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Is Goodwill Capitalized or Expensed?

Goodwill is generally recognized as a capitalized unidentifiable intangible asset on a company’s balance sheet from the acquisition of another companies net identifiable assets. However, after the purchase of a company’s net identifiable intangible assets, they may expend resources to continuously maintain it. The CPA Exam will refer to this situation as “internally developed” goodwill.

So How do We Calculate Goodwill?

Upon acquiring another company’s net identifiable assets, goodwill is calculated as the difference between the purchase price of the company and the fair market value of its net identifiable assets.

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  • How is goodwill created?

    When a company purchases a company, the buyer acquires the fair market value of the net identifiable assets. Goodwill is considered the excess over fair market value of the purchased assets. For example, if a Vesla (electric car company) pays $5 million for a company with fair market value of net identifiable assets of $4 million, then goodwill would be $1 million.

  • What are non-current assets?

    Items typically classified as non-current include land, buildings, machinery, equipment, leasehold improvements, goodwill, intangible assets (patents, copyrights, trademarks). These items typically have a lifespan of more than one-year.