Classification:
(a) Purchased/Acquired Goodwill:
Purchased goodwill arises when a firm purchases another firm and when payment is made in excess of net assets acquired for that purpose; such excess payment is known as Purchased Goodwill. The same has also been corroborated by AS 10 (Accounting for Fixed Assets).
Treatment of Purchased Goodwill as per AS 10 (Accounting for Fixed Assets):
Goodwill, in general, is recorded in the books only when some consideration in money or money’s worth has been paid for it. Whenever a business is acquired for a price (payable either in cash or in shares) which is in excess of the value of the net assets of the business taken over the excess is termed as Goodwill. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise. As a matter of financial prudence goodwill is written-off over a period. However, many enterprises do not write off goodwill and retain it as an asset.
Treatment of Purchased Goodwill as per AS 14 (Accounting for Amalgamation):
Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to the nature of goodwill it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, however, made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a period not exceeding 5 years unless a somewhat longer period can be justified.
(b) Inherent/Latent Goodwill:
It is practically the reputation of a firm which has been acquired by the business over a period of time. It is not purchased for cash consideration. That is why; it is not recorded in the books of accounts like Purchased Goodwill. This type of goodwill depends on a number of factors, viz, supplying goods and services at reasonable price to the society etc. Accountants are not concerned about it.
Inherent/Internally Generated Tangible Assets — As per AS 26:
Internally generated goodwill should not be recognized as an asset. In some cases, expenditure is incurred to generate future economic benefits, but it does not result in the creation of an intangible asset that meets the recognition criteria in this statement.
Such expenditure is often described as contributing to internally generated goodwill. Internally generated goodwill is not recognized as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost.
Difference between the market value of an enterprise and the carrying amount of its identifiable net assets at any point in time may be due to a range of factors that affect the value of the enterprise. However, such difference cannot be considered to represent the cost of intangible assets controlled by the enterprise.
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