“GOODWILL."

Lyttelton Times, Volume CV, Issue 12421, 9 February 1901, Page 3

“GOODWILL."

Tie following paper was read 'by ‘Mu W. H. G undry, F.I.A.N.Z. , afc a conference of delegates from the Institutes ol Accountants of Australasia, held at Sydney on Jan. 2: Mr Chairman and Gentlemen,—Having been accorded (die privilege of addressing you on tints occasion. I have selected the subject of “ Goodwill" .upon which to .make a few remarks. Aly reasons for doing so are, that it enables mo to express to _ the accountants of this ucat Island Continent the hearty goodwill of their pioimtsioual brethren residing in Xew-.Zealand and also that I wish to speak professionally on the subject, and point out some of the difteiences of opinion we find expressed by piominent authorities as to the methods to be adopted in its treatment m accountancy. We have first to consider “ M hat is Goodwill?” “Is it a capital asset?” The goodwill which our Australasian Colonies bear towards each other, and that of the colonies to the Empire are assets, which I trust we shall never have cause to ‘ write down It may be said, however, we do not take this asset into our financial records. That is so, therefore for the present-we .will call it a “ secret reserve,” although ■ l '® cenfc events have shown that there is very httle secresy about it, and there can be very little doubt about the value and strength of the reserve.” We, as business men, know that the goodwill of our fellows, which is based on individual character, is a. asset to possess. It maj be indefinab e but while we can succeed in holding it, that is, prove worthy to hold it, it « oi value indeed. So much for my endeavou to strike the keynote of my line of th' oU - however, the more definable g° odw “ i + rpTfTtiFiib in accountancy, commerce, and its ■tieatmsuo * * > upon which I now wish to speak. We know that goodwill is legalised as a fixed a.set, which may remain upon oui books foi - indefinite period, and that we need not pro--5 iiSKpital earns a profit; that ufoflfc' can be divided amongst the Jiaieinevitable depreciation o[ f e Wbot I wish to draw Attention to as the Sr extreme into which certain'wnten. on nbiect of goodwill -appear to -have Av&W&SS P -f, ,e Tfhrad?l nothing move than ft. llS^Sei^nnp.n ™war to conclude, that the term Gc.od3’> ailies only to trade, or the effects of tra.de/but the term trade « a very wa ® Qfpvpns on Mercantile Law says, •■lf'Lord Eldon inteiadedAhis definition to 1( „ pvhaiistwe. it is insufficient. I Hunk Would define goodwill as “the capitalised l/renent o( v.V. over the Mri cod. basing the profits a a a given, rate of interest.” Svith the various illustrations of the methods of arriving a^j^ e ° goodwill which come into the hands -, ot our candidates for the purpose of study, I have nothing to say, further than the very width, height and depth of them show thif in each case it must be a matter of competent judgment. Here I wish to quote some authorities on the treatment ol goodwill in accountancy. 'Mr/Pnxley says It is .very. desirable, instead of dividing all the profits among shareholders, for a sinking fund to he raised, so that.ab themid ,cfa certain period this account may be either written off or reduced m amount to a saleable value. If 'this plan be adopted also with the fictitious assets accounts (I presume preliminary expenses), and they have by that means been abolished, the. share-, holders will .then ..have their invested in realisable securities. Mr Dicksce appears to deprecate the inclusion of goodwill in any accounts where it can, possibly be avoided. He says, however,- In the case of a company acquiring an established business, a charge will no doubt have been made by the vendors in respect of goodwill and as a matter of bookkeeping it wilt then, under ordinary circumstances, be a physical impossibility to prevent the item c/Vroodwill appearing as an asset as against the liability for the capital, actually subscribed by .the shareholders.” He points out that when a company s shares are sola at an excess of value per share of its assets over its liabilities, the buyer is m reality paying for a portion of the goodwill, and, suggests “a simple method by which pa company about to be formed might acquire the tangible assets and l goodwill of the untertaking.” He says, “ Let the share capital he fixed upon such a ba-sis as to supply the necessary funds to acquire the tangible assets purchased, and provide a sufficient surplus for working capital, and in order to provide funds to acquire the goodwill of the under taking, let the shares he issued at such, a premium as would amount ,to the price of the goodwill.” Mr Dicksee, of course, is merely making a suggestion, but I feel impelled to ask, why this aversion to goodwill as a principle? A vendor selling the goodwill of a leasehold property would have no difficulty in deciding what to do. with the money he received as goodwill, and the purchaser would .probably add the amount to the intrinsic value of the bargain, and debit it to leasehold property, make future provision for depredation, and call it a tangible asset. The term goodwill is permissible in this case. Then why not instance a freehold which perhaps has increased in value fifty-fold.in fifty years? We' again say freehold is ai tangible asset, but the. goodwill of the London “Times,” “ New York Herald,” or “ New River Company ” are not tangible assets. By-the-bye, if I remember, rightly, the Shares in the New River Company are real estate hy Act of Parliament. Doubtless the goodwill of either of the above concerns would! be capitalised into a very substantial figure, and a rapidly increasing one probably. Would you think it, necessary to be continually writing,it off? .The fact is, there appears to be a prejudice against tbe term goodwill as an asset, although it is such an important factor in our commercial economy, in which all factors, even gold, ■ar§ liable to fluctuations. I would like to illustrate that very tangible asset, freehold property, as compared with, say, the goodwill of a vauT&ble renewable patent right. We have heard much in our colony in recent years about the nationalisation of laud. From the State’s point of view, surely this is very undesirable? • The title to the land is only within the State. The present position is that w© have sold the land at a. reasonable market value and gob the moneyi We. wanted population, and anchored the occupier. But, gentlemen, the land, with the improvements thereon and increment of value, still belongs to the State in fact. That is, there is no- limit to the rating powers of tbe State; instance one of our colonial towns, where the rates amount to about 6s 8d in the £. I know of no law to prevent the people rating it at 20s in the £. If there were, the law is easily amended. Yet this is a- tangible asset, but the' goodwills I have mentioned are not.-considered tangible. The ‘‘Accountant” says: “It has been held and stated by no less an authority than Mr T. A. Welton, F.C.A., that it is undesirable to write anything off the value ol goodwill as stated in the original accounts; he being of the opinion that it is very much more desirable that anything which it may be considered expedient to put aside out of profit should be accumulated upon the other side of the balance-sheet in the form of a reserve fund 1 .” I am not going into the question of goodwill minutely, time would not permit me to do so, even if I had tie inclination. What I wish to illustrate is that goodwill is, a. valuable asset, and probably a more tangible one than appears to bo generally supposed. Goodwill is legalised as a fixed- asset, and while we must admit that the greatest care, judgment and skiff are necessary, both in yalumg on purchase and dnr the subse-

quenfc dealing with the item in the. books of a company or partnership, the general denouncement and deprecation of the term as an asset is altogether unnecessary, and at the same time injudicious.