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Comment by dylan604 | Hacker News Reader

They should just call it a tip, since that's the world we live in now.

Tips are expenses. Goodwill is an asset.

This is why I'd never be a good accountant. The price paid was $1m, the thing was valued at $500k, leaving $500k in goodwill? How is spending more money on something than it is worth an asset?

No, 500 more than the book value. The issue you are taking about is that book value doesn’t equal asset value perfectly for a variety of reasons.

Goodwill is basically a carrying error.

You can say things like this all day long, but to people that think logically and not in the "make-up-numbers" accounting world, this is how things like Enron can happen.

In supply-demand situations like houses, the seller can list a price they are okay with receiving. If it has more interested parties, they can make an offer higher than the asking price. When selling a company, there's similar practices of looking at the current annual income, project growth over a few years, and offer a price based on that. Explaining in terms that are logical, non-accountants can keep up. Making comments of "we value at $500, but paid 2x that for goodwill" just makes no sense

Goodwill refers to the part of the price that is based on "looking at the current annual income and projecting growth over a few years." It's the value over and above what you would get if you emptied the company bank accounts and sold all its other property in a fire sale. It's a perfectly sensible concept, even if the process of quantifying it by coming up with a price "based on" current income and anticipated growth (or other advantages like eliminating competition) is contestable.

> people that think logically and not in the "make-up-numbers"

I would disagree. It’s not very logical to value software companies (for instance) at their book because a lot of their worth is in know-how, workforce and the products themselves. Unless you believe that’s worthless “goodwill” makes perfect sense. The issue is that these intangible assets are notoriously hard to value.

Of course if we’re talking about utility companies for instance it’s quite different.

> current annual income, project growth over a few years, and offer a price based on that

These are not a tangible assets. Future growth expectations are included in “goodwill”.

> Making comments of "we value at $500, but paid 2x that for goodwill"

Nobody does that, or should do it anyway. There is a lot of inefficiency in acquisitions that’s true but no company is going to just say “well we value it X but going to pay 2X”. In most cases there is no real way to calculate future growth without a very wide margins of error anyway..

Anyway there is no point in getting too worked up about this. The main purpose of goodwill is to prevent a massive decrease in company’s assets after they acquire another company. You can deduct depreciation in goodwill from your tax bill anyway. One of the few issues I can think of is this distorts GAAP earnings data for public companies. e.g. look at AMD it looks as if they have not been making any money for the past year or so, which is far from the truth. They just get to depreciate ~$2 billion in goodwill from the Xilinx acquisition depressing their reported net income.

> When selling a company, there's similar practices of looking at the current annual income, project growth over a few years, and offer a price based on that.

Precisely. That practice is establishing the goodwill value of the company. This is another word for expected future cash flows.

If you've ever had a small company be acquired for more than it's asset value - you were the beneficiary of "goodwill".

The book value of a company does not reflect the whole strategic value an acquisition provides (talent, userbase, moat) etc. -basically anything not listed on the balance sheet. "Good will" encompasses the remainder of the value of the acquisition. i.e the price the sellers can command. It's not error in the sense that its "erroneous"

More like the thing was valued at $1m but if you add up all the assets and liabilities of the thing you only get $500k. Obviously when you're a capitalist and buy something, you're doing so for future cash flows, but those don't show up on a balance sheet. Still, the accounting identity must hold, cash can't just disappear, so you end up recording it as goodwill.

People often speak highly of the invention of double entry book keeping. But to me it looks like a half-useful idea that ended up creating a bunch of phantom account categories, just to have somewhere to put many of those second entries. Then it's made even worse because those made up categories get set in stone by tax law and reporting requirements, as if that accidental complexity is the only way to account for things.

Personally I downplay the concept of depreciation as much as I'm able. I don't analyze purchases in terms of cost depletion over some imagined life, expecting virtual savings/profit in the first year. Rather I think in terms of number of years/uses that will be required to break even on the initial purchase, after which it's all a bonus (and/or the new normal).

Having standard accounting customs probably makes more sense as you get further into the business world, with less unilateral decision making plus the general need for standardization. But it's not like overabstracted/overleveraged businesses have great societal effects either.

Imagine a box that is made up of materials worth $10. However, the box has the very peculiar property that a $100 appears in it on the first Monday of each month. Ask yourself how much you would pay to own this box?

Most rational people will be willing to pay more than $10 (the book value of the box). The difference between what you pay for the box and the value of the materials of the box is recorded as "goodwill".

The goodwill is clearly an asset (it's the value ascribed to the future cash streams from the box). This analogy extends to companies if you think of them as a source of future cash streams and should give you some intuition for why the accounting is done this way

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