A: Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business. Let’s see the following example: Acquirer buys Target for Rs500m in cash. Target has 1 asset: PPE with book value of Rs100, debt of Rs50m, and equity of Rs50m = book value (A-L) of Rs50m.
- Acquirer records cash decline of $500 to finance acquisition
- Acquirer’s PP&E increases by $100m
- Acquirer’s debt increases by $50m
- Acquirer records goodwill of $450m
