Goodwill is an asset that exists when a business is acquired for more than the book value of the business. The buyer recognizes goodwill as an asset on its books as a separate line item. While uncommon, goodwill can be a negative number.
Originally, before the common definition set forth above was adopted, the term goodwill was used to reflect intrinsic value such as going concern value or reputation value.
The basic goodwill formula is: Take the purchase price of a company and subtract the net fair market value of identifiable assets and liabilities. Goodwill = P - (A-L) where P = Purchase price of the target company, A = fair market value of assets, and L= Fair market value of liabilities.
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