Goodwill, in the context of accounting and business, is an intangible asset representing the excess of a company's purchase price over the fair value of its identifiable tangible and intangible assets, less liabilities. It occurs during business acquisitions, where one company acquires another company for a price higher than the sum of its individual assets' fair values.

What You Need To Know

Goodwill represents the reputation, brand value, customer loyalty, and other non-physical assets that contribute to a company's overall value but are not separately identifiable. It is considered an intangible asset because it lacks physical substance and cannot be physically measured or seen.

When a company acquires another business, it pays a premium based on the target company's perceived value, which includes factors such as its customer base, intellectual property, skilled workforce, or market position. The excess amount paid over the fair value of identifiable assets is recorded as goodwill on the acquiring company's balance sheet.

Goodwill is subject to periodic impairment tests to ensure its value is still accurate. If the value of goodwill declines over time due to changes in the business or market conditions, an impairment charge may be recorded, reducing the goodwill value on the balance sheet.