Goodwill

Of course the goodwill i'm that i'm thinking about is nearer to the accounting kind, as compared to the chim chim moral philosophy kind which i was introduced to while doing the Ethics course.

According to FRS 103,

IN10 - The FRS requires the acquirer, having recognised the identifiable assets, the liabilities and any non-controlling interests, to identify any difference between:
(a) the aggregate of the consideration transferred, any non-controlling interest in the acquiree and, in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; and

(b) the net identifiable assets acquired.

The difference will, generally, be recognised as goodwill.

Core principle :

IN5 An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition

Which leads me to think that Prof JJ is absolutely correct, goodwill should be called BADWILL. It is the bad will of the manager that causes loss for the acquirer shareholder. Essentially, the more you pay over the fair value the asset, the greater the goodwill. What I don't get is - What's so good about over paying?

If I own a roti-prata store, and sell it to Company P(urchaser), my book value could be my stove and woks which have a worth 100k. But P is required to measure the value all the identifiable fair value in the business and get to the goodwill figure. So if P pay me 500k, and identified 100k worth of brand name/patented curry recipe, P will have to record a 300k goodwill figure.

If i used to earn around 40k per annum on my hard assets, the return on asset was 40%.

Post purchase, the return on asset for P including goodwill will be about 8%. So what is so GOOD about buying good assets at fancy price?

On a side note, we had a great evening spent at Coffeenation. We sang in C major key into the night; and the staff was warm and friendly despite us not ordering much after the main course. I believe their attitude and service had generated tremendous goodwill. If they keep this up day after day, their economic moat will widen in the Bugis/Bali Lane area and they may earn very satisfactory return on capital. This will not be captured by accounting numbers, but it is nevertheless a real advantage they can have over competitors like Swensens or Fish and Co..

We should understand that "It is better to be vaguely right than exactly wrong.", but as students get more skillful at complex mathematics and excel spreadsheet, i fear that we are more often "precisely wrong" than not.