Importance The article underpins the approach to recognition of goodwill as capitalization of transaction costs of a merger. Objectives The main purpose of the study is to explore the economic substance of goodwill, being a separate intangible asset, which results from business combinations. Methods The methodological framework for goodwill accounting as an unidentifiable intangible asset rests on the economic theory of property rights, which provides a conceptual definition of the use of the theory of costs in a business combination. Results The paper proves that goodwill is a market valuation of transaction costs of a business combination, in contrast to the estimated value of difference between actual investment and net asset value of the investee. It also proves that goodwill is a result of business combination; it represents capitalization of transaction costs. Goodwill may be recognized as an unidentifiable intangible asset that can not be separated from the firm itself, and the value of which (future economic benefits) is extremely difficult to determine. Conclusions and Relevance The determinants of option value of a business combination determine the market component of the option's capitalized value, which has a significant impact on the fair value of goodwill.
Keywords: goodwill, transaction costs, business combination, cost determinants, option value
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