Saturday, March 07, 2009

Monetizing Goodwill

Putting a price on anything is not an obvious process. All those pricing textbooks that you read are only good enough to tell you what to avoid. Given that an engineering education and a geek-desi background often biases you towards expecting logic in everything, I am sure many were horrified to learn that accountants put a monetary value to the "good will" that a company has. It is there in the balance sheet. The line item is strangely called "Goodwill". Not only did they do that, accountants put them as an "asset" in the balance sheet. It was the only and the biggest intangible item on the balance sheet and had no basis in financial flows of the company. It sort of tries to put an amount to quantify what the public thought about the company in their minds.

New to the BSchool and in my first ever accounting course - I was so looking forward to the scientific process behind this. Coca Cola and Walmart are giants in the case study business. Every course that had case studies used these two companies always. It got to a point where if you lost something in your house, you'd have to removes tons of Coke & Walmart print out's to find your remote control or cell phone. Coke's goodwill $ amount was quoted as among the highest around and we were taken through the process in which it was calculated. And till date I haven't been able to reconcile with the "science" in the process. Frankly, I don't know how those accountants do it. What is more baffling is the complete absense of "Badwill" in some companies that have "goodwill". At least some "badwill" reflecting a collective public hatred towards the company in the liability section would have appeased symmetry seekers like me. Instead we have a fuzzy "Negative Goodwill".

In today's economy, I would like to see what happens to the millions of dollars of goodwill that banks have put out there. Citibank for example has $ 41 Million"good will" in their balance sheets. So do other banks. Will they be impaired and go down to zero in the next balance sheet? Shouldn't it move as "BadWill" and find a place in the liabilities section. Or will people say that NYSE:C still has "some" "goodwill" left? It is not just the banks. The interesting questions here are; Should any company have goodwill? And varying amounts of it? Sathyam computers had monetized goodwill!!! I would like to know - Is goodwill binary like virginity or marriage? Once you have lost goodwill can you re-acquire it? Either you have it or you don't and really you can't have a lot of virginity or be too married. Reminds me of the Seinfeld situation with Elaine;

Elaine at her job interview at Doubleday with Mrs. Landis.

LANDIS: Of course, Jackie O. was a great lady. Those are going to be some tough shoes to fill. Everyone loved her. She had such...grace.
ELAINE (gushing): Yes! Grace!
LANDIS: Not many people have grace.
ELAINE: Well, you know, grace is a tough one. I like to think I have a little grace...not as much
as Jackie -
LANDIS: You can't have "a little grace." You either have grace, or you...don't.
ELAINE: O.K., fine, I have...no grace.
LANDIS: And you can't acquire grace.
ELAINE: Well, I have no intention of "getting" grace.
LANDIS: Grace isn't something you can pick up at the market.
ELAINE (fed up): Alright, alright, look - I don't have grace, I don't want grace...I don't even say grace, O.K.?

27 comments:

Anonymous said...

is negative goodwill!=badwill?

Hawkeye said...

badwon't?

Destination Infinity said...

It is indeed surprising to to know that companies actually have an entry and a monetary value for goodwill!! I think this is another technique in the basket of the auditors that wants to earn the extra commission for their 'goodwill'!

Destination Infinity

D.N.A. said...

May be related. But why do normally very logical & analytical folks find it difficult to embrace the concept of "subjective aspects"? Shouldn't very analytical people understand that there are always subjective pieces to any model/process/puzzle?

Hawkeye said...

DNA,

awareness, though a very good thing, isn't everything.

Vee Cee said...

no youtube link?
i suppose, this is something even the Great Goundan couldn't explain.

Mambalam Mani said...

why cant all these accountants think for a change and really have some good will and for example, add a goodwill column to GM's next quarter balance sheet to the tune of $20billion. i mean they are not falsifying any statements. then people will believe GM is good and things will be back to normal :)
in my opinion, the recession is being prolonged mainly by the media and those jobless companies like Standard & Poor, Fitch etc who keep issuing donwgraded ratings to all companies everyday.

Gradwolf said...

The binary idea makes a lot of sense. It's either there or not. But at the same time, what about something like Microsoft? The general public would point at a lot of Goodwill. Then what about the Unix geek public?!

Anonymous said...

MONDAY, JANUARY 12, 2009

Vechaa Kudumi
It is interesting to note the "extreme"ness when people process information and interpret anything that is told to them. Among the things that I struggle while communicating with people - positioning 'degrees of something' or 'magnitude/proportion of something' has been one of the hardest. I have come to believe that people can assign only binary values to most things and it is almost impossible to convince them that there lies a spectrum of continuous values. For example; attributes like confidence, courage, honesty, credibility, unpredictability/randomness cause the most discomfort among other things.


How is goodwill different from any of those listed above?

Disclaimer: I read your disclaimer.

I think public (customers) can make companies have profits. But the losses companies incur are due to their expenses. That's why there is only goodwill and no badwill :-)

- Ramesh

Anonymous said...

goodwill has nothing to do with "goodwill" per se.. if you pay more than total asset balance, you need a plug to balance the balance sheet.

Hawkeye said...

ramesh,

Won't play my 'disclaimer' card yet.

how about this for some nice recursion - A post about "people assinging binary value to things instead of considering a spectrum" has been binary'fied and assumed that *all* things have spectrum and no binary situation exists.

