What Is Negative Goodwill?
Let me explain negative goodwill, or NGW, directly to you. In business, it's the term for the bargain amount you pay when acquiring another company or its assets for much less than their fair market value. We also call it badwill, and it usually means the seller is in trouble, maybe distressed or bankrupt, with no choice but to sell cheap. This setup almost always benefits the buyer. It's the flip side of regular goodwill, where you'd pay a premium for those assets.
Key Takeaways
You should know that negative goodwill is that bargain payment in an acquisition. It shows the seller is desperate and unloading assets at a discount. The buyer wins out here. You have to report it on your income statement if you're the buyer. Again, it's the opposite of paying extra for goodwill. All this falls under GAAP rules.
Understanding Negative Goodwill
Negative goodwill, like goodwill, accounts for the tricky part of valuing intangibles—things like reputation, patents, customer lists, and licenses. These aren't like tangible stuff such as equipment. Usually, in acquisitions, you see goodwill because buyers pay more than the tangible asset value. But sometimes, it's negative goodwill, and you record that as a gain on the buyer's income statement.
This reporting is required by GAAP, specifically FASB Statement No. 141 on business combinations. If the assets' value beats the purchase price, it's a bargain purchase—where net assets acquired exceed what you paid. As the buyer, you recognize a gain, boosting net income right away.
Track negative goodwill because it gives a fuller picture of company value. It inflates reported assets, income, and equity, which can skew metrics like ROA and ROE, making them look lower.
Examples of Negative Goodwill
Here's a straightforward example: Suppose Company ABC buys Company XYZ's assets for $40 million, but they're worth $70 million. This happens because XYZ needs cash badly, and ABC is the only buyer. ABC records the $30 million difference as negative goodwill on its income statement.
For a real case, look at 2009 when Lloyds Banking Group bought HBOS plc for way less than its net assets' value. That created about GBP 11 billion in negative goodwill, which Lloyds added to its net income that year.
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