What is Negative Goodwill?

Answer: When reviewing a customer's financial statements, you might occasionally find an entry: "Negative Goodwill". Negative goodwill occurs when the fair market value of the assets acquired is higher than the purchase price of the asset. This situation is a result of market imperfections. Situations can occur when the acquisition cost is less than the value of the assets being purchased. In this scenario; a credit results that is referred to as negative goodwill [or the excess of book value over the cost of assets acquired].

Companies that have negative goodwill are in an interesting position because the amortization of this negative goodwill increases earnings. Under U.S. Generally Accepted Accounting Principles the excess of book value over cost should be allocated to reduce proportionately the values assigned to non-current assets in determining their fair values. If the allocation reduces the non-current assets to zero value, the remainder of the excess over cost should be classified as a deferred credit and should be amortized systematically to income over the period the acquiring company will benefit from the purchase - which cannot exceed 40 years.