Term · Balance Sheet & Debt
Goodwill
In briefGoodwill arises in business combinations as a residual when the price paid exceeds the fair value of the identifiable net assets. For acquisition-driven small companies, an impairment can abruptly reduce equity.
Definition
Goodwill arises in a business combination as the residual amount when the consideration transferred plus certain further components exceeds the fair value of the identifiable net assets.
How it is calculated
Formula. Simplified per IFRS 3: consideration + minority interests where applicable + fair value of previously held interests − fair value of identifiable net assets.
Why it matters for small caps
Small, acquisition-driven companies often carry high goodwill balances — an impairment can abruptly reduce equity.
Common misreadings
- Goodwill is neither automatically worthless nor a freely disposable asset. High goodwill increases dependence on assumptions and later impairment tests.
In the process
Frequently asked
What is goodwill?
It is the amount paid in an acquisition above the fair value of the individually identifiable assets. It sits as an intangible item on the balance sheet.
How does goodwill arise arithmetically?
Per IFRS 3, it results from the consideration, minorities, and previously held interests less the fair value of the identifiable net assets. It is thus a residual value of the purchase price.
What risk lies in high goodwill?
It is neither automatically worthless nor freely disposable, but it depends heavily on assumptions. In an impairment test, it can be written down and burden equity.
Related terms
Sources
Primary
IFRS Foundation – IFRS 3 Business Combinations
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-3-business-combinations/
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-3-business-combinations/
Methodology
IFRS Foundation – IAS 36 Impairment of Assets
https://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets/
https://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets/
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.