Goodwill
In one sentenceThe excess of the price paid to acquire a business over the fair value of its identifiable net assets, recorded as an intangible asset by the buyer.
Simply put
When you buy an existing business, you usually pay more than the value of its assets minus its liabilities, in exchange for its reputation, customers, and team and the profits you expect. This excess is goodwill.
Under international standards (IFRS 3 and IAS 36), goodwill is not amortized annually; it is tested for impairment at least once a year, and any impairment is recorded as a loss.
Worked example
A company acquired a restaurant group for 5,000,000 SAR; the fair value of the group's assets is 4,500,000 SAR and its liabilities are 700,000 SAR.
Net assets at fair value4,500,000 − 700,000 = 3,800,000 SAR
Acquisition price5,000,000 SAR
Goodwill = 5,000,000 − 3,800,0001,200,000 SAR
Formula: Acquisition price − fair value of identifiable net assets
Don't confuse it with
Intangible assetsGoodwill is a special type of them that cannot be separated or sold on its own, unlike purchased software and trademarks.