Goodwill
Definition
Goodwill is the intangible asset created in an acquisition equal to the purchase price of the target's equity minus the fair value of its identifiable net assets (after writing assets and liabilities up or down to fair value and creating new identifiable intangibles). It captures things that cannot be separately identified — synergies, workforce, brand power beyond bookable intangibles, and any overpayment.
Under US GAAP, goodwill is not amortized for public companies; it is tested for impairment at least annually. An impairment charge reduces goodwill and hits the income statement as a non-cash expense, effectively an admission that the acquirer overpaid or the business deteriorated.
Goodwill only arises from acquisitions — companies cannot record goodwill on internally generated value. It is the balancing plug that makes the pro forma balance sheet balance in merger models.
Why interviewers ask
"Walk me through how goodwill is created" and "what happens when goodwill is impaired across the three statements" are M&A-accounting staples. Traps: saying goodwill is amortized under US GAAP (it is not, for public companies; note the private-company election and different IFRS/legacy rules), and computing goodwill off book value without adjusting for fair-value write-ups and new DTLs.
Related terms
Interviews don't test definitions — they test recall under pressure.
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