Goodwill is an intangible asset that arises when one company acquires another company for a price higher than the fair value of its identifiable assets minus its liabilities. It represents the value of elements such as brand reputation, customer relationships, and expected future earnings. 

Goodwill reflects the premium paid for a company’s intangible strengths.

When a company makes an acquisition, the purchase price is compared to the net value of the acquired company’s assets. If the buyer pays more than the net asset value, the difference is recorded as goodwill on the balance sheet. Goodwill does not generate cash flow on its own and is not amortized like other assets, but it must be tested regularly for impairment.

If the acquired business performs worse than expected, part of the goodwill may be written down, which can reduce reported profits. Investors monitor goodwill because large impairment charges can signal that an acquisition did not deliver the expected value.

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