Most people are aware of loss contingencies, where a company writes down a portion of an asset when there is a likelihood that a loss will occur. Some companies have insurance policies to protect from loss, others take the write down. A loss contingency is used is to account for invoices that may not be collectible. You can see this pretty regularly as an Allowance for Bad Debt. The loss hasn’t occurred yet, but history shows that it is likely.
I often get asked about goodwill – its importance as well as how to value it. It’s complex. Goodwill is intangible. Hard to quantify but an important asset none the less.
Goodwill is defined as the amount of money someone is willing to pay for a company over and above the value of the assets within the company. The company’s book value is the equity within the company as listed on the balance sheet. Any money paid above the book value is considered goodwill. It’s the difference between cash received during the purchase and the actual value of the company.