Today we are going to be discussing goodwill, which is an asset you will find located on the balance sheet. We have mentioned goodwill within the financial analysis pieces here before, but I thought it would be good if we could create a reference point for this topic for future purposes.
In accounting terms, goodwill is generated when one company acquires another. When the acquiring company acquires another firm, the purchase price is an accumulation of all the identifiable assets, less all liabilities, based on a fair value basis. In terms of the assets of the business, this includes both tangible and intangible assets, the latter of which can be hard to value given their nature.
If the purchase price the acquiring company pays is greater than fair value of the company being acquired, then this excess is registered as an intangible asset called goodwill.
You might be pondering why a company would ever pay excess to acquire a company when they can somewhat gauge…