Goodwill
BeginnerGoodwill is the amount a company pays to buy another business above the fair value of that business's identifiable net assets. It reflects things such as reputation, customer relationships, skilled staff and expected benefits from combining the businesses.
When one company acquires another, it often pays more than the value of the separate assets it can identify, such as buildings, equipment, inventory, patents and customer contracts, minus the liabilities it takes on. The extra amount is recorded as goodwill.
For example, a company pays 100 million for a business whose identifiable assets are valued at 90 million and liabilities at 20 million, giving net assets of 70 million. The remaining 30 million is recorded as goodwill on the buyer's balance sheet.
Goodwill arises only from acquisitions. A business cannot record goodwill for its own reputation, however strong.
Under IFRS and US GAAP for public companies, goodwill is not amortised. Instead, it is tested for impairment at least once a year. If the acquired business performs worse than expected, the goodwill may be written down, reducing profit. Large goodwill balances therefore show how much a company has paid for acquisitions, and large impairments often signal that an acquisition has disappointed.
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