During the twentieth century the concept of goodwill has changed significantly. In the earlier days goodwill was thought of as the good and valuable relationships of a proprietor of a business with his customers. The present concept is broader in that it encompasses many more intangible economic factors of a business enterprise and accountants now consider that goodwill results from the evaluation of the earning power of a business by investors …show more content…
A broader concept of goodwill recognizes the economic value of a business' internally developed non-purchased goodwill such as name, developed markets, managerial talent, labour force, government relations, ability to finance operations easily, etc. Such non-purchased goodwill has not been recognized in the balance sheet and expenditures that may result in internally developed goodwill have not been capitalized. The primary reason for not accounting for goodwill developed in this manner is the absence of generally accepted objective methods of measurement.
When a company buys another company, they can use one of two accounting methods: Pooling of Interest and Purchase. When the pooling of interest method is used, the balance sheets of the two businesses are combined and no goodwill is created. When the purchase method is used, the acquiring company will put the premium they paid for the other company on their balance sheet under the