What is goodwill in accounting?

Goodwill in accounting is defined as an intangible asset that arises when a company is acquired for more than the fair value of its net identifiable assets. This situation typically occurs when the purchasing company pays a premium for various factors such as brand reputation, customer loyalty, or proprietary technology that are not separately identifiable but are expected to contribute to future profitability.

The calculation of goodwill involves determining the fair value of the identifiable assets acquired during a merger or acquisition and subtracting this from the purchase price. The resulting difference is recognized as goodwill, reflecting the premium the buyer is willing to pay for the potential benefits of the acquired company that are not recorded on the balance sheet. Understanding goodwill is critical for assessing a company's value beyond its tangible assets and liabilities, as it represents a key component of strategical business advantages.