WHAT IS GOODWILL? The main method used by businesses to classify assets is to divide them into tangible assets, which have an existence separate from the business (examples of which might include buildings, land and machinery), and intangible assets which do not. Some clear examples of intangible assets include goodwill, patents, research and development expenses, and trademarks. Intangible assets are usually created within the organization over a period of time, by the company itself, rather than acquired from an external source and are rarely sold individually: they can normally only be sold together with associated tangible assets. Robins, in his essay "FRS 10: Goodwill and Intangible Assets" identifies three sources of goodwill within a company. He states them as:1. Workforce Expertise: Current accounting practices do not allow knowledge or business acumen to be included in financial statements. This way there is no provision for the skill of the workforce or the value of human resources to be recorded as an asset on the balance sheet.2. The reputation of the company's product(s): Often, if the product has a familiar name associated with it, generating positive connotations, sales and profits will be "boosted" based on that reputation.3. The general economic environment: current levels of interest and exchange rates, as well as levels of investor confidence in general, will have a large influence on the value of businesses and will therefore also influence the amount of goodwill associated with a business in any time. Goodwill on the balance sheet has now been considered one of the most controversial aspects of financial reporting as there is no provision on the balance sheet for unpurchased goodwill. THE DIFFERENCE BETWEEN PURCHASED AND UNPURCHASED GOODWILL Goodwill can be classified into "purchased" and "unpurchased" goodwill. Rohan defines the difference between the two as follows: “Goodwill can be classified into 'purchased goodwill' and 'unpurchased goodwill'. Purchased goodwill arises from the acquisition of an existing business, while unpurchased goodwill is been accumulated over time and cannot be objectively verified". Due to its very nature of being difficult, or in some cases impossible, to identify, unpurchased goodwill cannot be included in the financial statements. Unpurchased goodwill (often known as inherent or internally generated goodwill): • Cannot be attributed to separately identifiable expenses. • It is intrinsic to the activity. It cannot be sold as a separate asset. • It has a value that can vary widely based on internal and external circumstances and this value can be subjective