How this calculator works
When one company buys another, the buyer allocates the purchase price to the fair value of the assets acquired and the liabilities assumed. Anything left over is goodwill. It represents the value of things that cannot be listed separately: brand, customer relationships, trained staff, expected synergies and, sometimes, simply an overpayment. Goodwill is not amortised under IFRS or US GAAP; instead it is tested for impairment at least once a year. If the acquired business performs worse than expected, the impairment charge can be large and sudden. If the purchase price is below the fair value of net assets, the difference is a bargain purchase gain, shown here as negative goodwill.
Formula
Net identifiable assets = fair value of assets - fair value of liabilities. Goodwill = purchase price - net identifiable assets. Purchase price = goodwill + fair value of assets - fair value of liabilities. Fair value of assets = purchase price - goodwill + fair value of liabilities. Fair value of liabilities = fair value of assets + goodwill - purchase price.
Worked example
A purchase price of $1,000,000 against assets with a fair value of $800,000 and liabilities of $200,000 gives net identifiable assets of $600,000 and goodwill of $400,000. If the assets were fairly worth $950,000, goodwill would fall to $250,000.
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Frequently asked questions
Can goodwill be negative?
Yes. Buying a business for less than the fair value of its net assets produces a bargain purchase gain, which is recognised in profit or loss immediately under current standards rather than as negative goodwill on the balance sheet.
Is goodwill an asset I can sell?
No. Goodwill is not separable from the business and cannot be sold on its own. It only has value as part of the reporting unit to which it was allocated, which is why impairment testing is done at that level.
What is the difference between goodwill and acquired intangibles?
Identifiable intangibles, such as patents, trademarks and customer lists, can be separated and valued individually, so they are recognised separately and usually amortised. Goodwill is the residual that cannot be attributed to any specific asset.