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==One of the ways that advertisers and marketing people stay employed is they say that the output of their effort and money spent is not quantifiable.== It get

==One of the ways that advertisers and marketing people stay employed is they say that the output of their effort and money spent is not quantifiable.== It gets quantified as "Goodwill" any time a company is valued (acquisition, IPO, investment, etc.) or releases financial statement (it's on the balance sheet). Coca-Cola is coming up a lot in this discussion. They have Goodwill of $17.7 billion, along with additional intangible assets of $11.2 billion. That $29 billion of Goodwill makes up about 32% of Coke's total assets of $90 billion. https://finance.yahoo.com/quote/KO/balance-sheet?p=KO https://finance.yahoo.com/quote/KO/balance-sheet?p=KO

hengri 5y ago
I was under the impression that marketing costs fall under a cost of revenue column and goodwill is just a BS account item to account for differences in money spent and 'market value' during m&a. See https://www.investopedia.com/terms/g/goodwill.asp https://www.investopedia.com/terms/g/goodwill.asp
- ghaff 5y ago
  Not market value as the term is usually used. Value of assets less liabilities.
- long_time_gone 5y ago
  The third sentence of your link: "The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists." The first three are directly tied to advertising and brand-building. You call it "BS" for some reason (you seem not to believe in it), but it is a real thing and we have financial methods to account for it.
  - bokstavkjeks 5y ago
    > You call it "BS" for some reason (you seem not to believe in it) The balance sheet is typically abbreviated as BS, so a BS account is a balance sheet account. It's been a while since I've had anything to do with goodwill, but if I remember correctly it's most commonly the difference in the assets net market value and the purchase price of a company. So if company A buys company B, which has assets of $50 for $100, then they'll add $50 in goodwill to account for the difference. This is, of course, a simplification as I'm sure goodwill is regulated under GAAP/IFRS. But it does mean that you can't use goodwill to accurately estimate the effects of brand advertising as there could reasons other than brand marketing for a company being traded above its assets' fair market value at the time of the sale.
    - long_time_gone 5y ago
      ==So if company A buys company B, which has assets of $50 for $100, then they'll add $50 in goodwill to account for the difference.== Goodwill is an asset and we frequently see it monetized. It isn't just a made-up number to make things balance, it is a stand-in for particularly "hard-to-value" assets like perception. Ford famously licensed their logo and built a $1 billion business [0]. Prior to the licensing deal, that value would have only been captured as Goodwill on Ford's balance sheet. It is the value of the blue shield that they have built over decades of company performance and advertising. ==But it does mean that you can't use goodwill to accurately estimate the effects of brand advertising as there could reasons other than brand marketing for a company being traded above its assets' fair market value at the time of the sale.== Goodwill is a combination of many things, one of the largest pieces being brand value. Publicly traded companies generate a Goodwill number each time they release a financial statement. [0] https://www.forbes.com/sites/dalebuss/2012/05/24/ford-has-built-1-5b-business-licensing-blue-oval-products/?sh=6d4b4a7661eb https://www.forbes.com/sites/dalebuss/2012/05/24/ford-has-bu...)
  - dudeman13 5y ago
    >we have financial methods to account for it. Could you go over some of them or point to some resource? I'd love to learn more!
