Periodic revaluation of good-will must next be considered. This involves a determination as to whether it is subject to depreciation. From what has been established as the essence of good-will, viz., the ability to earn excess profits, it is apparent, as stated in the case Stewart v. Gladstone on page 333, that its value must fluctuate from time to time with the earnings of the business. Because of this changing and at times doubtful value, some authorities advocate its being written off the books periodically, and a good many concerns do so write it off. The effect of this, so long as there is any value remaining in good-will, is to create a secret reserve and this is justified on the ground of conservatism. The practice is not reprehensible, though usually to be discouraged.
The weight of authority is to the effect that all purposes are best served by allowing it to remain always on the books at cost. There is no logical reason for writing it off. When profits are large, good-will is a very real asset. To write it off then is not logically consistent. When profits are small and good-will is accordingly of less value than before, it would hardly be logical to write off any amount less than its decreased value, yet the profits at such a time are rarely sufficient to stand so heroic a treatment.
As was stated above on page 330, all intangible assets should be examined carefully by a prospective purchaser as to the values at which they are being carried.
Good-will, because of the improper and misleading uses to which it has so often been put, is never above suspicion and its value should not be taken without close investigation. If it really exists, the profit and loss record will show it. That should guide as to its valuation and not the value carried on the balance sheet. Accordingly, since the asset does not depreciate but only fluctuates in value, and since it is neither prudent nor consistently possible to take these changing values onto the books, the best course for all purposes seems to be to retain good-will in the accounts always at its cost figure.
The above considerations as to the depreciation of good-will apply with almost equal weight to the depreciation of trade-marks.
In closing this chapter attention should be called to the fact that the term “going value” is used in the case of public utility companies in much the same way as good-will.
CHAPTER XIX
LIABILITIES ON THE BALANCE SHEET;
CURRENT AND CONTINGENT LIABILITIES
Form and Valuation
The problem of handling liabilities on the balance sheet is usually not so complicated as that of assets. The questions of arrangement, form, groups, and suitable nomenclature have in the case of liabilities an equal or even greater importance than that of the assets, the governing principle being clearness and fullness in the information given, with due regard to the purpose and intended use of the balance sheet.
The problem of valuation, which assumes great importance in the treatment of the assets, has normally little or no significance in the consideration of liabilities. This is due to several causes. In the first place, human nature being what it is, there is normally little danger of an overstatement of liabilities; they are usually sufficiently large, and no desire exists to make them appear more than they really are. Secondly, and likewise based on human frailty, while a concern may desire to undervalue its liabilities, the other party to the liability, the person holding the claim, can usually be depended upon to press his claim with sufficient insistence as to make the concern aware at all times of the amount of its liabilities.