In corporate acquisitions, goodwill is an intangible asset recognized when a company pays more than the fair value of identifiable net assets.
The calculation is broadly the purchase price minus the fair value of identifiable assets and liabilities acquired. The residual can reflect a target’s reputation, customer relationships, workforce, brand strength, technology, or expected synergies that do not qualify for separate recognition under accounting rules.
Goodwill is created through an acquisition rather than through ordinary internal brand-building in the same way. Under United States generally accepted accounting principles and International Financial Reporting Standards, publicly accountable companies generally do not amortize goodwill; instead, they test it for impairment when required. A decline in the acquired business’s value can produce a large impairment charge.
Goodwill is not the same as a brand name or a patent, because those identifiable intangibles may be measured separately. It also does not represent cash held by the buyer. Because it depends on acquisition valuations and forecasts, goodwill can be a major focus of merger accounting reviews.