/* I think public (customers) can make companies have profits. But the losses companies incur are due to their expenses. */

if i use your logic the profits that a company incurs is due to income. so why goodwill?

anon,

your definition is the modern definition. the initial definition for 'good will' was for companies that did not fall into a M & A context.

Hawkeye said...

gradwolf,

i do understand that the "magnitude" of popularity exists and so can *potentially* be translated as differing values of goodwill.

this is a light hearted post. i wasn't attempting any serious logic here. i wanted to generally poke fun at 'goodwill' and no 'bad will'.

Anonymous said...

how about this for some nice recursion - A post about "people assinging binary value to things instead of considering a spectrum" has been binary'fied and assumed that *all* things have spectrum and no binary situation exists.

Was it not a question that I had asked? Sorry if it appeared to be an assumption/conclusion.

Income/Profit
Can one be the consequence of another? May be yes in the sense that Slumdog Millionaire got 8 oscars because it got 1 award after getting 7. (Mathematical explanation)

Bharath, my intention is not to win an argument, but to make one for it might bring in clarity.

- Ramesh

Anonymous said...

In light of your reply to Gradwolf's comment:
It was a needless argument that I tried to make. After posting my first comment I wondered "isn't Hawkeyeview a place for fun, even at the cost of logic, sometimes". Sorry for the wasted space and time. Take it easy!

- Ramesh

Anonymous said...

I wanted to make the same point that anon has made. I didn't understand your response to it. Can you elaborate? I thought goodwill is just an arithmetic term and not to be taken literally. Goodwill could have easily been called "x" or "differential" or "potential" or some such thing. It cannot be added to the asset column just like that. Only in an acquisition context can it be included. What is the "initial definition" of good will in a balance sheet?

Hari said...

From what I understand.. Goodwill doesn't refer to the 'brand value' of the company that the balance sheet belongs to..

Supposing Company A buys out Company B (or any part of it), the purchase price is a multiple of the assets / annual revenues / EBITDA or whatever

The additional cost incurred in purchasing that company is now entered as goodwill (simply to 'account' for the money spent).. And no doubt, that additional money paid will be viewed as an asset

This quantity is normally slowly eroded from the balance sheet over time (unless further acquisitions are made)

Sridhar M. A. said...

@Ramesh

proably hawkie has gone to sleep. i was waiting for him to respond.

Looks like you haven't understood his comment-reply on the recursion. It was not a question you asked (at least thats how i read it).

.....and why is everybody else not getting the "original" definition of godwill. People keep talking about it in some acquisition terms.

Anonymous said...

Ulaga Tamil makkaley - please don't ridicule Goodwill and start a goodwill revolution against 'Goodwill'.
What will a commerce students like me do? Goodwill itself was complex, idhuley bad will vera-ya?
For 5 years ippadi thaan my balance sheets tallied!

Shanmugha, Kandhaa, Kadhanbha...!

- BS

Anonymous said...

Reiterating what Hari has said

Goodwill arises only when you acquire a company. It is the excess you paid over the book value of the company you acquired.

No Goodwill is not based on some fancy market research survey conducted and ascribe a multiple to the score.

Having said that, the bigger fraud lies in what is called impairment of goodwill!!

Vathsan

Pradeep Kumar said...

Vidunga pa.. Theriya thanama hawkeye annan konjam technical'ana subject'la post pottutaaru.. adhukkaga imbuttu doubt'a?

Hawkeye said...

hari & vathsan,

(this post was never meant to be subject to this sort of analysis. anyway let me try again)

1. so if a company has never been acquired will it not have good will?

2. going by your logic - why do companies pay more than balance sheet? what is the basis for that?

Accountant CPA said...

vathsan & hari,

Don't you even click through the links in this post ? Or did you arbitrarily google for this?

Laksh said...

LOL! nice post considering I was just done with financial accounting a few weeks back.

Anonymous said...

1. so if a company has never been acquired will it not have good will?
There will be no good will

2. going by your logic - why do companies pay more than balance sheet? what is the basis for that?
Tyre with the car is worth more than tyre on its own.. crude but effective. you want to be fluffy, call it synergy

Hawkeye said...

anon,

1. here is coke's $102 million good will http://finance.yahoo.com/q/bs?s=COKE&annual

has coke been acquired? (really a question. not for argument)

2. How is this "synergy" (or) Goodwill = Price (Tyre + Car) - Price (Tyre) - Price (Car) any different from the "goodwill" this post talks about?

Anonymous said...

1. here is coke's $102 million good will http://finance.yahoo.com/q/bs?s=COKE&annual

has coke been acquired? (really a question. not for argument)

$102 millions exist because of acquisitions made by coke over the years, it has nothing to do with coke not been aquired.
accounting is not advanced to reflect inflation and value perception etc.. mark to market accounting tried and failed spectacularly. it is rather dumb academic exercise, you need some system to provide employment and nothing more. World will be better off without accountants

You are smart dude, do not waste your time on worthless concepts, I have enjoyed your post over the years... keep it going

Babs said...

sounds to me Goodwill has multiple meaning and one of which is "Bribe" :-)
Coke acquired Pepsi but had to bribe few investors and other officials.....chuck it in the goodwill