What is goodwill in accounting?

Goodwill in accounting is defined as an intangible asset that occurs when a company acquires another business for a price greater than the fair value of its identifiable net assets. This excess amount represents various intangible factors contributing to the acquired company's worth, such as brand reputation, customer relationships, employee expertise, and potential for future earnings. Goodwill reflects the premium paid for these non-physical assets that are not separately identifiable but add significant value to the overall business.

Goodwill is recorded on the balance sheet of the acquiring company and is subject to annual impairment tests, rather than amortization. Understanding goodwill is crucial in accounting for mergers and acquisitions, as it directly affects financial reporting and the valuation of a company’s total assets. In a business combination, the recognition of goodwill indicates the perceived advantages of the acquisition beyond the tangible and identifiable intangible assets identified at fair value.