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.
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 = purchase price − fair value of net identifiable assets acquired. It is the balancing figure that makes the acquirer's balance sheet work after a deal, representing what was paid above the fair value of identifiable assets and liabilities.
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.
Under both IFRS and US GAAP, goodwill is not amortised. It is tested for impairment at least annually, and written down when the acquired business underperforms — which is how an overpayment eventually shows up in reported earnings.
What candidates get wrong
- Saying goodwill is amortised. It is not under current standards; it is impairment-tested.
- 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.
Go deeper
This term comes up constantly in accounting interviews and on the desk.
IB technical questions guideRelated Accounting terms
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