Goodwill is an asset generated from the acquisition of one entity by another. It is the difference between the price paid by the acquirer for a business and the amount of that price that cannot be assigned to any of the individually-identified assets and liabilities acquired in the transaction. The acquirer must recognize goodwill as an asset as of the acquisition date. The goodwill calculation is as follows:
Goodwill = (Consideration paid + Fair value of noncontrolling interest) – (Assets acquired – Liabilities assumed)
When calculating the total amount of consideration paid as part of the derivation of goodwill, consider the following additional factors:
- Fair value of assets paid. When the acquirer transfers its assets to the owners of the acquiree as payment for the acquiree, measure this consideration at its fair value. If there is a difference between the fair value and carrying amount of these assets as of the acquisition date, record a gain or loss in earnings to reflect the difference. However, if these assets are simply being transferred to the acquiree entity (which the acquirer now controls), do not restate these assets to their fair value; this means there is no recognition of a gain or loss.
- Share-based payment awards. The acquirer may agree to swap the share-based payment awards granted to employees of the acquiree for payment awards based on the shares of the acquirer. If the acquirer must replace awards made by the acquiree, include the fair value of these awards in the consideration paid by the acquirer, where the portion attributable to pre-acquisition employee service is considered consideration paid for the acquiree. If the acquirer is not obligated to replace these awards but does so anyways, record the cost of the replacement awards as compensation expense.
Once goodwill has been recorded by the acquirer, there may be subsequent analyses that conclude that the value of this asset has been impaired. If so, the amount of the impairment is recognized as a loss, which reduces the carrying amount of the goodwill asset.