Goodwill is an accounting concept used to describe the intangible value a business holds beyond its identifiable assets and liabilities. It is typically the premium a buyer pays when acquiring a company because it has value-creating qualities that cannot be directly measured in numbers.
What does goodwill consist of?
- Customer loyalty - a stable customer base that secures future revenue.
- Brand and reputation - a strong name that builds trust and increases market value.
- Employees’ knowledge - know-how, culture and capabilities that can’t be bought separately.
- Business relationships - partnerships, supplier relationships and networks.
Goodwill in the financial statements
Goodwill only arises when a company is purchased at a higher price than its book value of assets minus liabilities. It is recognised as an intangible asset on the balance sheet. Under accounting standards (IFRS and Danish rules), goodwill must not be amortised systematically, but instead tested annually for impairment (impairment test). If the value is assessed as lower than the book value, it must be written down, which directly impacts the profit and loss statement.
Example
If a company has assets of DKK 10 million and liabilities of DKK 4 million, its book equity is DKK 6 million. If a buyer pays DKK 8 million for the company, goodwill of DKK 2 million arises. This amount reflects the expected added value that cannot be measured in physical assets.
Why is goodwill important?
Goodwill is important because it shows that a company’s value is not only in buildings, machinery and cash, but in its ability to generate earnings through relationships, knowledge and market position. For investors and buyers, goodwill provides insight into how attractive and resilient a business is over the long term.