concept of goodwill plays an important role here. We suggest finding out what goodwill is in accounting, what types of goodwill there are and how they differ from each other.

What is goodwill?

In an accounting sense, goodwill is a value expression of a company’s business reputation, showing the difference between the acquisition price of an enterprise as an integral financial and property complex and the total value of its net assets. Goodwill can be positive or negative. Literally from English good will means “good will” and in this context means favor, disposition, goodwill.

How to calculate goodwill?

Determining the goodwill ratio is not that difficult. To do this you need:

1. At the current market value, evaluate the entire set of assets available to the acquired enterprise as if they were purchased separately.
2. Determine the net asset indicator.
3. Compare two quantities.

The resulting difference can be called goodwill or negative goodwill. When compared with other intangible assets, it is usually classified as an unidentifiable intangible asset. As for the identifiability of intangible assets, it is characterized by the fact that it can be acquired not only externally, but also created on its own.

Positive goodwill

It is known that the very concept of goodwill determines additional income, which arises for a company as a result of its inherent advantages. It is customary to distinguish between positive and negative goodwill. The first occurs when the total value of the identifiable assets and liabilities of the acquired entity is less than the cost of its acquisition.

Negative goodwill

Another type of goodwill occurs when the acquirer's interest in the fair value of the identifiable assets and contingent liabilities acquired as part of a business combination exceeds its cost of acquisition. Negative goodwill is goodwill that arises when the total value of an entity's identifiable assets and liabilities exceeds its purchase price. It is important that the acquirer reconsiders the valuation and allocation of identifiable assets, contingent liabilities and the acquisition price assessment.

Business reputation is usually understood as an intangible benefit, which is an assessment of the activities of a physical or legal entity from the point of view business qualities. This is also the name for the difference between the current price of an organization and its value directly on the balance sheet. If we talk about goodwill, then we are talking about economic term, which is used in accounting to reflect the market value of a company without taking into account the value of liabilities and assets. The goodwill ratio is attributed to intangible assets.

Goodwill is a combination of factors, the good name of the brand, advantageous location, recognition trademark and others that are not identified separately from the company, allowing one to make a conclusion about the future increase in the company's profit in comparison with the average profit of similar competitive companies and enterprises.

3 simple steps
to receive the report

Convenience of working with us

Guarantees of correct assessment

Join the ranks of our clients:

Presentation of services valuation of intangible assets

Our guarantees low prices

• Our company is not bureaucratic and we do not have dozens of managers feeding off clients.
• All our employees have extensive experience in assessing various objects and proven methods that greatly reduce labor costs for assessment.
• We do not spend your money on our image paraphernalia. The best image for us is satisfied customers.

A company's business reputation is not a material benefit or an asset, but it plays an important role in the development and financial position of a legal entity. In this regard, business reputation is considered to be an intangible asset (ITA) of an organization, consisting of such components as location, presence of customers and partners, their loyalty and trust, product range, etc. Individually, all these criteria are difficult to evaluate, but taken together they can be expressed in quantitative indicators that will demonstrate the profitability, profitability and profitability of the company's activities.

Assessing the business reputation of an enterprise is of great importance not only for the company itself, but also for business partners, because If the organization’s prospects are obvious, then there will be interest in its promotion to a higher market level.

The Civil Code of the Russian Federation does not contain the concept of “business reputation”, therefore in Russia it is customary to use international standards to “dress” business reputation in an economic “shell”, using the term “goodwill”.

For a correct and complete understanding of the phenomenon of “reputation”, as well as the entire range of activities necessary for its assessment, deep knowledge in the field of finance, management, marketing, PR and analytics is required. Some managers, considering themselves quite knowledgeable in these areas, try to independently assess the business reputation of their company, however, as a rule, they overestimate the value of their intangible assets, which leads to biased results, as a result of which the company's trends and development prospects are seen in a distorted form. Valuation of an enterprise's Goodwill is the prerogative of experienced appraisers who understand all the intricacies of this complex and labor-intensive process!

Goodwill Valuation Methods

The assessment of Goodwill's business reputation is a set of measures aimed at determining the difference between assets and liabilities and the company's unified property complex. This algorithm allows you to derive an indicator of the value of a company’s reputation, which will indicate its profitability.

The assessment of the value of Goodwill is carried out by the two most effective methods for objectively calculating the reputation coefficient:

• The excess profit method involves evaluating a specific brand, which is the main source of income, generating profit precisely due to its name. This method is based on identifying the source of financial income and their calculation, and comparing the profitability of the evaluated brand with the income of competing brands operating in a similar area, with subsequent capitalization without taking into account the company’s material assets.
• Balance sheet valuation method. It allows you to determine the value of a company's goodwill by calculating the difference between total cost business and the total value of assets owned by the company. This method is carried out taking into account the results that were achieved through specific business operations.

