Goodwill and Intangibles

Intangible assets refer to assets that a company derives benefit from, but unlike fixed assets these assets cannot be physically touched or counted. Copyrights, patents and trademarks are all examples of intangible assets. A publishing company has copyright to lots of different books. These books can be printed and sold exclusively by the company due to the copyright, and that is how the business earns revenue. The copyright here is an asset, albeit an intangible one, because it allows the company to generate economic benefit.

Goodwill is a special category of intangible assets. Let’s say a pizza company, Roma, decides to buy out another pizza outlet named “Italiano”. The total assets of Italiano amounts to Rs.10,00,000 and this is the amount that would ideally be paid to the owners of Italiano for buying out their business. However, since Italiano has a loyal customer base and is located in an area that attracts lot of footfalls, the owners demand a premium of Rs.3,00,000 to sell their business. If Roma decides to pay the higher price and purchase the business, the additional Rs.3,00,000 paid will be recorded as goodwill on the assets side of Roma’s balance sheet.