What is Goodwill?

Goodwill is the excess of the purchase price paid for an acquired entity and the amount of the price not assigned to acquired assets and liabilities. It arises when an acquirer pays a high price to acquire another business. This asset only arises from an acquisition; it cannot be generated internally.

Goodwill Impairment

The value of goodwill is highly subjective, especially since it does not independently generate cash flows. Consequently, the accounting standards require that an acquirer regularly test its goodwill asset for impairment, and to write down the asset if impairment can be proven. When a write-down occurs, it tends to be for a significant amount, and perhaps for the entire amount of a goodwill asset.

Presentation of Goodwill

Goodwill is an intangible asset, and so is listed within the long-term assets section of the acquirer's balance sheet. This classification is used because goodwill is assumed to give value for an extended period of time to the business on whose books it is recorded.

What is Negative Goodwill?

Negative goodwill arises when an acquirer pays less for an acquiree than the fair value of its assets and liabilities. This situation usually only arises as part of a distressed sale of a business.