An assessment of an enterprise’s Goodwill is extremely necessary not only for the company’s ability to realistically look at the current state of its affairs and correctly predict future prospects, but also in case of business expansion, for example, during the acquisition or merger of a company, the purchase or sale of a business, the reorganization of an enterprise and in many other cases.

Company reputation analysis

To increase the effectiveness of Goodwill assessment, experts must conduct an in-depth analysis of the company’s reputation, formed over a specific period of its activity. During the analysis process, specialists study the main factors influencing general image companies, namely:

• the quality of products (services) produced by the company, the ratio of their price and quality from the point of view of consumers;
• level of brand awareness and popularity;
• the level of profitability of the company, the presence of positive trends in increasing income, the coefficient operational efficiency, stability of work;
• presence of business partners (sponsors, investors, dealers);
• the level of competence and authority of the company's manager from the point of view of employees;
• working conditions, absence/presence of staff turnover, quality of salary payments, etc.

List of documents required for expert assessment

To conclude an agreement to assess the company’s reputation, officially authorized person must provide the expert company with certified copies of the following documents:

• Certificate of state registration of the organization, constituent documents (memorandum of association, charter);
• Issue prospectuses, reports on the results of share issues;
• Information about the structure and types of activities of the enterprise;
• Real estate rental agreements (if any);
• Financial documentation for at least the last 3 years (balance sheets, income and loss statements);
• Auditor's report(last check);
• Inventory lists;
• Statement of accounting of fixed assets;
• Data on assets (bills, real estate, shares third party organizations etc.);
• Information about accounts payable;
• Information about holdings and subsidiaries, financial reporting documentation on them;
• Enterprise development plan for the next 3-5 years (estimated gross revenue, costs, investments, profit for each year are indicated).

Estimating the value of Goodwill can be carried out for different purposes, and, depending on specific goals and objectives, additional data on the organization’s work may be required, so this list of documents can be adjusted by an expert during the research process.

Only in our company!

When ordering an assessment service for an amount exceeding 200,000 rubles
we give you a new one iPad 5

Goodwill can be half the value of the enterprise or more (for example, for a television company).

Let's determine the value of goodwill at following example:

ü 10% of receivables will not be collected;

ü 5% inventory obsolete and can only be sold for 10% of the face value;

ü according to the conclusion of a real estate appraiser, the land and building cost 2,500 thousand rubles;

ü according to the conclusion of the equipment appraiser, the equipment costs 1,600 thousand rubles;

ü according to the business assessment, the cost of investment in the company is 450 thousand rubles;

ü average income per equity for the industry it was 14%;

ü normalized net profit 600 thousand rubles;

ü capitalization ratio 30%.

There is a past balance sheet (Table 6.11).

Table 6.11

Past Balance Sheet

Indicator		Amendments	Updated cost		Reasonable market value for
Cash
Accounts receivable
Inventory
Total current assets
Land and buildings
Equipment
Total fixed assets
Investment in ABC Company
Total assets
Total liabilities
Cost of equity
Total liabilities and equity
Note. Italics indicate calculated data

The calculation of the excess profits method is carried out in stages.

At the first stage an economic balance is built in which assets are given at market value, that is, at the value that can be obtained for them on the market today. This is also called adjusted cost calculation. The only item on the balance sheet that is not adjusted is cash. However, if the bank in which the company has deposited money in its current account is in receivership or has simply disappeared, the corresponding amount of funds is reset to zero. In our example, the bank is functioning normally, everything is in order at the cash desk, so the amount of funds remains unchanged.

According to the problem, 10% of receivables will not be collected, which means that the adjusted cost is 180, the adjustment is 20. The assessment of receivables is carried out in 3 main stages: drawing up a calendar schedule for repayment of receivables, identifying overdue debts in this schedule, highlighting bad debts in overdue debts. Bad debt is not included in the economic balance sheet.

When assessing inventory, a complete inventory must be carried out according to market prices to date. In our example, 5% of inventory (i.e. inventory worth 50) is obsolete and could be sold for 10% of face value (i.e. 5 monetary units), so the adjusted inventory value would be:

(1000 – 50) + 50 * 0,1 = 955.

The adjusted value of the land and building is 2,500, the equipment is 1,600. An appraiser specializing in the valuation of securities has determined that the value of the investment in ABC Company is 450. Next, we find the adjusted value of all assets. It is equal to 6,060.

Appraisers never calculate liabilities, but make the assumption that the value of liabilities on the economic balance sheet is equal to the adjusted value of assets (6,060). Liabilities are the sum of equity (this is the value of the enterprise) and liabilities. The amount of liabilities remains unchanged (3,000), so the adjusted cost of equity is:

6 060 – 3 000 = 3 060.

