Advanced Financial AccountingTU Board 2080
What is goodwill?
2Answer
Goodwill refers to the intangible asset arising from factors such as reputation, customer loyalty, skilled workforce, favorable location, or other advantages that enable a business to earn supernormal profits beyond the normal return on its tangible assets. It is recorded in the balance sheet when one business acquires another and pays more than the fair value of the net identifiable assets (difference = goodwill).
Goodwill can be:
- Purchased goodwill: Arises on acquisition (capitalized and amortized over its useful life).
- Self-generated goodwill: Not recorded in books (e.g., brand reputation built organically).
Under IFRS, goodwill is tested annually for impairment (not amortized), while Nepali GAAP (AS-26) allows amortization over a reasonable period (e.g., 5–10 years). It improves a firm’s bargaining power, market share, and long-term profitability.
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