 Corporate finance, presentation, acquisition and goodwill. Get ready, it's time to take our chance with corporate finance. First question is, what is goodwill? So it's the intangible factors that allow a business to earn above average profits. So the way you might want to think about that is to first think about a business that isn't being purchased and sold. If you just got one business that started from scratch, they just started doing business, they started earning revenue, then you can look at their financial statements, they got the balance sheet, assets minus liabilities is the book value of the company, and then the income statement, which is their performance. Now, if you were to say, hey, is this company worth more than their equity, than their assets minus the liabilities, than their net assets, in other words, if it is, then you're saying, hey, there must be some intangible factor that's not really on the balance sheet that would explain the reason why the value of them, because most likely through their profit generation and through the perceived ability, the likely ability to earn profit in the future is greater than just what's on the balance sheet, assets minus liabilities. So you would think then that many companies, if a company is doing well then, there's gonna be some kind of intangible factor there that's not basically on the balance sheet that basically explains why the company is doing better than just the value of the company being assets minus liabilities. So in other words, if we were to purchase the company, you would think that you would purchase it for their assets minus the liabilities, that's what they consist of, that's breaking them down to their parts. Why would not just purchase just that? Well, because there's some other factor, something that's intangible, something we can't touch that is helping to generate added profits, which might be the reputation of the company, the brand name and that type of thing. So when this comes into play, of course, is when you have an acquisition now, now we've got to, if you have an actual situation where someone is paying more than the book value of the company, now you have to have the recognize that difference and that difference that we're gonna recognize is basically goodwill. So that's kind of like, you can also think of it as kind of like the plug factor in terms of trying to account for a transaction where someone is paying more than or for more than what you would think the value of the company would be by just looking at the balance sheet. So let's break this down with regards to an acquisition here. So we have the difference between the fair value of the acquired company and the fair value of the company's net identifiable assets. So if we're talking about a purchase situation, you're gonna be saying, okay, well, what if we have a situation where the acquiring company is paying more than the net assets of the acquired company? Well, it might to be the case, you might say, well, that's because the acquired company's assets are not at the fair value. They need to be revalued. We talked about that in prior presentations where we could revalue at that point in time at the point of sale. But what if we then revalue, like we're gonna do, we're gonna revalue the assets, the net identifiable assets, which are basically the assets minus the liabilities. And we still say that once after revalued to basically the fair value that the fair value of the acquired company is still greater than the fair value of the assets and the liabilities, the net identifiable assets. Well, then that's gonna be the goodwill. So let's read that one more time. The difference between the fair value of the acquired company, so that takes into consideration everything, including this goodwill factor and the fair value of the company's net identifiable assets, which basically would be the assets minus the liabilities, which have now been valued at fair value would mean that there's some intangible asset there and that's gonna be the goodwill. So fair value of consideration given is compared to the fair value of the acquiree's net identifiable assets and the difference is goodwill. So you can imagine the process here, we're gonna get the acquisition happening, you have revalue the acquiree's assets and liabilities and then you take a look at the difference, the net assets there and then you think about the fair value of the company in total, which you can typically get by the exchange, right? You might be saying, well, how would I know what the fair value of the acquired company will be? How do I know that? Because if we revalue all the assets and the liabilities, then you would think that would be the fair value. How would you know? Well, it's a market exchange. So if in this point in time, there's an actual sale taking place, meaning there's an acquisition in essence, then that exchange, whatever the consideration is, if the consideration is more than the fair value of the net assets, then you would think that that would be the calculation or that would be the good will that would take place. So let's just take a look at a quick example of this. If we had, say a company, we had the book value of the company that's gonna be acquired here is this, right? First thing we would have to do is then revalue that to the fair value. So we're gonna say, all right, the assets now we're gonna take a look at all the assets and revalue them to what we believe the fair value is and say that's this number. So we've done that. We've revalued all the liabilities here. And then that means that the net assets, assets minus liabilities, which would normally be the equity section, right? Assets minus liabilities, but this is on a book basis and we've now revalued them to a fair value. So that's what you would think then that the purchase price would be. But then if the purchase price, if we actually look at the compensation that's being exchanged here is at 440,000, they're still paying more than the net assets. And that difference, of course, is the goodwill. So notice that goodwill is something that we assume is in a company typically. If the company is moving along and they're doing quite well, we say, hey, there's probably goodwill that's in there, but it's not actually on the balance sheet, right? We're not gonna value the goodwill typically. We don't value goodwill unless there's gonna be an acquisition. And when there's an acquisition, we can identify the goodwill and we almost have to in order to make the accounting work, right? Because at that point in time, there's an exchange that took place. That exchange that took place exposes in essence the goodwill and is also what is needed to reconcile the transaction that's gonna be taking place. So we're gonna account this for a sale. Therefore we revalue the assets and liabilities. We look at the net assets at that revaluation. We compare that to the consideration that was given and that will allow us to see what the goodwill is given the market transaction that took place. So goodwill, then what are we gonna do with that? That goodwill, that transaction, that goodwill is gonna be capitalized as an asset. So it's gonna be on the books as an asset similar to property, plants, and equipment, but it's gonna be an intangible asset. And then the next question is, you might say, well, then do we depreciate it or amortize it? No, we're not gonna depreciate it or amortize it because you can think of it kind of like land, right? If it's taken care of, the goodwill is something that could last basically indefinitely, right? It's something that could be there for a long period of time. And therefore we're gonna keep it on the books. We're not gonna amortize it. But we must assess for impairment annually. So in other words, we're not gonna, we're gonna assume the goodwill is still there unless there's some problem that had impaired it. And then we need to test for that impairment. So we're not gonna just depreciate it or allocate the cost of it like we do when we do depreciation or other types of amortization. But rather, we're gonna test it from time to time and say, is this goodwill still valid? And of course you might ask, well, how would you test it? It's not the easiest thing to do, right? But still, the attempt here is to put it on the books and not decrease it by just allocating the cost, but put it on the books and then annually test it and to see if there is impairment. And of course, if there is impairment with the perspective that we don't wanna overstate the financial statements, we want to then record the impairments that happen. So then we must write down if there is an impairment. So then goodwill needs to be tested for impairment annually at the same time each year. So we wanna do it at the same time. And obviously that's kind of a rule that would make sense to put in place because people might try to manipulate the system of their goodwill by trying to test it if there are seasonal business at different times within the season to try to adjust things. So you want the goodwill to be tested at the same time each year so that you can see the same kind of outcomes each year. So the goodwill that results from a business combinations needs to be designed to individual reporting units. So again, you might say, okay, now that we figured out the goodwill, the goodwill you can see kind of takes place when you think about the aggregate calculation, right? We revalued all the assets and liabilities compared it to the purchase price and we've got goodwill that's kind of allocated to the entire organization. Now, when you think about, okay, well, how are we going to then see if goodwill has gone down? Well, then we're gonna have to basically assign to individual reporting units so that we can better assess. So the goodwill that's been assessed kind of like on a company level that we've applied this goodwill that this company, this huge company has, then we're gonna have to basically track that in some way or assign it to particular reporting units in some way so that we can test for impairment of goodwill on at least an annual basis. The fair value of the reporting unit is then compared with its carrying amount to test for impairment.