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Goodwill / Badwill

Goodwill / Badwill


Added value on Intangibles representing discrete reserves of the Company is often called as Goodwill. This is very often created in moment, when for instance Company Lenovo buys part of IBM business, company or another its Division and pays for it substantially higher price then what is just the accounting value. Lenovo is willing to do this because relying on future profits that will be generated by this new business as IBM represents well-known brand mark. Therefore this represents purchase price premium in form of Goodwill and it is then amortized into Depreciation costs for certain period depending on accounting standards applied. However this item may substantially increase the value of Assets and therefore it is broadly recommended to deduct the Goodwill or generally Intangibles from Equity to get the net value of Assets (of the Company).

This is because there is certain room for accounting manipulation, especially when two entities out of same Group undergo a Merger, which helps then to balloon the Assets and thus create some “virtual” Goodwill from added value thanks to a stronger and bigger company with higher market share.

This is also referring to second method of booking a Goodwill, that is not reflecting a purchase price premium but rather an added-value (own know-how etc.) of the Company assessed by the Management. In this case, the assets are becoming “virtually” ballooned within the Balance sheet of the Company after the merger and it will be as well reflected as an Equity premium on side of Liabilities. Further, there is negative aspect on this that this Company may decide in the future to de-merge in to two entities again while this increased Equity will be split among two legal successors but including this additional Premium. So that in the end, there might be standing exactly the same entities as they were before merger, but with better risk profile (thanks to artificially inflated equity and assets amount).   

On the contrary to the Goodwill, there may be also a Badwill incurred when some part of business, company or Division is bought for less than what is its accounting value, so Badwill may be interpreted as negative Goodwill. This happens primarily under the distress conditions when targeted Company faces certain negative situation resp. its Debts highly exceed the Net assets, so that there is no hidden reserve in the Balance sheet and most likely it will require capital injection after the purchase.

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