what is goodwill?
An intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company’s brand name, good customer relations, good employee relations, solid customer base and any patents or proprietary technology represent goodwill.
In accounting, goodwill is an intangible assets associated with a business combination. Goodwill is recorded when a company acquires (purchases) another company and the purchase price is greater than the combination or net of 1) the fair value of the identifiable tangible and intangible assets acquired, and 2) the liabilities that were assumed.
Goodwill is reported on the balance sheet as a noncurrent asset
Goodwill is an intangible asset and is simply the reputation of a business. It is generally not measurable in monetary terms.
In accounting, it is valued at the time when there is an amalgamation of 2 or more enterprises and payment made is in excess of the purchase consideration.
Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business. Let’s walk through the following example: Acquirer buys Target for $500m in cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m.
- Acquirer records cash decline of $500 to finance acquisition
- Acquirer’s PP&E increases by $100m
- Acquirer’s debt increases by $50m
- Acquirer records goodwill of $450m