One of the bookkeeping concepts that can give non-accountants a fit is the distinction between goodwill and intangible assets in a company’s financial statements. Perhaps the confusion is to be expected. After all, “goodwill,” in the lexicon of accounting, denotes the value of certain non-monetary, non-physical resources of the business—and that sounds like exactly what an intangible asset is. However, the two terms represent separate line items on the balance sheet.
Intangible assets are those that are non-physical, but identifiable. Think of a company’s proprietary computer software, copyrights, patents and domain names. These aren’t things that one can touch, exactly, but it is possible to estimate their value to the enterprise.
Goodwill, on the other hand, is more of a miscellaneous category for intangible assets that are harder to parse out individually. A company’s brand recognition, innovation and the experience of its management team are usually included here. (See also: Can You Count On Goodwill? and our video on Goodwill.)
Look at this example of an assets section of a balance sheet. Goodwill is a separate line item from intangible assets.
In terms of accounting treatment, there are some significant differences between the two. Goodwill only shows up on a balance sheet when two companies complete a merger or acquisition. When a company buys another firm, anything it paid above and beyond the net value of its identifiable assets becomes goodwill on the balance sheet. On the other hand, intangible assets can be bought and sold independently of the business itself.
There’s also a key distinction in how the two asset classes are amended once they’re on the books. Because assets tend to lose some of their value over time, companies sometimes have to make periodic write-downs. Intangible assets are amortized, which means a fixed amount is marked down every year, resulting in a simultaneous charge against earnings.
According to the latest Financial Accounting Standards Board (FASB) statement on goodwill, it can no longer be amortized; prior to 2001, it could be amortized over a period of 40 years. Now it is listed as an asset. Once a year, the company must review and evaluate it for impairment. Impairment is an accounting term that refers to a permanent decrease in value of a particular asset. Evaluating for impairment is time-consuming and costly, so the FASB issued a new statement in 2014 allowing goodwill to be straight-line amortized over a period of 10 years.
The Bottom Line
While “goodwill” and “intangible assets” are sometimes used interchangeably, there are significant differences between the two in the accounting world.