What is goodwill?
When a company acquires another, it often pays a premium over the value of the assets and liabilities it can separately identify. That premium is goodwill. It reflects future benefits that can't be recognised individually, such as reputation, synergies or a trained team.
Formula
Goodwill = Purchase price − Fair value of identifiable net assets acquired
Example
A company pays $5 million for a competitor whose identifiable assets have a [fair value](/glossary/fair-value) of $4.2 million and liabilities of $1 million (net assets $3.2 million). Goodwill = $1.8 million.
Accounting treatment
- IFRS ([IFRS 3](https://www.ifrs.org/issued-standards/list-of-standards/ifrs-3-business-combinations/)): goodwill is not amortised. It is tested for [impairment](/glossary/impairment) at least annually.
- US GAAP: public companies test for impairment; private companies may elect to amortise over up to 10 years.
- IFRS for SMEs: goodwill is amortised over its useful life.
Internally generated goodwill
A business can't put its own goodwill on the balance sheet. It only appears when bought in an acquisition.
Negative goodwill
If the price is lower than net asset value (a "bargain purchase"), the gain is recognised in profit after checking the values.