Changes

On a strictly theoretical basis, Goodwill is the present value of the superior earnings stream of a business, capitalized in perpetuity.  Put another way, you would only pay $2 million for a business with assets of $1.3 million if you thought you would make a lot more money than that sort of investment would normally generate.

On a strictly theoretical basis, Goodwill is the present value of the superior earnings stream of a business, capitalized in perpetuity.  Put another way, you would only pay $2 million for a business with assets of $1.3 million if you thought you would make a lot more money than that sort of investment would normally generate.

Managment must review the asset value of Goodwill every year to determine if it is still a legitimate asset.  If it is not, the asset must either be reduced or written of completely.  Reverting to the previous example, suppose the business purchased had a competitor that opened a location just across the street, and that ongoing profits would be reduced.  Management would be required to reduce, if not write off completely, the value of Goodwill.

Management must review the asset value of Goodwill every year to determine if it is still a legitimate asset.  If it is not, the asset must either be reduced or written off completely.  Reverting to the previous example, suppose the business purchased had a competitor that opened a location just across the street, and that ongoing profits would be reduced.  Management would be required to reduce, if not write off completely, the value of Goodwill.