0

I am reading Warren Buffett's book Lessons For Corporate America and I got to the goodwill section. I do not understand why wold the buyer of a company would be expected the amortize the goodwill?

As the buyer:

  • The chocolate I buy is 10 dollars

  • I buy the chocolate for 20 dollars

Why the hell am I expected to pay the difference? Why do I have to pay (20-10) /40 dollars/year?

I pay taxes for buying the chocolate so why do I also have to write it off? I assume goodwill is not the only element that has to be written off but I do not get it.

Can anyone please explain? Also is this something particular to the USA?

Bob Baerker
  • 76,304
  • 15
  • 99
  • 175
Bercovici Adrian
  • 103
  • 3
  • 1
    https://en.wikipedia.org/wiki/Goodwill_(accounting) "Under US GAAP and IFRS, goodwill is never amortized, because it is considered to have an indefinite useful life." – ceejayoz Dec 08 '19 at 15:27
  • 1
    I think you're misunderstanding a write off. If I have $100mm of revenue and I buy a jet for $60nm, the best thing for me would be to write off the whole $60mm expense from revenue and owe taxes on the remaining $40mm, but the tax rules say I have to amortize the expense over the useable life of the jet. So, even though I spent $60mm I only get to write off $3mm because the jet has a 20 year useable life and now i owe tax on $93mm. A write off is a good thing. – quid Dec 08 '19 at 16:32

1 Answers1

5

Goodwill is an asset, just like a building, intellectual property, tools and equipment. It's part of what you pay for if you buy a business. If an up-and-running business is for sale for 400k, including a building worth 200k and equipment worth 100k, then the rest of the price (100k) is goodwill - that's the reputation of the business in the area, the existing orders and contracts, the relationship with employees and suppliers, and so on. (I am oversimplifying, but go with it because precise definitions depend on your location.)

Buildings and equipment depreciate at different rates. Goodwill depreciates at still a different rate (in some jurisdictions, zero.) That has to do with how much you can reduce your profit in a given year to determine the taxes you need to pay. It has nothing to do with actually paying for the goodwill in the first place. You normally do that when you buy an up-and-running business instead of finding an empty building and buying it, ordering a bunch of equipment, hiring people, and then trying to find customers and suppliers yourself.

Kate Gregory
  • 13,193
  • 1
  • 33
  • 52