Suppose a company has acquired a competitor at a $50m purchase price with a fair market value (FMV) of $48m. Based on this hypothetical scenario, how much in goodwill is recognized on the acquirer’s balance sheet?

• A. 0
• B. 2
• C. 4
• D. 8

Answer: (B)

In a business combination, goodwill is the excess of the purchase price over the fair value of the identifiable net assets acquired. Net identifiable assets are the fair value of assets minus liabilities.

Here, the acquirer pays $50 million for the target, and the fair value of the target’s net identifiable assets is $48 million. The difference is $2 million, which is recorded as goodwill on the acquirer’s balance sheet. (If the purchase price were less than the fair value of net assets, you’d have a negative goodwill situation, handled as a bargain purchase under accounting rules.)