Goodwill

Goodwill is a residual consequence of excess consideration given for the fair market value of readily identifiable tangible assets and liabilities acquired or assumed in a purchase transaction between two or more unrelated companies. The excess purchase price represents the intangible value for such items as reputation, brand recognition, technical skills, and other intellectual capital an acquiring company believes is inherent in the acquired company. [Page 229]For example, assume ABC Medical Center purchases XYZ Hospital for $10 million although the net assets of XYZ Hospital have a fair market value of $9 million. ABC Medical Center would record, as a long-term asset, $1 million in goodwill.

When goodwill emerges as a result of a business combination, the initial recognition and subsequent treatment, including impairment recognition parameters, are governed in the United States primarily by the Financial Accounting Standards Board (FASB) in Statement of Financial Accounting Standards No. 142. Under the provisions of Statement No. 142, goodwill is no longer subject to amortization as it was under previous authoritative guidance. Rather, companies must annually reassess the value of their recognized goodwill and, if certain conditions or indications of impairment are present, write the recorded goodwill down to the current fair value. Any writedown that occurs because of impairment may not be restored at a future date in the event of a recovery in value.