Business Goodwill

Goodwill is an intangible asset that is associated with the purchase of one company by another company. Goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all the assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists.

The process of calculating goodwill can be quite complex in practice. To determine goodwill in a simplistic formula, take the purchase price of a company and subtract the net reasonable value of identifiable assets and liabilities.

The value of goodwill comes from an acquisition—when an acquirer purchases a company. The amount the acquiring company pays for the company over the target’s assets at value accounts for the value of the target’s goodwill. If the acquiring company pays less than the target book value, it gains negative goodwill, meaning that it purchased the company at a bargain in a distress sale.

Goodwill is recorded as an intangible asset on the acquiring company's balance sheet under the long-term assets account. Under the accepted accounting principles (GAAP) and the International Financial Reporting Standards (IFRS), companies are required to evaluate the value of goodwill on their financial statements at least once a year and record any impairments.

Goodwill is recorded as an intangible asset on the acquiring company's balance sheet under the long-term assets account. Under the generally accepted accounting principles (GAAP) and the International Financial Reporting Standards (IFRS), companies are required to evaluate the value of goodwill on their financial statements at least once a year and record any impairments. Goodwill is considered an intangible asset because it is not a physical asset.

Goodwill is different from other intangible assets. Goodwill is a premium paid over fair value during a transaction and cannot be bought or sold independently. Other intangible assets include the likes of licenses and can be bought or sold independently. Goodwill has an indefinite life, while other intangibles have a definite useful life.

Goodwill is an intangible asset that is created when one company acquires another company for a price greater than its net asset value. Unlike other assets that have a discernible useful life, goodwill is not amortized or depreciated but is instead periodically tested for goodwill impairment. If the goodwill is thought to be impaired, the value of goodwill must be written off, reducing the company’s earnings.