Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Chapter 24. Accounting Goodwill: Is It Any Good?

You can live a full and rewarding life without ever thinking about [accounting] Goodwill.... But, students of investment and management should understand the nuances of the subject.^[185]

—Warren Buffett

Here is a surprising fact: The accounting Goodwill amount shown in financial statements has almost nothing to do with the word goodwill in everyday use. However, it is often a significant percentage of total assets on a company's balance sheet. To better understand accounting Goodwill, I present data on Goodwill and other assets for several well-known companies. I also discuss its implications for you in evaluating company profitability.

Accounting Goodwill and Its Economic Value

Table 24.1 reports summary balance sheets along with the recent Goodwill amounts for several well-known companies. Goodwill as a proportion of total assets for these companies is between 3 percent for ConocoPhillips and 42 percent for Procter & Gamble. There is no apparent association between these percentages and the everyday meaning of the word goodwill. For Microsoft, reported Goodwill of $12 billion is only 17 percent of its total assets. By contrast, Procter & Gamble's Goodwill of $60 billion is 42 percent of its total assets. How, then, should you analyze the reported Goodwill in financial statements?

Table 24.1. Goodwill and Other Assets of a Few Large Companies, 2008

	Berkshire Hathaway	Coca-Cola	ConocoPhillips	General Electric	Microsoft	Procter & Gamble
Dollar ...