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Negative Goodwill Yes, I believe goodwill can have a negative balance. We call this negative goodwill as "Bargain Purchase". It's a difference between the purchase price paid for an asset and its actual fair market value. Although you should know that it’s an extremely rare case scenario. Negative GRead more
Negative Goodwill
Yes, I believe goodwill can have a negative balance. We call this negative goodwill as “Bargain Purchase”.
It’s a difference between the purchase price paid for an asset and its actual fair market value. Although you should know that it’s an extremely rare case scenario.
Negative Goodwill v/s Goodwill
I think if you get an idea of the difference between the two you will be in a better position to understand why it arises and what exactly does it mean.
- Negative goodwill is exactly opposite to goodwill as while goodwill is favourable for the seller the bargain purchase is not favourable for his company
- Negative goodwill arises when the purchase price of an asset is lower than its market value.
- Whereas in the case of goodwill the purchase price is higher than its market value. To simply state it goodwill is a premium paid by the buyer for the assets of such another company.
- While negative goodwill is favourable to the buyer the positive goodwill is favourable to the seller.
In case of a bargain purchase the Purchase Price of an Asset < its Fair Market Value
the above statement could be interpreted with the help of a below-mentioned example
The company ABC faced financial distress for since a few years and hence the board of directors had only 2 alternatives left i.e either to sell the company or file for liquidation.
The company was hence sold for an amount lower than its fair market value
It is reflected from below mentioned illustration
| Particulars | Purchase Value | Fair Market Value |
| Inventory | 20,000 | 40,000 |
| Trade Receivables | 40,000 | 46,000 |
| Cash and Bank Balance | 50,000 | 65,000 |
| Property plant and equipment | 1,50,000 | 155,000 |
| Patents and Copyrights | 25,000 | 35,000 |
| Assets | 285,000 | 3,41,000 |
| Long term Debts | 65,000 | 60,000 |
| Trade Payables | 20,000 | 30,000 |
| Liabilities | 85,000 | 90,000 |
| Net Assets | 2,00,000 | 2,51,000 |
You would doubt that even though the goodwill can have a negative balance how shall it be presented in the Financial Statements. Moving ahead –
Negative Goodwill in an income statement
It should be recognized as a “gain on acquisition “ in the income statement of an acquirer.
The below image would be of some help-
Negative Goodwill in a Balance Sheet
It can be shown as a part of liability or as a negative balance in the books of Seller Company since it unfavourable for such company whereas goodwill is shown as an intangible asset. Alternatively, such negative balance can also be shown as a negative balance under the intangible asset.
I generally follow the alternative approach to present negative goodwill under the head of intangible asset but you can follow any method you are comfortable with since both are acceptable in the industry.
If you are still confused about how to present negative goodwill in a balance sheet perhaps the below-stated example may be of some help
Aastha Mehta
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No, Goodwill is not a fictitious asset. What is Good Will? Goodwill of an entity is an intangible asset. It can be said that it's the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is wilRead more
No, Goodwill is not a fictitious asset.
What is Good Will?
Goodwill of an entity is an intangible asset. It can be said that it’s the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is willing to pay the higher amount reasons such as brand image, modernised technology, high-grade employee relationships etc.
The goodwill is valued at the time of the merger of two or more entities or acquisition of one by another entity.
It is generally noticed that better the organisation’s reputation higher is the value of goodwill.
What is a Fictitious Asset?
Fictitious means “Bogus” or “Untrue” and asset means anything beneficial for the organisation.
Thus fictitious assets are not an asset but just the expenses or losses which can not be accounted for in the current reporting period rather are to be written off in the future reporting period.
For Example,
Why is goodwill not a fictitious asset?
Goodwill is an intangible asset and not a fictitious asset. A fictitious asset does not have a realizable value as it is merely an expenditure incurred by the company. It does not have a tangible existence either. Whereas goodwill has a monetary value i.e it has a realizable value even though it has no tangible existence. Hence, it’s an intangible asset.
Goodwill is presented in a balance sheet as –
Aastha.
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