Features of Goodwill
1. It is an intangible asset: Goodwill cannot be seen or touched, it does not have any physical existence, thus it belongs to the category of intangible assets such as patents, trademarks, copyrights, etc.
2. It is a valuable asset
3. It is helpful in earning excess profits.
4. Its value is liable to constant fluctuations: While goodwill does not depreciate, its value is liable to constant fluctuation, its vlaue is liable to constant fluctuations.It is always present as a silent asset in a business where there are super profits (i.e.more than the normal) but declines in value with the decline in earnings.
5. It is valuable only when entire business is sold: Goodwill cannot be sold in part. It can be sold with the entire business only. The only exception is at the time of admission or retirement of the partner.
6. It is difficult to place an exact value on goodwill: This is beecause its value may fluctuate from time to time due to changing circumsatnces which are internat and external to business.
Goodwill is divided into two categories.
I. Purchased Goodwill: Purchased goodwill means goodwill for which a consideration has been paid e.g. when business is purchased the excess of purchase consideration of its net assets i.e. (Assets – Liabilities) is the Purchased Goodwill. It is separately recorded in the books because as it is purchased by paying in form of cash or kind.
Characteristics
(i) It arises on purchase of a business or brand.
(ii) Consideration is paid for it so it is recorded in books.
(iii) Shown in balance sheet as on asset.
(iv) It is amortised (depreciated).
(v) Value is a subjective judgment & ascertained by agreement of seller & purchaser. It is approximate value and cannot be sold separately in the market or in parts.
II. Self-generated Goodwill also called as inherent goodwill. It is an internally generated goodwill which arises from a number of factors that a running business possesses due to which it is able to earn more profits in the future.
Features
(i) It is generated internally over the years.
(ii) A true cost cannot be placed on this type of goodwill.
(iii) Value depends on subjective judgment of the value.
(iv) As per Accounting Standard 26( Intangible Asset), it is not recorded in the books of accounts because consideration in money or money’s worth has not be paid for it.