What happens if your purchase price is below book? I understand that you would amortize excess EV by using Goodwill as a plug, so is the opposite true if the purchase price is below book?
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So then what would the account be called on the balance sheet? sorry, not good at this. Also, it says:
does it mean it was purchased from a distressed *seller?
I don't have experience with an example of this happening myself, but I think it would just show up as a contra asset account (similar to accum depreciation being a negative asset on the asset side of the balance sheet) and would amortize up to 0 over its useful life (assuming you're working with a company that can amortize goodwill). So you'd be getting a yearly non-cash income almost the opposite of depreciation, which would increase the carry value of the contra asset over time, ultimately reaching 0 at the end of its useful life. If they can't amortize goodwill, I'd assume that the asset would just sit there, negative, on the BS and get periodically tested for needed adjustment.
thank you for the response, but i'm a little confused about the gain.. normally, goodwill is increased right? so shouldn't negative goodwill decrease existing goodwill, like even if we don't amortize? how can this be a gain? I didn't think you normally record a loss by paying a prem over book
This assumes that the company started with 0 goodwill: Normally, a company is acquired and the buyer adds goodwill to its balance sheet. Then, for certain private companies, it is allowed to be amortized (see https://www.wallstreetprep.com/blog/goodwill-amortization-back-private-…), meaning it is an expense akin to depreciation. For a public company, it would sit on the BS and only go up or down if it was impaired or there were additional acquisitions. In the case where it's negative, instead of the buyer having paid a premium for a company (which when you think about it a premium you pay means additional expense), they have gotten a bargain (so, you have gotten additional value). Again, in the case of a private company who is amortizing goodwill, positive goodwill amortizes to zero as you recognize the (non-cash) expense over its useful life, depleting goodwill to zero. Negative goodwill amortizes to zero (but this means the asset is going up) as you recognize the (non-cash) income over its useful life. In either case, after fully amortized, any capitalized asset ends up at zero (or its salvage value, assumed to be zero in goodwill's case). If it starts as negative, mathematically that means it must increase to zero.
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