Goodwill

An example to start

Not to drown the non-specialist under countable definitions and financial terms, let us take a concrete case to illustrate the problems of the goodwill.

Maybe, at the time of the Bubble Internet, a company, A.com, which repurchase another strong, B.com, because it presents interesting prospects.

The assessment of B.com presents, in the active few fixed assets (some computers, a waiter) and in the passive a cumulated loss (due to the wages of the developers and with an advertizing campaign to launch the B.com site) and debts. The credit net is clearly negative but A.com spent a million euros to acquire the site, the mark, the employees (the human capital), as many elements as one qualifies the immaterial ones or the incorporeal ones.

In the journals of A.com, this acquisition (the million euros spent) figure in the financial fixed assets. However A.com, which consolidates B.com in its accounts should “erase” this million and show that it does not have in all and for only some computers and of the debts.

Does one have to pass this difference in loads or to recognize that “a certain” value exists indeed? By registering this difference, the goodwill, in the active of A.com, one recognizes that a million euros was not spent to no purpose but that this acquisition has a value.

Perhaps that thanks to fusion with A.com, this participation is worth much more; perhaps also that the employees preferred to leave B.com following this fusion with A.com which they do not like and which the advertizing campaign was a failure - the customers are not with go; perhaps finally that A.com was satisfied to use the technology of B.com for the development of its own site, A.com without investing resources in the future of B.com… Which is the real value of the goodwill? It is the task of the Auditors which to check if the value in the books of A.com corresponds well to the brought up to date Valeur of the future profits that B.com could generate.

Definition of the goodwill

Dictionary consultation Economic and financial “Of the English with the French” (Eugene Lafond, ED. of the Man) provides the following definition: “Goodwill: custom, funds customers, goodwills (customers, more right to the lease, plus trade name, brand names…). ”

One can define the goodwill as an evolution and extension of the traditional concept of Goodwills. In the same way the French traditional term, “overvalue”, of which the use was still dominating in the years 1970, but which comprises a negative connotation, has had for summer supplanted by the optimist “goodwill”. This one can indeed be estimated starting from the prospects for profitability of the Investissement S realized by the company by holding account of the positions that it was ensured on the market. One speaks about badwill if these prospects are bad, so much so that the investment carried out has less of value than his credit net calculated starting from his only identifiable credits.

Within the framework of the standards IAS/IFRS or American (US GAAP), its value will be tested each year and will give place if necessary to a depreciation.

Within the framework of the French standards, the goodwill is deadened linearly, over one duration which is spread out in practice between 5 and 40 years, with a concentration around 10 to 20 years. It is however possible, in certain cases, to charge this goodwill to the consolidated stockholders' equity of the purchaser, who thus disappears from this fact.

The companies subjected to standards IFRS cannot deaden their goodwill any more. They must with the place carry out a impairment test to make sure that the accounting value is lower than the actual value and, in the contrary case, to depreciate the goodwill.

The concept of overvalue or goodwill corresponds to a valorization of strategic occasion, financial counterpart of notoriety, know-how and performances of the company, and measures the incorporeal advantages this one has. These advantages make it possible to explain the reasons for which this company generates a profitability higher for the normal benefit than would justify its credit net, and which constitutes “superbénéfice”.

According to Michel Albouy, the goodwill is not a simple writing. As the examples of Vivendi or France Telecom illustrate it, the damping of the fixed assets can have a very negative impact on the Bottom line of the purchaser. A study on 46 large French companies shows that the higher the overvalue is, the less acquisition is likely to be a creative investment of value and the less favorable the Stock exchange courts will be. The goodwill is thus an element which the investors have interest to follow closely.

According to Maurice Nussenbaum, “Comptablement, it is the difference between the paid price for the acquisition of a company, or a group of credits and the revalued full value of the identified credits (body and incorporeal). It should well be understood that it does not return to accountancy to come to a conclusion about the nature of the goodwill since it defines it only as one balance. It is thus allocated to the economists to say if this balance corresponds to an economic reality or a simple on-price paid to acquire the whole of the credits of the company” p.76.

According to the dictionary Bernard and Colli, the goodwill was translated traditionally by the word " clientèle" or " achalandage" of a commercial firm. The term had a broader significance while being defined as what differentiates an established business and having made its place of an establishment which settles and it remains to be essential (environment and localization, customers, network of relations and correspondents of any kind, reputation, competence, social climate). To the favor of the customers, one adds today the attachment or the confidence of the suppliers, the employees and the whole of the partners.

