Goodwill is the difference between the price paid to acquire a company and the fair value of the identifiable net assets acquired. If a group pays 10 million euros for a business whose identifiable assets and liabilities are valued at 7 million, goodwill is 3 million. It is recognised as an intangible asset on the consolidated balance sheet.
That 3 million is not a premium paid by mistake. It represents what the buyer is acquiring but cannot put a separate line against: customer loyalty, workforce expertise, market position, expected synergies. Goodwill is the accounting residue of everything that made the target worth more than the sum of its parts.
It arises only on consolidation, and only after purchase price allocation has assigned fair value to each identifiable asset and liability. Goodwill is what is left once that exercise is complete, which is why a poorly performed allocation inflates it: intangibles that should have been identified and amortised separately stay bundled inside the residual.
Subsequent treatment splits by framework. Under IFRS, goodwill is not amortised. It is tested for impairment at least annually, and any loss is recognised in profit. Under French rules, goodwill is amortised where its useful life can be determined, and tested for impairment where it cannot. The same acquisition therefore weighs on the income statement very differently depending on the framework.
Where the acquisition price falls below the fair value of net assets acquired, the difference is badwill instead. Both sit within the consolidation scope, and both depend on the acquired entity's data being reliable before any calculation begins.
