What is goodwill?
Have you ever seen goodwill on a balance sheet and wondered what it is?
Goodwill is an intangible asset that’s recorded when one company acquires another company for a price that is greater than the fair value of the target company’s net assets.
Purchase price - fair value of net identifiable assets = goodwill
So let’s say Microsoft decides to buy Pinterest.
Let’s also assume the fair value of Pinterest’s assets is $30 billion and the fair value of its liabilities is $5 billion, which means the fair value of its net identifiable assets is $25 billion.
If Microsoft pays $32 billion to acquire 100% of Pinterest, then Microsoft would record $7 billion of goodwill, calculated as follows:
Purchase price of $32 billion - $25 billion FV of net identifiable assets = $7 billion of goodwill
Thus, goodwill isn’t tangible property and it’s not something you can sell or trade. It’s simply the premium the company paid for another company’s net assets.
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