In accounting, negative goodwill is a gain experienced by the buyer of an asset when it is sold at a price below the fair market value. This occurs most commonly in a distressed sale when assets are being sold off quickly to raise funds or when a company is being liquidated and sold. There are accounting procedures that must be followed when recording negative goodwill to ensure that it is properly accounted for in financial statements. Accountants keep up with the latest standards and policy changes so they can serve their clients as effectively as possible.
This term is the inverse of goodwill. When a company pays a price above the fair market value for an asset, the overage is considered “goodwill.” The company pays a premium for the asset with the understanding that it is obtaining intangible benefits such as association with a strong brand or respected product name. Goodwill is recorded on balance sheets as an intangible asset.
In the case of negative goodwill, the difference between the fair market value and the purchase price is treated as income for the buyer. In the world of accounting, there is no so-called free lunch, and companies that make favorable deals on purchases are expected to account for those deals in their financial statements. A distressed sale is an opportunity for the buyer, and the negative goodwill represents a benefit in the deal.
When assets are sold, an attempt is made to determine their fair value before the sale takes place. This is done for the benefit of buyer and seller, to ensure that a fair price is negotiated and that if the asset is sold for above or below the fair market value, all parties are aware. Valuation of some assets may be straightforward, as when a company acquires a publicly traded company and can use the stock value as a rubric for determining value.
One problem with distressed sales is that while companies are required to account for negative goodwill, it can be difficult to determine the fair market value of a distressed asset. Valuation is a challenge if an asset's worth is fluctuating wildly or if it could not be sold on the open market. Assets might not be saleable for a number of reasons, including hesitation on the part of investors to buy openly. This can complicate matters when it comes to recording negative goodwill fairly and honestly.
