Is goodwill an asset on a business’s books?

A buyer reading a set of books may find no goodwill line at all and conclude the business has none. That is not a safe reading. Under IFRS, whether goodwill appears depends on whether it was bought or built.

Goodwill that was bought

IFRS 3, the international standard for business combinations, says the acquirer recognises and measures the goodwill acquired in the business combination. So if the owner bought a business, the books may show goodwill from that purchase. Which accounting framework the business follows is a question for its accountant, because IFRS is only one framework.

Goodwill that was built

IAS 38, the standard on intangible assets, says internally generated goodwill is within its scope but is not recognised as an asset because it is not an identifiable resource. So under IFRS, a business that earned its reputation and customer base over many years can look the same on paper as a younger one. A buyer who wants to pay for that goodwill has to look past the balance sheet to the earnings and the customer relationships behind it.

How tax treats it

The Canada Revenue Agency’s capital gains guide describes eligible capital property, the category used before January 1, 2017, as property that does not physically exist but gives a lasting economic benefit, and lists goodwill as an example. It also says that starting January 1, 2017, property that is goodwill is included in capital cost allowance Class 14.1. Tax treatment is a separate question from the accounting one, so ask your accountant how any figure on the books relates to the tax result. See how goodwill is taxed when you sell.

What to ask the seller

Ask whether the business ever acquired another, and whether any goodwill on the books came from that deal. Ask your accountant how the price you are offering would be allocated. For a wider check of the numbers, see how to check a business’s books before buying it.