What Is Goodwill in Accounting? Definition, Formula, and Examples

Goodwill in accounting is an intangible asset recognized when an acquiring company pays more than the fair value of an acquired company’s identifiable net assets in a business combination.
It represents future economic benefits arising from assets that are not individually identifiable or separately recognized.
Under U.S. GAAP, goodwill is recorded only at the acquisition date and is subject to ongoing impairment testing.

Tangible vs. Intangible Assets in Accounting

To understand how goodwill is created, it is important to distinguish between tangible assets, identifiable intangible assets, and goodwill.

Tangible assets are physical items that can be seen and touched, including cash, equipment, inventory, buildings, and land. These assets are typically straightforward to measure and value.

Identifiable intangible assets are non-physical assets that can be separately identified and reliably measured. Examples include trademarks, patents, customer lists, software, and licenses. When acquired in a business combination, these assets are recognized separately from goodwill.

Goodwill represents the residual value after all identifiable assets and liabilities have been recognized at fair value. It captures economic benefits that cannot be individually separated but are expected to contribute to future earnings.

How to Calculate Goodwill in Accounting

Goodwill is calculated as the purchase price minus the fair value of identifiable net assets acquired.

Goodwill Formula

Goodwill = Purchase Price − Fair Value of Identifiable Net Assets

Identifiable net assets include tangible assets and identifiable intangible assets, net of assumed liabilities.

Goodwill Calculation Example

Assume Company A acquires Company B for $500,000.

• Identifiable assets (tangible and intangible): $450,000
• Liabilities assumed: $50,000
• Net identifiable assets: $400,000

Goodwill calculation:

• Purchase price: $500,000
• Less: fair value of identifiable net assets: $400,000
• Goodwill recognized: $100,000

The $100,000 goodwill balance represents the premium paid for unidentifiable economic benefits such as brand strength, customer loyalty, operational synergies, and expected future cash flows.

Where Goodwill Appears on the Balance Sheet

Goodwill appears on the balance sheet as a noncurrent intangible asset.

Because goodwill provides long-term economic benefit, it is classified as a noncurrent asset and remains on the balance sheet at its carrying amount unless impaired. Unlike tangible assets, goodwill does not have a finite useful life and is not depreciated or amortized under U.S. GAAP.

Goodwill vs. Other Intangible Assets

Before goodwill is calculated, all identifiable intangible assets must be separately recognized and measured at fair value.

• Identifiable intangible assets can be separated or arise from contractual or legal rights.
• Goodwill cannot be sold or transferred independently and exists only as part of a business combination.

Goodwill is therefore a residual asset that reflects the portion of the purchase price not attributable to specific, measurable assets.

Goodwill Impairment and Ongoing Measurement

Goodwill is not amortized under U.S. GAAP and is instead tested annually for impairment.

Impairment testing is also required when triggering events occur, such as declining financial performance, loss of key customers, adverse market conditions, or significant changes in business strategy.

If the fair value of the reporting unit falls below its carrying amount, goodwill is written down and an impairment loss is recognized in the income statement.

Bargain Purchases and Negative Goodwill

In rare cases, an acquisition results in a bargain purchase, where the purchase price is less than the fair value of the acquired company’s net assets.

In a bargain purchase:

• No goodwill is recorded
• The excess is recognized as an immediate gain in earnings

Accounting standards require a reassessment of asset and liability valuations before recognizing a bargain purchase gain.

Why Goodwill Matters in Financial Analysis

A goodwill balance provides insight into a company’s acquisition strategy and risk profile. Significant goodwill may indicate acquisitive growth and reliance on intangible value creation, while also introducing future impairment risk.

For investors and finance teams, goodwill should be evaluated alongside operating performance, cash flows, and impairment history to assess whether acquisition premiums are supported by results.

Goodwill in Accounting: Key Takeaways

• Goodwill is recognized only in a business combination.
• It equals the excess of purchase price over identifiable net assets.
• Goodwill is a noncurrent intangible asset.
• It is tested annually for impairment, not amortized.
• Impairment results in an immediate expense.

Frequently Asked Questions About Goodwill in Accounting

Is goodwill amortized under GAAP?

No. Under U.S. GAAP, goodwill is not amortized and is tested annually for impairment.

Can internally generated goodwill be recorded?

No. Internally generated goodwill cannot be recognized on the balance sheet.

Is goodwill a current or noncurrent asset?

Goodwill is classified as a noncurrent intangible asset.

What causes goodwill impairment?

Impairment may result from declining performance, loss of customers, market disruptions, or other events that reduce the fair value of the reporting unit.

How does goodwill differ under IFRS?

IFRS also prohibits amortization of goodwill but applies different impairment testing methodologies than U.S. GAAP.

Brooke Colglazier

Marketing Manager