Why is goodwill only recognized when another company is purchased?

Answer 1

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When a company is purchased for amounts above their asset value, goodwill is assumed because there has to be a significant reason some entity is willing to spend more than the asset values to acquire a company.

If you were to allow a company to create their own goodwill, this opens up the door to fraud. Goodwill can only come out of an arms-length transaction, or companies would magically book goodwill entries that could dramatically increase the amount of assets on their balance sheet without any real economic change.

Answer 2

Because a "new" company cannot have goodwill. Goodwill is an asset after the company has been purchased and the company has proved that the name of the company or its products does indeed have goodwill value. Also, this is used to balance out the income statements when the company purchased has much less value in inventory, equipment, etc.- the goodwill value will usually equal the leftover sum for which the company was purchased.

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