Goodwill Accounting Definition

Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of goodwill; internally generated goodwill and purchased goodwill.  

What Is Goodwill In Accounting?

In accounting, goodwill is treated as an intangible asset. Since goodwill is an intangible asset it can only be recorded as an asset under certain conditions are met. In general, goodwill means reputation that a business may build over time. This type of goodwill has no monetary worth so it cannot be recognized as an asset. When this business is sold to another business, the selling business may demand an additional amount that is in excess of the total worth of business’s net assets. If paid by the buyer of the business, the buyer should recognize the difference as goodwill.

How to Calculate Goodwill in Accounting

The rules say that at the time of acquisition of a business, the net assets (Assets-Liabilities) of the seller should be recorded at fair value. In return, the buyer has to transfer some consideration in cash or other forms. The consideration paid in excess of the fair value of net assets acquired is called the goodwill. The formula to calculate the goodwill resulting in a business acquisition is

                Consideration Paid                                                                          XXX

                Less: Fair value of Net assets acquired                                           (XXX)

                Goodwill                                                                                       XXX

Control Resulting Form Business Combination

As per standards, a business combination will result in a transfer of control over net assets of the seller’s business if the buyer has acquired more than 50% of the total shares of the seller’s business. This gives rise to a group of businesses; one of them is called the parent and another one is called a subsidiary. Since the parent has more than 50% of the holdings it has controlling interest in the group.


Suppose to exercise control over the seller’s net assets, the buyer acquired 60% of the holding out of 100% of the seller’s net assets. This will result in a 40% of non-controlling interest. The NCI is either measured at fair value at the date of acquisition or at a proportionate share of net assets, e.g. 40% of net assets acquired in this case. Now the goodwill arising will either be a gross goodwill or goodwill attributable to parent only.

Goodwill Attributable to Parent or Group Goodwill

When the parent acquired either 100% of the shares of a subsidiary or when the NCI is measured at the proportionate share of net assets of a subsidiary, then there is no goodwill attributable to NCI and goodwill then be attributable to parent only. Here is how to calculate goodwill attributable to the parent

                Consideration Paid                                                            XXX

                Less: Share of Net assets acquired (60% or 100%)             (XXX)

                Goodwill attributable to parent or Group Goodwill                XXX

Gross Goodwill or Full Goodwill

When NCI is measured at fair value, the goodwill calculated should be grossed up and allocated to the NCI. Here is how to calculate a gross goodwill.

                Consideration Paid by parent                                             XXX

                Add: Fair value of NCI                                                      XXX

                Less: Fair value of Net assets acquired (100%)                  (XXX)

                Gross Goodwill or Full Goodwill                                          XXX

Negative Goodwill Accounting

The negative goodwill or bargain purchase arises when the worth of net assets acquired is more than the cost paid for it. For example, parent acquired net assets worth $5 million by paying consideration of only $4 million, the resulting $1 million is a negative goodwill and will be recognized as a profit in the income statement.

Goodwill Accounting Example

Suppose P Company acquired 85% shares of S Company by paying $7.5 million. At that time the fair value of net assets of S Company was $6.2 million and fair value of NCI was $1.9 million. Calculate the group goodwill and goodwill attributable to NCI.

Group Goodwill                                                                        $ million

                Consideration Paid by P Company                                    7.50

                Less: Share of Net assets acquired (85% of $6.2 m)        (5.27)

                Goodwill attributable to parent or Group Goodwill             2.23

Goodwill Attributable to NCI                                                    $ million

                Consideration Paid by parent                                         7.50

                Add: Fair value of NCI                                                   1.9

                Less: Fair value of Net assets acquired (100%)               (6.2)

                Gross Goodwill or Full Goodwill                                     3.20

                Less: Group Goodwill                                                   (2.23)

                Goodwill attributable to NCI                                          0.97

Accounting for Goodwill Impairment

An asset impairs when its carrying amount exceeds its recoverable amount. Then the asset’s carrying amount is written down to its recoverable amount and the difference is charged in income statement s a loss. Since the goodwill is not associated separately with a single asset it is allocated to business’s assets that are not separable and work in a group also known as a cash-generating unit. Thus the impairment of goodwill is associated with the recoverable amount of CGU. If on review the recoverable amount of CGU is less than its carrying value, the difference is charged as the impairment loss and the individual assets’ carrying values are written down.

Still want to learn more about Goodwill

Checkout other online study materials on SolutionInn

Related solved question answer on Goodwill

Join SolutionInn Study Help for
1 Million+ Textbook Solutions
Learn the step-by-step answers to your textbook problems, just enter our Solution Library containing more than 1 Million+ textbooks solutions and help guides from over 1300 courses.
24/7 Online Tutors
Tune up your concepts by asking our tutors any time around the clock and get prompt responses.
Post a Question

Answers from our experts for your tough homework questions

Relevant accounting tutors