How is goodwill defined in accounting?

Goodwill is defined in accounting as an intangible asset that arises when one company acquires another for a price that exceeds the fair value of its net identifiable assets. This scenario occurs during the acquisition process when the purchasing company is willing to pay a premium for the target company, often due to factors such as brand reputation, customer loyalty, employee relationships, or other synergies that are not directly quantifiable.

The key component of goodwill is that it reflects the value of the company’s earned reputation and potential earning capacity beyond the physical assets and identifiable intangible assets that can be measured at fair value. In essence, it embodies the additional value that the acquirer expects to gain from the acquisition that is not captured by the fair value assessment of identifiable assets and liabilities alone.

This distinguishes goodwill from other types of intangible assets, such as branding or patents, which can have specific quantifiable values. Goodwill is not considered an expense, nor is it related to general marketing efforts or specifically to product patents, making the other options less accurate in describing this accounting concept.