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Goodwill

Goodwill.webp

Key Highlights

  • Goodwill is an intangible asset that arises when a company acquires another business for a price higher than the fair value of its net identifiable assets (assets minus liabilities).

  • Goodwill = Purchase Price - (Fair Value of Assets - Liabilities)

What is Goodwill?

Goodwill is an intangible asset that arises when a company acquires another business for a price higher than the fair value of its net identifiable assets (assets minus liabilities). It reflects non-physical assets such as brand reputation, customer loyalty, employee relations, and intellectual property that contribute to the business’s profitability.

When Does Goodwill Arise?

Goodwill is recorded only during an acquisition. It is the excess amount paid by the buyer over and above the net assets of the acquired company.

Formula

Goodwill = Purchase Price - (Fair Value of Assets - Liabilities)

Example

Company A acquires Company B for ₹100 crore

Fair value of Company B’s net assets = ₹75 crore

Goodwill = ₹100 crore - ₹75 crore = ₹25 crore

Key Components of Goodwill

  • Brand Value
  • Customer Relationships
  • Skilled Workforce
  • Proprietary Technology
  • Market Position

These elements are not recorded as separate assets in accounting, but they add value to the company and are captured under goodwill.

Accounting Treatment

Under Indian Accounting Standards (Ind AS 103) and IFRS:

  • Goodwill is not amortized (i.e., not gradually expensed).

  • It must be tested annually for impairment.

  • If the value of goodwill falls (i.e., business underperforms), an impairment loss is recognized in the profit and loss statement.

Impairment of Goodwill

  • Impairment means the goodwill no longer holds the value recorded during acquisition.

  • Companies must assess the recoverable amount of the business unit (cash-generating unit).

  • If this amount is less than its book value, the difference is recorded as a loss.

Importance of Goodwill

  • Reflects the true value of a business beyond its physical assets.

  • A high goodwill figure may indicate a strong brand or high customer satisfaction.

  • However, overpaying for an acquisition can result in inflated goodwill and future impairment.