Negative Goodwill (NGW)

What Is Negative Goodwill?

In business, negative goodwill (NGW) is a term that alludes to the bargain purchase amount of money paid, when a company gains one more company or its assets for fundamentally less their fair market values. Negative goodwill generally shows that the selling party is distressed or has declared bankruptcy, and faces no other option except for to empty its assets for a negligible portion of their worth.

Subsequently, negative goodwill almost consistently inclines toward the buyer. Negative goodwill is something contrary to goodwill, where one company pays a premium for another company's assets.

Grasping Negative Goodwill

Negative goodwill, alongside goodwill, are accounting ideas made to recognize the test of evaluating the value of immaterial assets, like a company's reputation, patents, customer base, and licenses. These theoretical assets vary from substantial things, like equipment or inventory. In most acquisition cases, transactions include goodwill, where buyers pay a greater sum than the value of the selling company's substantial assets. However, in rarer cases, negative goodwill happens, where the value of the immaterial assets must be recorded as a gain on the buyer's income statement.

This goodwill/negative goodwill reporting command falls under generally accepted accounting standards (GAAP) — explicitly under the Financial Accounting Standards Board (FASB) Statement No. 141, with respect to business combinations. On the off chance that the value of the relative multitude of acquired company's assets surpasses the purchase price of the company, a "bargain purchase" is said to have happened. FASB characterizes a bargain purchase as "a business combination where the acquisition date amounts of identifiable net assets acquired, excluding goodwill, surpass the sum of the value of consideration moved."

In the event of a bargain purchase, the purchaser is required under GAAP to perceive a gain for financial accounting purposes. The effect of this gain is an immediate increase in net income.

Negative goodwill is particularly important to follow in light of the fact that it provides investors with a more comprehensive snapshot of a company's value. An acquisition that includes negative goodwill increases reported assets, income, and shareholder equity, possibly mutilating performance metrics like return on assets (ROA) and return on equity (ROE), which would seem lower therefore.

Instances of Negative Goodwill

As a fictitious illustration of negative goodwill, we should assume Company ABC purchases the assets of Company XYZ for $40 million, however those assets are really worth $70 million. This deal just happens in light of the fact that XYZ is needing cash, and ABC is the main entity ready to pay that amount. In this case, ABC must record the $30 million difference between the purchase price and the fair market as negative goodwill on its income statement.

Think about this genuine illustration of negative goodwill: In 2009, British retail and commercial bank Lloyds Banking Group (formerly Lloyds TSB) acquired banking and insurance company HBOS plc, for a purchase price that was substantially lower than the value of HBOS plc's net assets. Thus, this transaction delivered negative goodwill of around GBP 11 billion, which Lloyds Banking Group added to its net income that year.

Features

• Negative goodwill is something contrary to goodwill, where one company pays a premium for another company's assets.
• Goodwill/negative goodwill reporting falls under generally accepted accounting standards (GAAP).
• Negative goodwill almost consistently leans toward the buyer.
• Buying parties must declare negative goodwill on their income statements.
• Negative goodwill (NGW) alludes to a bargain purchase amount of money paid when a company gets another company or its assets.
• Negative goodwill shows that the selling party is in a distressed state and must empty its assets for a negligible portion of their worth.