Updated on March 2, 2023
Goodwill is an intangible asset and generally comes into picture when a company purchases another company. Goodwill means a company’s brand name, customer base, customer / employee relations, brand image, patents, niche technology etc.
Goodwill is recorded in a situation in which the purchase price is higher than the sum of the value of assets and intangibles as well as the liabilities. The cost of a business evaluation includes, apart from the tangible assets, fair market value and liabilities plus the amount of goodwill. Goodwill can be seen as a company’s reputation or market standing for expected future growth and profits which exceed the rate of profits in the industry. For accounting purposes, goodwill should be of monetary value.
How is Goodwill calculated?
The fair market value of assets and liabilities is subtracted from the purchase price of a company:
Goodwill = P−(A+L)
P = Purchase Price of the target company
A = Fair market value of Assets
L = Fair market value of Liabilities