It is also the excess of the acquisition cost over the buyer's share, realized during an equity investment transaction or a merger, in accordance with IFRS3.
In other words, it is the difference between the purchase cost and the economic value of a structure and which represents a future benefit arising from a takeover.
Goodwill is recorded at the level of intangible assets, in order to reconcile the asset on the balance sheet with its real market value. When the difference between the purchase price and its economic value is negative, we speak of badwill.
The notion of goodwill comes into play in particular in the context of the consolidation of accounts, also called group accounting
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The issue of goodwill in accounting
Goodwill can be assimilated to goodwill. It replaces the term goodwill that was used in the 1970s.
Its estimate is made on the basis of the profitability prospects of the investments undertaken by a company, while taking into account its positions on the market.
When the outlook is not good and the investment is worth less than the net assets, it is called badwill.
Goodwill represents a strategic financial valuation of the brand image, reputation, know-how and performance of a company.
It is therefore a question of measuring the intangible assets at its disposal. This explains why a firm achieves higher profitability than normal profit.
Initially, the term goodwill meant customers or goodwill. But since then its meaning has widened to make it possible to differentiate an already existing and well-established structure, from a new one which has just started and which must be imposed. In addition to the notion of customers, goodwill today encompasses the trust of suppliers, employees and all partners.
Goodwill is the difference between the economic valuation and the accounting valuation. If the difference is positive, it is considered a specific intangible asset.
With technological development and innovation, goodwill has become a determining asset for companies.

Goodwill and the impact of depreciation
Depreciation represents the loss of value of fixed assets and it negatively influences the net profit of the acquirer. The survey, which was carried out on 46 of the most important French companies, highlighted that the higher the goodwill, the less likely the investment will generate value and the less favorable the share price will be.
Therefore, goodwill must be taken seriously into account by investors. Companies that must apply IFRS standards do not have the option of amortizing goodwill.
They must verify that the book value is lower than the actual value, otherwise they write down goodwill. In accordance with French standards, goodwill is amortized over a maximum period of 20 years.
But in the event of an indication of loss of value, an impairment test must be carried out. In certain situations, there is the possibility of charging goodwill against the consolidated shareholders' equity of the acquirer.

Goodwill, goodwill generated by past and future elements 
Management is the very essence of goodwill which results from the combination of human, strategic, financial, economic and accounting elements.
To better understand the constitution of goodwill, it is necessary to divide it into past, present and future goodwill. Real goodwill results from the confrontation of theoretical goodwill and that of the market which emanates from the comparison of supply and demand. 
The present goodwill of past origin of goodwill
When we talk about the present goodwill of past origin, it brings together all the accounting, strategic and human elements. Most often we refer to the accounting component which results from the difference between the historical cost and the current valuation of the asset.
Goodwill is of great importance in terms of market positioning, location, targeted customers, research and development, among others. Even its presence in the accounting records is hardly noticeable.
Several intangible factors such as the company's reputation, its brand image, the services it provides to its customers, its competitive advantages and its synergy have value, but they do not appear on the balance sheet.
The latter does not put human resources first in terms of skills, know-how, training, networking and interpersonal skills. This is why the acquisition process is based on a deep knowledge of the purchased company.
And in this case the goodwill is an important element which takes into account the value of the intangible components and the benefits represented by the acquired structure.
Present goodwill of future origin of goodwill
With regard to present goodwill of future origin, it takes into account financial, strategic and human aspects. These last two elements are considered in financial terms because they generate future gains and prevent losses.
Ultimately, it is a question of carrying out an evaluation of the elements, which are usually not taken into account.
Goodwill can be seen as discounted future profit or be assimilated to potential gains. In the accounting field there is the principle of prudence and this is the reason why goodwill is not recognized.
This is a discounted future economic potential which takes into account the assessed risk and the expected profitability. It should be emphasized that profitability should always be aligned with risk. It is in this perspective that goodwill materializes the risk-return pair, or the reassessment of the new level of risk on future returns.
Take, for example, an unlisted company that exhibits high profitability associated with a low level of risk. In this case its purchase value must be revised, because it makes little sense to refer to its book value only. It is the same principle as in the stock market valuation of listed companies.
Goodwill represents a tool for future risk-profitability arbitrage. It takes into account not only the recorded accounts, but also current and future human, economic, strategic and financial factors. It is used to readjust the valuation according to market supply and demand.
Illustrative example of goodwill in accounting
Take for example a company A which proceeds to the acquisition of a structure B (a technological company) at the time of the health crisis of the coronavirus, since it has significant growth prospects.
Company B's fixed assets are sparse, barely displaying a few computers and digital content (data). At the time the balance sheet liabilities record a loss, associated with salaries of developers and an advertising campaign in addition to debts.
Even if the net assets of company B are negative, company A has paid a million francs for the acquisition of the site, human capital and other intangible components.
The acquisition transaction appears in the financial assets of company A. However, the consolidation of the accounts of company B should normally lead to the elimination of the million francs, given that the acquired structure only has a few computers and debts.
The difference must be recorded in the form of goodwill in the assets of company A, in recognition of the expenditure of one million euros in the acquisition of company B.
But there is a possibility that employees of the latter may choose to leave their positions after the merger. It is also possible that the advertising campaign failed and that there was no acquisition of new customers. Likewise, it is possible that the technology of company B will be used for the development of the site of company A, among other situations.
In this case, auditors must verify the accounts of company A, in order to ensure the present value of future earnings, likely to be generated by structure B.
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