Negative Goodwill (NGW)

What it is

Negative goodwill, also called a bargain purchase, occurs when an acquirer pays less for a company (or its assets) than the fair value of the identifiable net assets acquired. It typically indicates the seller is distressed or otherwise forced to accept a low price. Negative goodwill is the opposite of goodwill, where a buyer pays a premium over net asset fair value.

How it’s calculated

Negative goodwill = Fair value of identifiable net assets acquired − Purchase price (consideration transferred)

If this result is positive (i.e., identifiable net assets exceed consideration), a bargain purchase has occurred and the excess is recognized as a gain.

Accounting treatment

• Under U.S. GAAP (FASB guidance on business combinations), the acquirer:
• Identifies and measures the fair value of all identifiable assets acquired and liabilities assumed.
• Compares the total fair value of those net identifiable assets to the purchase price.
• If the fair value exceeds the purchase price, recognizes the excess as a gain in the acquirer’s income statement (often called a bargain purchase gain or negative goodwill).
• Before recognizing a gain, GAAP requires reassessment of the measurements of acquired assets and liabilities to ensure there are no measurement errors.

Simple journal entry (illustrative):
* Debit: Acquired assets (at fair value)
* Credit: Cash or consideration transferred
* Credit: Gain on bargain purchase (income)

Effects on financial statements and ratios

• Immediate increase in reported net income from the recognized gain.
• Increase in reported net assets and shareholder equity (via retained earnings).
• May distort performance metrics such as return on assets (ROA) and return on equity (ROE), making them appear lower than they would absent the bargain gain.
• Because negative goodwill boosts income, analysts should adjust or scrutinize results when comparing performance across periods or peers.

Examples

• Illustrative: Company A buys Company B’s assets for $40 million while those assets have a fair value of $70 million. Company A records a $30 million bargain purchase gain (negative goodwill) on its income statement.
• Real-world: A major bank acquisition in 2009 produced substantial negative goodwill when the purchase price was significantly below the acquired net asset value; the buyer recognized the resulting gain in that year’s income.

Practical considerations

• Negative goodwill is uncommon; it usually signals seller distress, forced liquidation, or an urgent need for cash.
• Proper fair-value measurement and due diligence are critical to ensure the gain is legitimate and not the result of valuation errors or incomplete accounting for liabilities.
• Disclosures in financial statements should explain the nature of the bargain purchase and the amount recognized.

Key takeaways

• Negative goodwill arises when purchase price is less than the fair value of identifiable net assets—resulting in a bargain purchase gain.
• GAAP requires recognition of the gain after reassessing asset and liability measurements.
• The recognition increases reported income and equity and can distort performance ratios, so analysts and management should treat such gains with care.