Goodwill
The excess of an acquisition’s purchase price over the fair value of the target’s identifiable net assets. Under current US GAAP and IFRS it is tested annually for impairment rather than amortised.
Behind the balance sheet · 16 of 17Next: Purchase Price Allocation (PPA)
Why Goodwill matters in interviews
Goodwill is where purchase accounting shows up in interviews, and it is a reliable follow-up to any merger model question. Interviewers like it because the calculation is simple but the intuition — that goodwill is a plug — is something candidates often miss.
How it works in practice
Goodwill is a plug rather than a measurement. Every other acquired asset and liability is written to fair value, and goodwill is whatever is left between that total and the price paid, which is what makes the acquirer's balance sheet work after a deal.
A worked case: acquire a company for $500m whose identifiable assets have a fair value of $380m and whose liabilities are $100m, so net identifiable assets are $280m. Goodwill is $500m − $280m = $220m.
An overpayment surfaces years later rather than at completion. Goodwill is tested for impairment at least annually and written down when the acquired business misses what was assumed for it, so the charge is an admission about a price paid in the past rather than news about the current period.
What candidates get wrong
- Saying goodwill is amortised. Under IFRS and US GAAP it is impairment-tested instead. The exception worth knowing is the US private-company election, which permits amortisation over ten years or less.
- Forgetting the intangible asset write-up step. Part of the excess purchase price is typically allocated to identifiable intangibles (brands, customer relationships, technology) which *are* amortised, and that amortisation is a real drag on pro-forma EPS.
- Missing the deferred tax liability created when assets are written up for book purposes but not for tax.
Goodwill: frequently asked questions
Is goodwill amortised?
No. Under both IFRS and US GAAP goodwill is carried at cost and tested for impairment at least annually, rather than amortised on a schedule. Identifiable intangible assets recognised in the same acquisition — brands, customer relationships, developed technology — generally are amortised over their useful lives.
What does a goodwill impairment tell you?
That the acquired business is worth less than the price paid for it. It is a non-cash charge and does not change the cash already spent, but it is an explicit admission that an acquisition has underperformed the assumptions used to justify it.
Where Goodwill comes up
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