What is goodwill and goodwill impairment and why does it go with operating expenses?

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What is goodwill and goodwill impairment and why does it go with operating expenses?

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Goodwill is what is paid above the actual value to buy another company. So if a company’s assets are worth $10M but Acme Co buys it for $20M, they’ve provided goodwill.

Goodwill impairment involves the bought company’s value dipping where fair value goes below book value.

These are both operating expenses as buying a company is an operating expense.

Great question! Here’s how I think of it (disclosure – I’m not a CPA). It cant fall into cogs, because goodwill does not relate to producing an incremental widget. And its not interest or taxes. So by process of elimination, operating expenses is the last left (and the least bad option in terms of fit).

It’s the dollar amount a company pays to buy another company above the book value of the company they are buying. Book value being the dollar value of the assets when the asset was purchased. So things like reputation, logo, client base all add to the value of a company you’re buying. But the company you’re buying doesn’t have this on their balance sheet so you can’t add it to yours. In order for your balance sheet to balance, you can’t spend money without showing where you spent it. So the placeholder (Goodwill) for this value was created. And the rest of the company you bought goes under the other asset categories like property, buildings, cash, etc.

hey, i’m an accounting major with an associates degree in accounting. I have no fucking clue but I know it’s accounting related! So that’s nice