What is goodwill?

When a company acquires another company, goodwill is calculated as the difference between the purchase price of the company and the fair market value of the assets less liabilities of the acquired company.

Goodwill is only recorded after all the identifiable intangibles of the acquired company are considered, including patents, trademarks and licenses among others.

Goodwill is not amortised but rather is tested for impairments annually. If the assets are found to be impaired by the valuers/auditors, then goodwill is written down and the company takes a hit on its income statement for the impaired amount.

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