Financial Analysis

Intangible Assets and Goodwill

Intangible Assets

These include copyrights, patents, franchises, etc., that the business uses in its operations to generate future cash flow, but does not have any physical form.

Any other assets which do not fall in any of the above categories are classified as other assets. An example is long-term pre-paid expenses.

The assets section of the balance sheet provides you with a big picture overview of the financial health of the company. By understanding the balance sheet, you'll understand how much money the company has. 

Goodwill

While goodwill is an intangible asset, it is listed as a separate item on the company’s balance sheet.Note that some assets such as goodwill have infinite life. Such assets are not amortized. Instead goodwill is impaired under US GAAP. The companies are required to determine the fair value of the reporting units, using present value of future cash flow, and compare it to their carrying value (book value of assets plus goodwill minus liabilities.) If the fair value is less than carrying value (impaired), the goodwill value needs to be reduced so the fair value is equal to carrying value. The impairment loss is reported as a separate line item on the income statement as an expense, and new adjusted value of goodwill is reported in the balance sheet. This is done atleast annually.

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