What is Goodwill?

Goodwill is an intangible assets usually seen on most larger companies balance sheet. It is also a term which most investors do not understand, nor do they know how it is calculated.

The rules on how to value goodwill have recently changed with the introduction of IFRS (International Financial Reporting Standards). The old calculation of goodwill was purchase price - net assets. Where net assets equals to assets minus liabilities. The difference between these two prices is what gets debited to goodwill. American companies though they do not officially recognize IFRS have begun to follow many of its principles.

Example GE offers 10 billion for XYZ Company with assets of 8 billion and liabilities of 6 billion

10 billion purchase price - (8-6) So the goodwill =8


The new IFRS standard of goodwill, is the purchase price minus the fair value of the net assets. So any company being bought all of their assets will best be determined at fair value and the difference is the amount of goodwill. If a company which is bought has goodwill that goodwill is re-valued and if it is not impaired then the purchaser gets all of this goodwill.

Example GE offers 10 billion for XYZ Company with fair value of assets of 6 billion and fair value of liabilities of 7 billion

than the calculation is 10-(6-7). So the goodwill = 11.