How is Goodwill calculated during an acquisition?

Goodwill is an intangible asset that arises when one company acquires another for more than the fair value of its identifiable net assets. The calculation involves taking the total purchase price paid for the target company and subtracting the fair value of the identifiable net assets (assets minus liabilities) that are acquired in the transaction.

When a company is acquired, the acquirer typically pays a premium over the fair value of the net assets because it expects to gain additional benefits from the acquisition such as synergies, market share, or future earnings potential. This excess amount paid is recognized as goodwill on the acquiring company's balance sheet.

Therefore, by calculating goodwill as the purchase price minus the fair value of net assets, it reflects the premium paid beyond the tangible and identifiable intangible assets acquired. This method ensures that the financial records accurately represent the investment being made beyond just the identifiable resources.