Goodwill

Goodwill = Purchase Price - Fair Value of Net Identifiable Assets. If Company A buys Company B for $500M, and Company B's identifiable assets (adjusted to fair value) minus liabilities total $350M, then $150M of goodwill is recorded on Company A's balance sheet. The 'identifiable assets' include tangible assets (PP&E, inventory) at fair value plus identifiable intangible assets (customer lists, patents, trade names) that are separately recognized under purchase accounting rules (ASC 805).

Under U.S. GAAP, goodwill is not amortized (unlike depreciation and amortization of identifiable intangibles) — it remains on the balance sheet indefinitely and is tested for impairment at least annually. If the fair value of a reporting unit falls below its carrying value (including goodwill), the company must write down goodwill. Impairment charges are non-cash but can be massive — they effectively admit that the company overpaid for an acquisition. Notable examples: AOL-Time Warner ($99B write-down) and Kraft Heinz ($15.4B write-down).

When building a merger model, goodwill is the 'plug' in the purchase price allocation. You start with the total purchase price (enterprise value), subtract the fair value of each identifiable asset and liability, and the remainder is goodwill. Bankers allocate value to identifiable intangibles first (which are amortized, creating tax deductions in an asset deal) to minimize goodwill. The allocation matters because amortization of intangibles is tax-deductible while goodwill impairment is not.

Under IFRS, goodwill is also not amortized but is tested for impairment annually (similar to GAAP). However, IFRS uses a one-step impairment test (comparing recoverable amount to carrying amount), while GAAP recently simplified to a similar one-step approach under ASU 2017-04. Some jurisdictions allow goodwill amortization for private companies. Understanding these differences is important for cross-border M&A, though most IB interviews focus on U.S. GAAP treatment.