Definition
Goodwill
Goodwill is the premium a company pays to acquire another over the fair value of its identifiable net assets, recorded as an intangible asset.
When one company buys another for more than the fair value of its net assets, the excess is recorded as goodwill, representing things like brand, customer relationships and synergies. It sits on the balance sheet as a non-current intangible.
Under Ind AS, goodwill is not amortised but tested annually for impairment; if the acquired business underperforms, the goodwill is written down, hitting profit. Large goodwill on a balance sheet warrants scrutiny, since impairment can signal an overpriced past acquisition.
Related terms
- AmortisationAmortisation is the systematic write-off of the cost of an intangible asset, such as software, patents or goodwill, over its useful life.
- Intangible AssetsIntangible assets are non-physical assets with economic value, such as patents, trademarks, software, licences and goodwill.
- ImpairmentImpairment is the write-down of an asset's carrying value when its recoverable amount falls below what is recorded on the balance sheet.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.