    - long_time_gone 5y ago
      == The Intangible Valuation Renaissance: Five Methods [0] == 3 methods for valuing intangible assets [1]: 1. Under the excess earnings method, valuators forecast the after-tax cash flow that the asset is expected to generate. This method can be the most complex (and costly), but is also usually the most accurate. 2. Under the relief from royalty method, valuators forecast the revenue that the asset is expected to generate, then apply a comparable industry royalty rate and subtract taxes. 3. Under the cost method, valuators determine the cost to develop the asset (i.e. labour and materials), plus a reasonable return on that investment. This method is often used for early-stage companies where forecasts are difficult to prepare or in instances where information doesn’t exist to use the first two methods. == Financial Valuation: Applications and Models [2] "Coverage includes state-of-the-art methods for the valuation of closely-held businesses, nonpublic entities, intangible, and other assets, with comprehensive discussion on valuation theory, a consensus view on application, and the tools to make it happen." [0] https://blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-five-methods/ https://blogs.cfainstitute.org/investor/2019/01/11/a-renaiss... [1] https://www.bdc.ca/en/articles-tools/change-ownership/sell-business/how-to-value-intangible-business-assets https://www.bdc.ca/en/articles-tools/change-ownership/sell-b... [2] https://www.wiley.com/en-us/Financial+Valuation%3A+Applications+and+Models%2C+%2B+Website%2C+4th+Edition-p-9781119286608 https://www.wiley.com/en-us/Financial+Valuation%3A+Applicati...
      - dudeman13 5y ago
        Many thanks my dude
        long_time_gone 5y ago
        Absolutely. It’s a very interesting industry as the idea of valuing “data assets” gets more mainstream.
scott00 5y ago
Goodwill only ever shows up as the result of an acquisition. If a company with a book value of $1B gets acquired for $10B, the balance sheet of the acquirer will see its goodwill increase by $9B after the acquisition closes. Nobody's doing a bottom up estimate of brand value to come up with that $9B, it's just the fudge factor double entry accounting needs in order to make the Equity = Assests - Liabilities equation continue to hold.
- zeusk 5y ago
  Why not just pare down the assets by $9B to reflect the expenditure of acquisition?
  - rmah 5y ago
    I don't know the details, but I'm pretty sure it's tax related. I'll bet companies would love to be able to do that. Because then that company could deduct that capital loss from their income to lower or eliminate their tax burden.
  - scott00 5y ago
    In double entry accounting, the $9B has to go somewhere, or you defeat the primary objective, which is to make it harder to forget transactions by maintaining a number of invariants. The two relevant ones here are [Equity]_t = [Assests]_t - [Liabilities]_t, and [Equity]_t = [Equity]_t-1 + [Profit]_t + [net cash from stock issuance/buybacks]_t - [dividends]_t The method that GAAP chooses is to move the $9B from cash to goodwill (assuming a cash transaction), which is a transfer from one type of asset to another. The alternative that I think you're suggesting is to move it from cash to expenses for the period in question. There's not necessarily a right answer to this question, accounting conventions are subjective, but I think most people think that the market premium you pay in an acquisition is more like acquiring an asset that will yield future business profits than an expense which, now that you've paid it, will have no future utility to the business. And it's easy enough to look at it the other way if you care to: the goodwill is reported in the balance sheet, and the cash flow statement shows the huge outlay of cash.
- long_time_gone 5y ago

