Goodwill
The premium paid over the identifiable net assets of a business acquired. Not amortised, tested for impairment, and writing it down concedes the price was too high.
Where you will meet it
Goodwill appears in 13 learning outcomes on the CFA syllabus. A few of them:
- Build a common-size balance sheet and explain what it shows
“Comparison across years shows whether the asset base is shifting — inventory building faster than sales, receivables growing as a share of assets, goodwill accumulating through acquisition — and comparison across peers shows whether the structure is normal for the industry.”
- Work out dividend yield and alternative price multiples and explain what they mean
“Analysts often adjust book value, for example removing goodwill to get tangible book.”
- Set out how IFRS classifies, measures and requires disclosure of: (1) financial asset investments; (2) associates; (3) joint ventures; (4) business combinations; (5) special purpose entities and variable interest entities
“Control means consolidation under the acquisition method, with goodwill and a non-controlling interest, and control rather than legal form decides whether a structured entity is consolidated.”
- Explain how goodwill is accounted for and disclosed
“Goodwill arises only in a business combination: in the simple case of buying all of a company, it is the consideration paid less the fair value of the identifiable net assets acquired (with a non-controlling interest or a previously held stake, those are added to the consideration), so it captures what cannot be separately identified, such as expected synergies and an assembled workforce.”
See also
Practise it
Practise goodwill until it is automatic: questions that explain every wrong option.
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