Lesson 2 of 6 · 13 min
Goodwill: recognition, impairment and analysis
Goodwill is the part of an acquisition price that cannot be pinned to identifiable net assets; it is never amortised, only tested for impairment, and analysts often strip it out to compare companies.
In short
- Goodwill = cost of the acquisition − fair value of the target's net identifiable assets (identifiable assets − liabilities and contingent liabilities, all at fair value).
- If net identifiable assets exceed the price, it is a bargain purchase and the gain goes to profit or loss immediately.
- Under IFRS and US GAAP goodwill is capitalised, not amortised, and tested for impairment at least annually. An impairment is a non-cash charge that cuts earnings and assets.
- Accounting goodwill exists only after acquisitions; economic goodwill reflects the business's ability to earn excess returns and shows up (in theory) in the share price.
- Analysts often exclude goodwill from ratio inputs and goodwill impairments from operating trends.
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