Goodwill

Goodwill is an intangible asset that arises when one company acquires another for a price greater than the fair value of the target's identifiable net assets. It represents the part of the purchase price attributable to things not separately recorded — brand and reputation, customer relationships not booked separately, workforce, expected synergies and growth prospects.

How it is measured

Goodwill is the residual in acquisition accounting (see purchase price allocation):

Goodwill = Purchase consideration − Fair value of identifiable assets acquired + Liabilities assumed

In other words, after the buyer allocates the price to all identifiable tangible and intangible assets and liabilities at fair value, whatever is left over is recorded as goodwill.

Accounting treatment

Under both US GAAP (ASC 350/805) and IFRS (IFRS 3 / IAS 36), goodwill from an acquisition is capitalised on the balance sheet and is not amortised for public companies. Instead it is tested for impairment at least annually (and when events indicate possible impairment). If the carrying amount of the relevant reporting unit / cash-generating unit exceeds its recoverable amount, the company records a goodwill impairment charge, reducing earnings.

Note: US GAAP provides a private-company alternative permitting goodwill amortisation, and standard-setters have periodically debated reintroducing amortisation more broadly.

Why it matters

• Large goodwill balances signal acquisitive companies that paid premiums.
• A goodwill impairment is a non-cash charge but a meaningful signal that an acquisition has underperformed expectations — a tangible footprint of the value-destruction risk discussed in mergers and acquisitions.
• Goodwill is excluded from tangible book value and is scrutinised by analysts when assessing balance-sheet quality.