Question

.I want you to analyze the write-off of the $23 Billion in GOODWILL by General Electric (GE).....Is there really an ASSET called GOODWILL????....Should Goodwill be recorded as an EXPENSE????

Answer 1

Answer:-

Yes, goodwill is an asset. It can be further classified as Intangible asset as it cannot be touched. It brings us to, what is goodwill then?

Goodwill is the amount of revenue you are earning and can earn over the normal profit.

Eg. In the textile industry, the normal rate of return is 10% and XYZ has a profit @15%, then this additional profit multiplied by the number of years the business is expected to continue is equal to Goodwill.

Goodwill can be self-generated as well as acquired. If you acquire some business and pay for more than Assets- Liabilities, then that amount is goodwill. Every year after considering the financial results, it is decided whether to impair goodwill or not. As goodwill represents a good chunk of Assets in the balance sheet, it affects the financial indicators like Earnings per share, Net profit, etc. All of this information is very dear to a stakeholder and can create a lot of fluctuation in the market price of a share.

Now General Electric decided to write off goodwill as they considered it was worthless and needs to be written off. There are many factors to be considered while writing off intangible assets. It affects the financial results of a company but on the other side is a non-cash transaction.

According to some industrialists, the goodwill paid for acquisition in 2015 was actually more than required. So the excess amount was treated as goodwill which now turned out pretty useless as the company is sinking. Further quarter results show that more goodwill was written off.

Usually writing off goodwill can have severe impact on the mindset of stockholders. GE has written off goodwill which is nearly 22-24% of the net assets in the last quarter.

Goodwill, when purchased, is recorded as an asset and when it is amortized, it is treated as an expense.

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Feel free to ask any doubts.