What is Negative Goodwill?

Negative goodwill arises from the bargain purchase of an acquiree. The amount of negative goodwill is the difference between the price paid and the fair market value of the acquiree's assets, when the fair market value exceeds the price paid. When negative goodwill exists, a bargain purchase has been made that favors the buyer. This situation typically arises when there is a distressed sale, such as when a business is in bankruptcy, and the seller has no other option.

Accounting for Negative Goodwill

When negative goodwill exists, the acquirer must recognize it at once as a gain. This increases the reporting net income of the acquirer.

Goodwill vs. Negative Goodwill

When an acquisition creates a goodwill asset, the acquirer has paid more than the fair value of the acquiree’s assets. When there is negative goodwill, the acquirer has paid less than the fair value of the acquiree’s assets. It is much more common for an acquirer to pay more than the fair value of an acquiree’s assets, because there is assumed to be additional intangible assets associated with an operating business, such as the value of its customer list, product branding, and research and development activities.