Goodwill
An intangible asset recorded when a company acquires another for more than the fair value of its net identifiable assets.
What is Goodwill?
Goodwill is an intangible asset that arises when one company acquires another and pays more than the fair market value of the acquired company's identifiable net assets. The premium reflects unquantifiable competitive advantages such as brand reputation, customer loyalty, proprietary technology, and employee talent. Under GAAP, goodwill is not amortized but is tested annually for impairment — if the acquired business performs worse than expected, a goodwill impairment charge reduces earnings. Goodwill can represent a large portion of total assets for acquisitive companies and is a key item for analysts evaluating deal quality and management capital allocation discipline.
Example
After acquiring LinkedIn for $26.2 billion in 2016, Microsoft recorded approximately $17 billion in goodwill — the amount paid above LinkedIn's identifiable net assets. This goodwill sits on Microsoft's balance sheet and is tested annually for impairment rather than amortized.