Goodwill

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For the charitable organization known for its chain of thrift stores, see Goodwill Industries.

In accounting, goodwill represents the purchase price of a business over the underlying fair value of its acquired assets.

For example, a buyer paid $2 million for a company whose net assets where only worth $1.3 million; the $700 thousand difference is treated as goodwill.

Management must review the asset value of goodwill every year to determine if it has been "impaired". If it is determined that the goodwill has been impaired, it must be reduced or, in some cases, completely written off. An impairment may occur for any reason; for example, a company purchases another company which has several government contracts, but later the purchased company fails to win the contract renewals and has difficulty winning new business.