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Goodwill has been defined as ‘the advantage, whatever it may be, which a person gets by continuing to carry on, and being ectitled to represent to the outside world that he is carrying on, a business which has been carried on for some time previously.’
Goodwill may be seen as an intangible asset, the value of the going concern element of the business. It is the excess of the cost of the acquisiton over the acquiter’s interest in the fair value of the identifiable assets and liabilities acquired as at the date of the exchange transaction.
Purchase goodwill arises as a result of a purchase transaction (e.g when one business acquires another as a going concern). It will be recognised within the accounts because at a specific point in time the face of purchase has established a figure of value for the business as a whole which can be compared with the fair value of the individual assets acquired, and this figure will be incorporated in the accounts of the acquiring business as the cost of the acquisition.
Non-purchased, or inherent, goodwill is not generally recognised in the accounts because no event has occurred to identify the value of the business as a whole.
Goodwill should be arised on an acquisiton to be recogniesd as an asset and amortised over its useful life. The useful life taken should not normally exceed twenty years, but a longer life may be taken if it can be justified by the circumstances.
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