When one company buys another, it almost never pays exactly what the balance sheet says: it pays for the customer base, the brand, the team, the market position and the synergies it expects to capture. The difference between the price paid and the fair value of what is acquired is goodwill.<\/strong><\/p>\n In the Spanish middle market it is usually one of the largest items on the balance sheet after an acquisition, and the most contested: it determines how much profit amortisation consumes each year, constrains dividend distributions, creates differences between accounting and taxable profit and, if the acquired business underperforms, forces an impairment that can wipe out several years of results. Understanding how goodwill is defined, valued and impaired is an essential part of financial advisory for companies<\/a> in any corporate transaction, and all the more so in Spain, where the Spanish General Accounting Plan (PGC) governs individual accounts and most consolidated accounts, while International Financial Reporting Standards (IFRS\/IAS) apply to listed groups.<\/p>\n Goodwill is the excess of the cost of a business combination over the fair value of the identifiable assets acquired less the liabilities assumed. By definition it is a residual: what is left of the price once everything that can be identified and measured separately has been allocated.<\/strong><\/p>\n From an economic standpoint, that residual captures elements that generate value but do not qualify for recognition as separate assets:<\/strong> the going concern itself, the trained and cohesive workforce, reputation, informal relationships with customers and suppliers, and the synergies the buyer expects to obtain. It may also include, although nobody admits it in the notes to the accounts, the premium paid in a competitive negotiation.<\/p>\n Classical financial theory puts it another way: goodwill is the present value of excess earnings, that is, of the return the business generates above what would normally be required on its identifiable net assets. This definition underpins the valuation methods discussed below.<\/strong><\/p>\n Both the PGC (recognition and measurement standards NRV 5 and 6) and IAS 38 prohibit the recognition of internally generated goodwill:<\/strong> a company that has spent thirty years building its brand and customer base cannot capitalise that value, because it is not an identifiable resource with a reliably measurable cost. Only when a third party pays for it in a business combination does it become an accounting asset.<\/p>\n Under the PGC, goodwill is an intangible fixed asset (account 204) that can only be recognised if it was acquired for consideration in a business combination;<\/strong> under IFRS it is presented as a separate line item with its own regime.<\/p>\n In consolidated accounts, goodwill arises from the difference between the cost of the investment and the proportional share of the subsidiary\u2019s net assets at fair value (Royal Decree 1159\/2010).<\/p>\n Before any accounting goodwill exists, a price has to be agreed, and that price embeds an implicit estimate of what the items missing from the balance sheet are worth. In the pre-deal phase, business valuation<\/a> offers two families of methods for quantifying it: those that derive it from the overall value of the company and those that calculate it directly from excess earnings.<\/strong><\/p>\n The dominant approach in corporate finance first obtains the enterprise value<\/a> (EV) by discounting free cash flows (FCF) at the weighted average cost of capital (WACC), plus a terminal value (TV) based on a perpetual growth rate (g); implied goodwill is the difference between that enterprise value and the net substantial value (NSV), that is, the identifiable net assets at fair value:<\/p>\n EV = \u03a3 FCFt<\/sub> \/ (1 + WACC)t<\/sup> + TV \/ (1 + WACC)n<\/sup><\/strong>, where TV = FCFn+1<\/sub> \/ (WACC \u2212 g)<\/strong><\/p>\n Goodwill = EV \u2212 NSV<\/strong><\/p>\n With market multiples<\/a> the reasoning is identical: EV = multiple \u00d7 EBITDA and Goodwill = EV \u2212 NSV. The advantage of both methods is their alignment with international practice; their limitation is sensitivity to the WACC, the growth rate g and the comparables chosen. One percentage point of WACC can move implied goodwill by more than 15%.<\/p>\n The mixed methods, long established in European practice and still common in expert witness reports<\/a>, family business valuations and negotiations between shareholders, start from the substantial value (NSV) and add the present value of excess earnings:<\/strong> the difference between expected normalised profit (B) and normal profit (k \u00d7 NSV), where k is the return the market would require on those assets. The excess earnings are capitalised at a rate i higher than k, because the persistence of an unidentified intangible is more uncertain than that of a tangible asset.<\/p>\n Anglo-Saxon or direct method.<\/strong> Capitalises excess earnings in perpetuity:<\/p>\n Goodwill = (B \u2212 k \u00d7 NSV) \/ i<\/strong><\/p>\n German or indirect method.<\/strong> Takes as enterprise value the average of the substantial value and the earnings value (EarV = B \/ k), which splits goodwill equally between buyer and seller:<\/p>\n EV = (NSV + EarV) \/ 2, hence Goodwill = (EarV \u2212 NSV) \/ 2<\/strong><\/p>\n Union of European Accountants (UEC) method.<\/strong> Corrects the previous ones by requiring that the normal return k also be applied to goodwill itself (EV = NSV + Goodwill):<\/p>\n Goodwill = (B \u2212 k \u00d7 NSV) \/ (i + k)<\/strong><\/p>\n In the post-closing PPA, identifiable intangibles are valued with their own methods (relief-from-royalty for brands, multi-period excess earnings or MPEEM for customer relationships) and goodwill is left as the residual.<\/strong> Best practice requires a reconciliation: the IRR implied by the price must be consistent with the WACC and with the weighted average return on the assets acquired (WARA), goodwill included. If the only way to make the numbers add up is to require a disproportionate return on goodwill, the price embeds buyer-specific synergies or, quite simply, an overpayment, and it is far cheaper to detect that before signing than to impair it two years later.