hengri 5y ago

I was under the impression that marketing costs fall under a cost of revenue column and goodwill is just a BS account item to account for differences in money spent and 'market value' during m&a. See https://www.investopedia.com/terms/g/goodwill.asp https://www.investopedia.com/terms/g/goodwill.asp

ghaff 5y ago
Not market value as the term is usually used. Value of assets less liabilities.
long_time_gone 5y ago
The third sentence of your link: "The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists." The first three are directly tied to advertising and brand-building. You call it "BS" for some reason (you seem not to believe in it), but it is a real thing and we have financial methods to account for it.
- bokstavkjeks 5y ago
  > You call it "BS" for some reason (you seem not to believe in it) The balance sheet is typically abbreviated as BS, so a BS account is a balance sheet account. It's been a while since I've had anything to do with goodwill, but if I remember correctly it's most commonly the difference in the assets net market value and the purchase price of a company. So if company A buys company B, which has assets of $50 for $100, then they'll add $50 in goodwill to account for the difference. This is, of course, a simplification as I'm sure goodwill is regulated under GAAP/IFRS. But it does mean that you can't use goodwill to accurately estimate the effects of brand advertising as there could reasons other than brand marketing for a company being traded above its assets' fair market value at the time of the sale.
  - long_time_gone 5y ago
    ==So if company A buys company B, which has assets of $50 for $100, then they'll add $50 in goodwill to account for the difference.== Goodwill is an asset and we frequently see it monetized. It isn't just a made-up number to make things balance, it is a stand-in for particularly "hard-to-value" assets like perception. Ford famously licensed their logo and built a $1 billion business [0]. Prior to the licensing deal, that value would have only been captured as Goodwill on Ford's balance sheet. It is the value of the blue shield that they have built over decades of company performance and advertising. ==But it does mean that you can't use goodwill to accurately estimate the effects of brand advertising as there could reasons other than brand marketing for a company being traded above its assets' fair market value at the time of the sale.== Goodwill is a combination of many things, one of the largest pieces being brand value. Publicly traded companies generate a Goodwill number each time they release a financial statement. [0] https://www.forbes.com/sites/dalebuss/2012/05/24/ford-has-built-1-5b-business-licensing-blue-oval-products/?sh=6d4b4a7661eb https://www.forbes.com/sites/dalebuss/2012/05/24/ford-has-bu...)
- dudeman13 5y ago
  >we have financial methods to account for it. Could you go over some of them or point to some resource? I'd love to learn more!
  - long_time_gone 5y ago
    == The Intangible Valuation Renaissance: Five Methods [0] == 3 methods for valuing intangible assets [1]: 1. Under the excess earnings method, valuators forecast the after-tax cash flow that the asset is expected to generate. This method can be the most complex (and costly), but is also usually the most accurate. 2. Under the relief from royalty method, valuators forecast the revenue that the asset is expected to generate, then apply a comparable industry royalty rate and subtract taxes. 3. Under the cost method, valuators determine the cost to develop the asset (i.e. labour and materials), plus a reasonable return on that investment. This method is often used for early-stage companies where forecasts are difficult to prepare or in instances where information doesn’t exist to use the first two methods. == Financial Valuation: Applications and Models [2] "Coverage includes state-of-the-art methods for the valuation of closely-held businesses, nonpublic entities, intangible, and other assets, with comprehensive discussion on valuation theory, a consensus view on application, and the tools to make it happen." [0] https://blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-five-methods/ https://blogs.cfainstitute.org/investor/2019/01/11/a-renaiss... [1] https://www.bdc.ca/en/articles-tools/change-ownership/sell-business/how-to-value-intangible-business-assets https://www.bdc.ca/en/articles-tools/change-ownership/sell-b... [2] https://www.wiley.com/en-us/Financial+Valuation%3A+Applications+and+Models%2C+%2B+Website%2C+4th+Edition-p-9781119286608 https://www.wiley.com/en-us/Financial+Valuation%3A+Applicati...
    - dudeman13 5y ago
      Many thanks my dude
      - long_time_gone 5y ago
        Absolutely. It’s a very interesting industry as the idea of valuing “data assets” gets more mainstream.

scott00 5y ago

Goodwill only ever shows up as the result of an acquisition. If a company with a book value of $1B gets acquired for $10B, the balance sheet of the acquirer will see its goodwill increase by $9B after the acquisition closes. Nobody's doing a bottom up estimate of brand value to come up with that $9B, it's just the fudge factor double entry accounting needs in order to make the Equity = Assests - Liabilities equation continue to hold.

zeusk 5y ago
Why not just pare down the assets by $9B to reflect the expenditure of acquisition?
- rmah 5y ago
  I don't know the details, but I'm pretty sure it's tax related. I'll bet companies would love to be able to do that. Because then that company could deduct that capital loss from their income to lower or eliminate their tax burden.
- scott00 5y ago
  In double entry accounting, the $9B has to go somewhere, or you defeat the primary objective, which is to make it harder to forget transactions by maintaining a number of invariants. The two relevant ones here are [Equity]_t = [Assests]_t - [Liabilities]_t, and [Equity]_t = [Equity]_t-1 + [Profit]_t + [net cash from stock issuance/buybacks]_t - [dividends]_t The method that GAAP chooses is to move the $9B from cash to goodwill (assuming a cash transaction), which is a transfer from one type of asset to another. The alternative that I think you're suggesting is to move it from cash to expenses for the period in question. There's not necessarily a right answer to this question, accounting conventions are subjective, but I think most people think that the market premium you pay in an acquisition is more like acquiring an asset that will yield future business profits than an expense which, now that you've paid it, will have no future utility to the business. And it's easy enough to look at it the other way if you care to: the goodwill is reported in the balance sheet, and the cash flow statement shows the huge outlay of cash.
long_time_gone 5y ago