What is goodwill?

Goodwill is the excess of the price paid for a company over the acquirer’s share of the net fair value of the acquiree’s identifiable assets (i.e., the amount by which the cost of an acquiree exceeds its book value).

Goodwill = Acquiree Cost > Fair Market Value

Goodwill cannot be meaningfully transferred to a new owner without also selling the other assets and/or the operations of the business.

Under both US GAAP and IFRS, it is capitalized and measured for impairment – not amortized.  Reporting units are measured at fair value and compared to their carrying value (i.e., the asset’s book value plus goodwill minus liabilities).  If the asset’s fair value is less than it carrying value, the asset is impaired and the goodwill is reduced by the amount of the impairment.  The impairment loss is reported as a separate line item on the income statement and the adjusted value of goodwill is reported in the balance sheet.

Impairment Loss = Carrying Value > Fair Market Value

Negative goodwill results is amount by which an acquirer’s interest in the net fair value of an acquiree’s identifiable net assets exceeds the price paid for a company (i.e. the amount by which the book value of the acquiree exceeds its cost).  Negative goodwill is deducted proportionally from the purchase price of the acquired assets, with any remaining value recognized in the income statement as a gain in the year in which it results.

Badwill = Acquiree Cost < Fair Market Value