Negative goodwill

What it means

Negative goodwill is the difference that arises when a buyer pays less for a business or part of it than the fair value of the net assets acquired, meaning assets less liabilities assumed. It is the opposite of ordinary goodwill, where the buyer pays extra for future benefits, the brand or customers.

Negative goodwill arises mainly in bargain purchases, such as distressed sales where the seller needs cash quickly, restructurings or cases where a business has long been loss-making and the buyer factors in the cost of turning it around. It may, however, also signal a valuation error.

Slovak accounting rules recognise negative goodwill on the purchase of a business and release it to income gradually over a set period. IFRS require the valuation to be reassessed first and, if the negative difference remains, recognise it at once as a gain on a bargain purchase.

How it works in practice

In an acquisition through the purchase of a business or part of it, assets and liabilities are measured at fair value, often based on an expert valuation. If the purchase price is lower, negative goodwill arises. In a purchase of shares, a share deal, goodwill does not appear directly in the buyer's individual financial statements.

Before recognising negative goodwill, it is important to check that all acquired assets and liabilities are valued correctly. A common cause is overstated assets or overlooked liabilities, such as provisions for litigation or environmental burdens, which would reduce the difference.

The choice between buying the business and buying the shares, a share deal or asset deal, affects whether and how goodwill is recognised, the tax consequences and which risks the buyer takes on. These questions are best assessed before the contract is signed.

What to watch out for

The tax treatment of negative goodwill follows special rules and need not match the accounting treatment. When buying a business, it is advisable to consult a tax adviser to determine the impact on both the seller's and the buyer's tax base correctly.

Large negative goodwill may attract the attention of auditors and the tax authority, especially in transactions between related parties. The company must be able to explain why the price was low, for example because of the business's poor financial position, and support the valuation with documentation.