For more on determining fair value, see how to calculate asset market value.
Inventory fair value may be more or less than book value. This depends on numerous factors, from production input prices to inventory turnover rate. A low inventory fair value is common in bargain purchases.
Unique technologies Brand names Licenses Workforce ability Agreements with customers or competitors Usage rights (such as EM spectrum rights)
For example, imagine that the company has $5 million in net current assets and $10 million in net fixed assets. Add these two together to get a total of $15 million.
For example, if the assessed value of the same company’s intangible assets comes to $20 million, including $6 million in patents and $14 million in the brand name, add this figure to total tangible asset value to get $35 million ($15 million + $20 million) in total asset value.
If the purchase price for the same company is $30 million, subtract the value of the company’s assets, $35 million, from this number to get goodwill. So, the negative goodwill in this case is $30 million - $35 million, or $-5 million. Even when the goodwill is negative, it is still listed simply as “goodwill” on the balance sheet. It is listed as negative number though.
For example, imagine that a company whose net assets are valued at $20 million is acquired for $15 million. The negative goodwill here is $5 million. The value of allocation assets is calculated at $6 million. First, debit fair value of net assets acquired for $20 million, credit consideration paid for $15 million, and credit initial negative goodwill for $5 million. Then, debit initial negative goodwill for $5 million and property, plant, equipment, and intangibles for $5 million. The result of this is that no negative goodwill is recognized on the balance sheet or income statement of the purchaser. [5] X Research source
Imagine that in the previous example, the value of the allocation assets was instead $4 million. You would still perform the first set of entries (net assets acquired, initial negative goodwill, and consideration paid) in the same way, but in the second, you would debit initial goodwill for $5 million, credit plant, property, equipment, and intangibles for $4 million, and credit residual negative goodwill (extraordinary gain) for the difference, $1 million.
Recent financial hardship Lack of potential buyers The business was sold quickly The seller was forced to sell Uninformed seller (about market trends, growth projects, etc. )