| Correct. Aatsmyles was mistaken in relating the goodwill he/she described to accounting goodwill. In other words, aatsmyles shouldn't have used the phrase "account for" goodwill. Interestingly (at least to a weird human like me), there is something of a relationship between accounting goodwill and goodwill like the value of a brand. The reason why goodwill only shows up on a balance sheet after an acquisition is, I imagine, to follow the accounting principal of conservatism. Let's spice things up with a hypothetical. I'm going to make up some numbers here so don't go around telling people I revealed some privileged information on HN. Say you're Mr. McIlhenny, the() owner of a major private company called the McIlhenny Company. The McIlhenny Company's primary endeavor is selling a beloved hot sauce called Tabasco. On the income statement side, McIlhenny has revenues of $200 million and profits of $30 million. On the balance sheet, Tabasco has no liabilities (no long term debt, no payables, etc) and its only asset is cash, of which it has $1 million. Since (equity) = (assets) - (liabilities), this company has a "book value" of $1 million. You might notice that the book value seems absurd - a company that makes tens of millions of dollars a year and has a product with a major following would be a total steal of a purchase at $1 million! A few purchasers attempt to woo you, and they each make offers for about $100 million. You go with Carl Icahn's offer. Now, the company's book value is $100 million (the balance sheet has $1 million in cash and $99 million in goodwill on it). Clearly, the day before the acquisition, the company had roughly $99 million in "real" or "intrinsic" goodwill, but that didn't show up in the balance sheet. Why's that? One reason is conservatism. For many intangible assets, there's an art to choosing a number. If you let CEOs put in a goodwill number, many would probably throw in huge numbers as they vastly hype up the value of their brand and reputation. So, instead, we have a market approach to calculating goodwill by using transactions. However, accounting principals allow companies downwards. So the CEO of Nikola isn't allowed to turn his bogus claims into dollars on the goodwill line item, but he is allowed to reduce goodwill if he buys a battery manufacturer that turns out to be a fraud too. () It's owned by the McIlhenny family, but no need to complicate things |