Lastly, according to Pascal Quiry and Yann Fur (Vernimmen), the goodwill represents the fraction of the difference in first consolidation remaining after the revaluation of assets of the subsidiary company. This goodwill, if it is positive, will seem an intangible fixed asset of a particular type.

Use of the term of accountancy

This element is generally not entered, except in the event of acquisition. Efforts are made to reveal some the fluctuations in additional documents. At the time of the sale, the overvalue is evaluated by the salesman, with the manner of what is made in France for the incorporeal elements of the Goodwills.

This value of acquisition gave at the end goodwill a certain popularity in the “Nouvelle economy” where the purchases of companies were numerous and where the paid prices for those were often without true relationship with the valorization of the Credit net, even with the real prospects for profitability of the bought companies…

Economic aspect

In a complex and moving economy which rests more and more on the Innovation, as well technique as organization strategy compared to the market, the goodwill is more and more one of the determining credits of the companies. See on this subject the Five forces To carry.

Decomposition of an overvalue

Goodwill, an overvalue present generated by last and future elements:

In general, it would be reducing to think that the composition of the goodwill can be only established starting from countable elements, “ even by disregarding criticism which can be addressed to accountancy (historical costs, principle of prudence, principle of realization). ” (Thibierge)

The goodwill is an element drawing its origin from the Gestion and the latter is not limited to accountancy. The goodwill is thus the resultant of a sum of components human, strategic, financial, economic and countable.

“ a solution which makes it possible to better assimilate the composition of the goodwill is to break up it into overvalues present of last origins and overvalues present of future origins ” (Anthony Lorrain). The theoretical total overvalue is then made up of the sum of these two last. But to summarize the composition of the goodwill to this only step of valorization of the “Actif S” would be an error. Indeed, “ the effective or really paid overvalue is the resultant of a confrontation between the overvalue of market (itself resulting from a confrontation between supply and demand or in other words between the salesman and the purchaser) and the theoretical total overvalue ” (Anthony Lorrain).

The last origin

The overvalue present of last origin is made up of a whole of elements (under-overvalues) countable, strategic or even human… The first element of which we generally think is the countable element which is represented by the difference between the historical cost and valorization present of the credit.

The strategic element, in term of market shares, establishment, types of customers, research and development… is also a paramount element which appears only partially of accountancy. The reputation of a company, its brand image, the services particular that it grants to its customers, the various competitive advantages or of synergy which it has, are as many incorporeal elements which have a value, although not being present at the assessment.

The human axis composed of the Competence S of each one, of the To know to make like knowledge be, formations acquired or even of the networks in place is also not developed with the assessment. This is why, to know the target company well seems a need in any process of acquisition.

The goodwill is well regarded here as a difference in value, a premium that the company purchaser is ready to pay for the value of the incorporeal elements and advantages of the acquired company.

The future origin

The overvalue present of future origin could be broken up into under overvalues of financial, strategic and human origins.

The strategic and human parts of the overvalue here are only considered in financial term while making it possible to even carry out future profits by avoiding financial losses. The goal being to evaluate these elements which are not it usually.

The Goodwill can be regarded as the Actualisation of the future results of the company (Delesalle, 1992,17), or be comparable with potential profits not carried out (Pierrat, 1992). So according to certain authors, under the terms of the countable principle of prudence, it should not be entered: “ being representative of future value, it is included in the category of the profits not carried out potential whose inscription in the active of the assessment is completely prohibited by the usual accounting policies ” (Pierrat, 1992,12).

The goodwill then becomes the countable recording of a future economic potential brought up to date according to the evaluated risk and of the rate of profitability hoped.

So for a given amount, one proposes a strong profitability for little risk, the arbitration wants that this amount is increased by an overvalue making it possible to align profitability with the risk. The goodwill would be then the countable concretization of the couple Rendement/Risque or the adaptation of the level of the risk on the future or hoped outputs of a survalorisation. In other words, a company not - dimensioned of which profitability would be strong with a low level of risk would see offering a cost price more important than its only accounting value; the whole on the same model as the stock exchange valorization of a company with dimensions.

The goodwill would then become a method of arbitration of the couple risks/future profitability.

Conclusion

The goodwill thus seems a registered value present of accountancy of origin human, countable, economic, strategic and financial, at the same time last and future.

This value is then presented to the market which readjusts the valorization according to supply and of.

One easily notices the various countable conflicts which can appear; namely a problem of recording of immaterial (example of the human capacities), but also a problem of temporal fastening (example of hoped profitability) or even of introduction of a concept of risk (example of the allowance for risk at the time of the repurchase of a company).

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