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The "controversy" section [0] of its Wikipedia entry summarizes it better than I could: > The accounting treatment for goodwill remains controversial, within b

The "controversy" section [0] of its Wikipedia entry summarizes it better than I could: > The accounting treatment for goodwill remains controversial, within both the accounting and financial industries, because it is, fundamentally, a workaround employed by accountants to compensate for the fact that businesses, when purchased, are valued based on estimates of future cash flows and prices negotiated by the buyer and seller, and not on the fair value of assets and liabilities to be transferred by the seller. This creates a mismatch between the reported assets and net incomes of companies that have grown without purchasing other companies, and those that have. [0] https://en.wikipedia.org/wiki/Goodwill_(accounting)#Controversy https://en.wikipedia.org/wiki/Goodwill_(accounting)#Controve...

zdragnar 3y ago
I run a startup. You think it could be worth $x based on $y projection. I disagree, optimistically believing I will double your projection. If you make an offer based on your projection, I'll turn it down. If you make a better offer (hoping to gain some efficiency by combining businesses together, for example) I might instead consider the offer worthwhile since it removes all of my risk, stress, and opens me up to start something different. At the end of the day, you've paid for my goodwill. Nothing nefarious, I (owner being bought out) just happened to be stubborn. The fact that we agreed on a price point that's not reflected in your accounting just means that an intangible value has been converted into dollars. Accountants and economists might not care for intangible value, but reality is more complicated than economic and financial models can describe.
- TechBro8615 3y ago
  Yeah, that's all well and good. But then after I acquire your company, I get to use that goodwill cost to offset other, unrelated losses. It seems counterintuitive, because I could overpay for your company, and then hide my existing losses by covering them with the "goodwill" premium I paid to you. In that situation I'm running a bad business: I was losing money, and I overpaid for an acquisition. But the goodwill makes it look on paper as if I've increased my total assets when really I'm just burning cash.
  - CamelCaseName 3y ago
    Uh?? Yes, your goodwill went up, but your cash went down? Assets are constant? And then in one year you'll need to take an impairment charge?
    - TechBro8615 3y ago
      Yes, that's my point. It's hand wavy and subject to manipulation. Hence why I called it "suspect." (And there's no need for the "Uhh??" tone, this isn't Reddit.)

zdragnar 3y ago

I run a startup. You think it could be worth $x based on $y projection. I disagree, optimistically believing I will double your projection. If you make an offer based on your projection, I'll turn it down. If you make a better offer (hoping to gain some efficiency by combining businesses together, for example) I might instead consider the offer worthwhile since it removes all of my risk, stress, and opens me up to start something different. At the end of the day, you've paid for my goodwill. Nothing nefarious, I (owner being bought out) just happened to be stubborn. The fact that we agreed on a price point that's not reflected in your accounting just means that an intangible value has been converted into dollars. Accountants and economists might not care for intangible value, but reality is more complicated than economic and financial models can describe.

TechBro8615 3y ago
Yeah, that's all well and good. But then after I acquire your company, I get to use that goodwill cost to offset other, unrelated losses. It seems counterintuitive, because I could overpay for your company, and then hide my existing losses by covering them with the "goodwill" premium I paid to you. In that situation I'm running a bad business: I was losing money, and I overpaid for an acquisition. But the goodwill makes it look on paper as if I've increased my total assets when really I'm just burning cash.
- CamelCaseName 3y ago
  Uh?? Yes, your goodwill went up, but your cash went down? Assets are constant? And then in one year you'll need to take an impairment charge?
  - TechBro8615 3y ago
    Yes, that's my point. It's hand wavy and subject to manipulation. Hence why I called it "suspect." (And there's no need for the "Uhh??" tone, this isn't Reddit.)