what is goodwill 
in business goodwill is an intangible asset that is recorded when one company is purchased by another it is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process this difference is due to things like the value of a company s name brand reputation loyal customer base solid customer service good employee relations and proprietary technology goodwill represents a value that can give the acquiring company a competitive advantage it is one of the reasons that one company may pay a premium for another investopedia lara antalunderstanding goodwillthe value of goodwill typically matters when one company acquires another a company s tangible value is the fair value of its net assets however the purchasing company may pay above this price for the target company this difference is usually due to the value of the target s goodwill if the acquiring company pays less than the target s book value it gains negative goodwill also known as badwill this means that it purchased the company at a bargain in a distress sale goodwill is recorded as an intangible asset on the acquiring company s balance sheet under the long term assets account goodwill is considered an intangible or non current asset because it is not a physical asset like buildings or equipment under generally accepted accounting principles gaap and the international financial reporting standards ifrs companies are required to evaluate the value of goodwill on their financial statements at least once a year and record any impairments 1goodwill is not the same as other intangible assets goodwill is the premium paid over fair value during a transaction and cannot be bought or sold independently other intangible assets like licenses or patents can be goodwill has an indefinite life while other intangibles have a finite useful life goodwill impairmentsaccounting goodwill involves impairments impairment of an asset occurs when the market value of the asset drops below historical cost this can occur as the result of an adverse event such as if a company assesses that acquired net assets fall below the book value or if the amount of goodwill was overstated then the company must impair or do a write down on the value of the asset on the balance sheet the impairment expense is calculated as the difference between the current market value and the purchase price of the intangible asset the impairment results in a decrease in the goodwill account on the balance sheet the expense is also recognized as a loss on the income statement which directly reduces net income for the year in turn earnings per share eps and the company s stock price are also negatively affected companies assess whether an impairment exists by performing an impairment test on an intangible asset the two commonly used methods for testing impairments are the income approach and the market approach calculating goodwillthe process for calculating goodwill is fairly straightforward in principle but can be complex in practice to determine goodwill with a simple formula take the purchase price of a company and subtract the net fair market value of identifiable assets and liabilities goodwill p a l where p purchase price of the target companya fair market value of assetsl fair market value of liabilities begin aligned text goodwill text p text a text l textbf where text p text purchase price of the target company text a text fair market value of assets text l text fair market value of liabilities end aligned goodwill p a l where p purchase price of the target companya fair market value of assetsl fair market value of liabilities there are competing approaches among accountants to calculating goodwill one reason for this is that goodwill involves factoring in estimates of future cash flows and other considerations that are not known at the time of the acquisition while normally this may not be a major issue it can become significant when accountants look for ways to compare reported assets or net income between different companies some of these may have acquired other firms and some may not have the financial accounting standards board fasb which sets standards for gaap rules at one time was considering a change to how goodwill impairment is calculated because of the subjectivity of goodwill impairment and the cost of testing it fasb was considering reverting to an older method called goodwill amortization this method would have reduced the value of goodwill annually over a number of years however in 2022 this project was set aside and the older method was retained 2limitations of goodwillgoodwill is difficult to price and negative goodwill can occur when an acquirer purchases a company for less than its fair market value this usually occurs when the target company cannot or will not negotiate a fair price for its acquisition negative goodwill is usually seen in distressed sales and is recorded as income on the acquirer s income statement there is also the risk that a previously successful company could face insolvency at the point of insolvency the goodwill the company previously enjoyed has no resale value when this happens investors deduct goodwill from their determinations of residual equity example of goodwillif the fair value of company abc s assets minus liabilities is 12 billion and a company purchases company abc for 15 billion the premium paid for the acquisition is 3 billion 15 billion 12 billion this 3 billion will be included on the acquirer s balance sheet as goodwill for an actual example consider the t mobile and sprint merger announced in early 2018 3 the deal was valued at 35 85 billion as of march 31 2018 per an s 4 filing 4 the fair value of the assets was 78 34 billion and the fair value of the liabilities was 45 56 billion the difference between the assets and liabilities is 32 78 billion thus goodwill for the deal would be recognized as 3 07 billion 35 85 billion 32 78 billion the amount over the difference between the fair value of the assets and liabilities 5