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Negative Goodwill (NGW)


Negative Goodwill (NGW) occurs when a company purchases an asset or a business for less than its fair market value. It generally arises in a distressed sale, where the seller is compelled to sell for financial reasons. This concept is the opposite of goodwill, where a company pays a premium over the fair market value.


Negative Goodwill – /ˈnɛɡətɪv/ /ɡʊdˈwɪl/ (N.G.W)

Key Takeaways

  1. Negative Goodwill (NGW): This occurs when the purchase consideration of a company is less than the fair market value of its identifiable assets. This typically happens in distress sales or bankruptcies where assets are sold below their actual value.
  2. Recognition and Treatment: Negative Goodwill is recognized on the buyer’s balance sheet when a business is acquired for less than the fair value of its net assets. However, it needs to be carefully evaluated as it may hint at inaccuracies in asset valuation.
  3. Impact and Reassessment: The impact of Negative Goodwill on a company’s finances can be major. It boosts the acquirer’s profits in the period the bargain purchase occurred, but it also warrants re-evaluating the fair values assigned to the acquired identifiable assets and liabilities because it might denote an error in the estimation process.


Negative Goodwill (NGW) is crucial in business and finance because it represents a situation where the price paid for a company in a merger or an acquisition is less than the fair market value of its net tangible assets. This can occur when a company is under financial distress, leading buyers to purchase it below its actual worth, creating a gain for the acquiring company. Recognizing negative goodwill can have significant impacts on a company’s financial statements. Once aware of the NGW, the acquiring company must immediately record it on its income statement as a gain, which will increase its net income. Thus, NGW plays a key role in understanding the financial health and real value of a company, especially after a merger or acquisition.


Negative goodwill (NGW), often encountered in the world of mergers and acquisitions, is an unusual financial scenario that arises when the price paid to purchase a company is less than its fair market value. This discrepancy typically occurs during the acquisition of financially distressed companies or when business conditions force the selling company to accept an offer for less than the net value of their assets. The goal of the buying company is to make a strategic purchase, save the distressed company from bankruptcy, or capitalize on the current market conditions. The purpose of NGW is to help balance out the figures in balance sheet transactions after a company acquisition. When a company acquires another at a price that is lower than its fair market value, the difference is booked as negative goodwill and recognized as a gain in the acquiring firm’s income statement, contributing to their net income. This creates instant profit and increases the profitability ratio of the firm. Furthermore, it also contributes to other key performance indicators like return on assets (ROA) and return on equity (ROE). Therefore, negative goodwill is a beneficial factor for the acquirer in financial reporting and performance measurement.


Negative Goodwill, also known as a “bargain purchase,” occurs when a company purchases another for less than its fair market value. This difference is then recognized as a gain in the buying company’s financial statements. Here are three real-world examples: 1. Hewlett Packard’s acquisition of Palm: In 2010, Hewlett Packard bought struggling phone maker Palm for around $1.2 billion. Shortly after the acquisition, HP wrote off a significant amount of Palm’s carrying value, essentially writing down a large part of what it had paid. This was due to a reassessment of Palm’s fair value, indicating that HP may have paid less than Palm was truly worth, resulting in a potential case of negative goodwill. 2. Wells Fargo acquisition of Wachovia: During the financial crisis in 2008, Wells Fargo purchased Wachovia. The acquisition was made at a time when Wachovia was on the brink of collapse, causing it to be sold for a value lower than its net asset value. Due to this, Wells Fargo experienced negative goodwill where they gained assets at a bargain. 3. Barclays acquisition of Lehman Brothers: In 2008, during the global financial crisis, Barclays purchased the North American division of Lehman Brothers for a value beneath its fair market value. This purchase could be categorised as negative goodwill, as Barclays ended up with assets of greater worth than they initially paid during the acquisition.

Frequently Asked Questions(FAQ)

What is Negative Goodwill (NGW)?
Negative Goodwill (NGW), also referred to as bargain purchase, is a situation in accounting that arises when a company purchases another company for a price below its fair market value.
How is Negative Goodwill generated?
Negative Goodwill is typically generated during acquisitions where the buyer acquires assets with market value greater than the selling price. This can be due to factors such as the seller’s urgent need to divest or market inefficiencies.
How is Negative Goodwill reported in financial statements?
On a balance sheet, Negative Goodwill is classified as revenue. It is recognized immediately on the income statement and is registered as gain from a bargain purchase.
Is Negative Goodwill common?
Negative Goodwill is relatively rare and is often scrutinized by regulators to ensure that the pricing of the acquired company or its assets was not deliberately manipulated to create this situation.
What is the difference between Negative Goodwill and Goodwill?
Goodwill represents an intangible positive asset that can include brand recognition, customer loyalty, etc., prevailing when a company acquires another for a payment more than its fair market value. Negative Goodwill, conversely, occurs when the acquisition price is less than the fair market value of the acquired company.
What happens if the fair value of net assets acquired exceeds the fair value of the consideration given in a business combination?
If the fair value of net assets acquired surpasses the fair value of the consideration given in a business combination, the resulting situation is Negative Goodwill.
How does Negative Goodwill affect taxes?
Reporting Negative Goodwill as a gain at the point of acquisition increases a company’s taxable income. Therefore, it can lead to higher tax liability in the year of acquisition.
What happens to Negative Goodwill over time?
Unlike Goodwill, which is routinely evaluated for impairment and may be amortized over time, Negative Goodwill is immediately credited to the buyer’s income statement once it is recognized, thus it does not decrease or amortize over time.
Does Negative Goodwill indicate an unhealthy business transaction?
Not necessarily. While NGW normally indicates that a company was sold for less than market value, it might also signify a great deal for the buyer, or it could show that the acquired company had undervalued assets.

Related Finance Terms

  • Impairment Loss
  • Bargain Purchase
  • Fair Market Value
  • Balance Sheet
  • Merger and Acquisition (M&A)

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