On second stage of calculations Form No. 2 (profit and loss statement) is normalized and, accordingly, the balance sheet is normalized on a pre-tax basis . To do this, the following calculations are carried out:

ü tax payments are added to net profit (according to the financial income statement), one-time or non-operating expenses or income are added (expenses are added, income is deducted);

ü the result is normalized profit before taxes;

ü From the normalized profit before tax deduction, taxes payable on the basis of normalized taxable income are subtracted. These are the taxes that the company would pay in the absence of unusual income and expenses;

ü the result is a normalized net profit, that is, the result of the second stage of calculating the value of goodwill using the excess profit method

In our problem, the normalized net profit according to the condition is 600 thousand rubles.

On T third stage The average industry return on assets (or on equity capital) is found, that is, the ratio of profit to assets or equity capital for enterprises on the industry average. This indicator can be found in industry magazines, Expert and Money magazines.

On fourth stage The calculation determines the expected profit. This is the profit that our enterprise would receive if it operated the way the average enterprise in this industry operates. To do this, you need to multiply the adjusted value of equity capital (or assets) by the industry average return on equity capital (assets). In our problem, the average return on equity is known. Therefore, the expected profit is:

3 060 * 0,14 = 428,4.

On fifth stage excess profit is determined. To do this, the expected profit is subtracted from the normalized net profit:

600 – 428,4 = 171,6.

There can only be goodwill if there is excess profit. An enterprise receives excess profit, which means it works better than enterprises on average in the industry, and has some advantages, which are united by the concept of “goodwill.”

If excess earnings are negative, then goodwill is negative. But enterprises do not place orders for the assessment of negative goodwill, since the services of appraisers are expensive.

At the sixth stage of calculation The value of goodwill is determined by the formula:

where I ( incom, income) is excess profit; R – capitalization ratio.

In our task

When calculating goodwill, the main thing is to correctly calculate the capitalization rate. In our problem it is given, but the evaluators calculate it. The value of goodwill almost entirely depends on the number that the appraiser puts as the capitalization ratio, and the value of the business depends on the value of goodwill.

The appraiser can process different income streams: cash flow or net income. Different discount rates and capitalization rates apply to these flows. At discounting cash flow or net profit, firstly, income streams are processed for several forecast years, and secondly, these streams are unequal in size. At capitalization the flow is processed for one time period (per year), these flows are equal in size or differ with a small amplitude of fluctuations (in the latter case, the numerator of the formula contains the arithmetic mean of the annual flow value).

The conversion of one rate to another is carried out using the following transformations. We determine the discount rate for net cash flow (that is, cash flow based on normalized net income) using either a capital asset pricing model or a cumulative construction model. Net profit cannot be processed using this bet. We conventionally assume that the discount rate for net cash flow is 23%.

We convert the discount rate for net cash flow (NCF) into the capitalization rate for NCF using the formula:

R to NDP = R d NDP – g,

where R to NDP is the capitalization ratio of net cash flow; R d NDP – discount rate of net cash flow; g is the expected growth rate of the company in the post-forecast period.

Conditionally we accept g = 5%, then

R to NPV = 23 – 5 = 18%.

Next, we convert the company’s normalized net profit into net cash flow. According to the condition, normalized net profit is 30,000, depreciation is 8,600, capital investments 15,000, increase in working capital 6,500, increase in long-term debt 7,500. Then

NPV = 30,000 + 8,600 – 15,000 – 6,500 + 7,500 = 24,600 thousand rubles.

We determine the discount rate for net profit. First, you need to divide normalized net income by net cash flow:

Then this result must be multiplied by the capitalization ratio of net cash flow, we obtain the capitalization ratio of net profit (forecast net profit, that is, the capitalization ratio for future periods):

R to PE = 1.22 * 18 = 22%.

By subtracting the net cash flow capitalization ratio from the net profit capitalization ratio, we obtain the conversion percentage:

22 – 18 = 4 %.

To determine the discount rate for net profit, it is necessary to add the conversion percentage to the discount rate for net cash flow:

R d PE = 23 + 4 = 27%.

We determine the capitalization ratio of net profit for the current year (this is what is used to capitalize excess profit when finding goodwill):

R to state of emergency of the current year = .

This formula calculates the capitalization ratio for both open and private joint stock company. The second method of calculating the coefficient has limited application - only for an open joint-stock company (OJSC), the shares of which are actively traded on the stock exchange:

R to the emergency situation of the current year = ,

where E is net profit per share; P – share price. That is, R to the current year’s emergency is the inverse value of the multiplier, which is given in analytical materials about the stock market.

Let's return to our example. We fill in the column “Reasonable market value” (see Table 6.10), that is, we rewrite the adjusted value of all elements of assets, including goodwill. The total assets are 6632 thousand rubles. We transfer this amount to the total liabilities. Liabilities remain at the same level, therefore, equity including goodwill is equal to:

6,632 – 3,000 = 3,632 thousand rubles.