<\/p>\n Goodwill arises on the acquisition date of a business combination, applying the acquisition method set out in NRV 19 of the PGC and in IFRS 3. The process has four steps:<\/strong><\/p>\n Goodwill is the positive difference between step 3 and step 4.<\/strong> If the difference is negative (badwill), the standard requires a reassessment of the identification and measurement of all items and, once confirmed, recognition as a gain in profit or loss.<\/p>\n Step 4 is what really determines the size of goodwill and is known as the PPA: identifying and valuing the intangibles the target did not carry on its balance sheet but which meet the identifiability criterion (brands, customer relationships, technology, patents, licences, favourable contracts, order backlog, non-compete agreements).<\/strong><\/p>\n Note: the allocation is not neutral. Identified intangibles are amortised over periods that are normally shorter than goodwill, which accelerates the accounting charge in the early years. A rigorous, documented PPA that can be defended before the auditor prevents goodwill from absorbing value that belongs in identifiable line items.<\/em><\/p>\n Since 1 January 2016, following Royal Decree 602\/2016 (which transposed Directive 2013\/34\/EU), the PGC requires goodwill to be amortised. NRV 6 presumes, unless there is evidence to the contrary, a useful life of ten years with straight-line recovery;<\/strong> in practice almost every company applies 10% per year, and anyone estimating a different useful life must justify it in the notes.<\/p>\n This was a reversal of the 2008\u20132015 model, which had no amortisation and a mandatory annual impairment test as under IFRS, and was driven by the European preference for prudence. The transitional provision allowed pre-existing goodwill to be amortised either prospectively from 2016 or retrospectively against reserves, an election that still shapes the amortisation profile of many earlier acquisitions.<\/p>\n Amortisation does not exempt goodwill from impairment. NRV 2 and NRV 6 require companies to check for indicators of a loss in value and, where they exist, to estimate the recoverable amount of the cash-generating unit to which goodwill was allocated. Since 2016 the test is no longer annual but indicator-driven.<\/strong><\/p>\n The ICAC Resolution of 18 September 2013 on the impairment of assets sets out the procedure (indicators, CGUs, value in use, fair value less costs of disposal, allocation of the loss and disclosures), and the Resolution of 28 May 2013 on intangible assets completes the regime. Both remain the reference, with the adjustments introduced by the 2016 reform.<\/p>\n One essential difference: impairment losses on goodwill are never reversed in subsequent years, even if the causes that gave rise to them disappear.<\/strong><\/p>\n The international model is the opposite. Since 2004, with IFRS 3 and the revision of IAS 36, goodwill is not amortised: it is assigned an indefinite useful life, and straight-line amortisation is considered arbitrary because it does not reflect how the associated economic benefits are actually consumed.<\/strong><\/p>\n In exchange, IAS 36 requires an impairment test at least once a year, at the same date each year, and whenever there is an indicator.<\/strong> Goodwill is allocated from the acquisition date to the cash-generating units (CGUs) or groups of CGUs expected to benefit from the synergies, at a level no higher than an operating segment under IFRS 8.<\/p>\n In practice, a group reporting under IFRS carries goodwill at its original amount for as long as the CGUs keep generating sufficient value. This flatters earnings, which bear no amortisation charge, but shifts the risk: when impairment comes, it tends to be sudden and large.<\/p>\n The debate is not over. The IASB spent years considering whether to reintroduce amortisation and, in its project Business Combinations \u2014 Disclosures, Goodwill and Impairment (exposure draft of March 2024, redeliberated in 2025 and 2026), decided to retain the impairment-only model and to focus the changes on better disclosure of acquisition performance. The FASB reached the same conclusion after abandoning its own amortisation project in 2022.<\/p>\n The mechanics are the same under IAS 36 and under the 2013 ICAC Resolution, which is modelled on it. What changes is the frequency (annual under IFRS, indicator-driven under the PGC) and the base (gross amount under IFRS, net of amortisation under the PGC).<\/strong><\/p>\n Indicators may be external (a fall in market value, adverse changes in the legal, technological or competitive environment, rising interest rates that push up the discount rate, market capitalisation below book equity) or internal (obsolescence, restructuring, performance below plan, loss of key customers). In a recent acquisition, the most common indicator is that the business is not delivering the plan on which the price was set.<\/p>\n Goodwill does not generate cash flows on its own, so it is never tested in isolation: it is allocated to the smallest CGU with independent cash inflows, and the recoverable amount of that unit is compared with its carrying amount, goodwill included. A CGU drawn too widely can mask the impairment of a specific business by offsetting it against more profitable ones.<\/p>\n The recoverable amount is the higher of two figures:<\/p>\n The discount rate must be pre-tax and reflect the time value of money and the specific risks not already adjusted for in the cash flows; in practice it starts from the WACC of comparable companies, adjusted for size, country and specific risk. A common error is to mix post-tax cash flows with pre-tax rates.<\/p>\n If the carrying amount of the CGU exceeds its recoverable amount, the difference is allocated first to the goodwill assigned to the unit and, once that is exhausted, to the remaining assets of the unit pro rata, without reducing any of them below its own recoverable amount. Neither IAS 36 nor the PGC allows a goodwill impairment to be reversed later, so that any recovery does not reflect internally generated goodwill; impairment of the CGU\u2019s other assets can be reversed.<\/p>\nWhat goodwill is<\/h2>\n
Acquired goodwill versus internally generated goodwill<\/h3>\n
Accounting nature<\/h3>\n
How goodwill is valued before the deal<\/h2>\n
Implied goodwill: discounted cash flow and multiples<\/h3>\n
Mixed excess-earnings methods<\/h3>\n
From valuation to PPA: the cross-check that reveals overpayment<\/h3>\n
How goodwill arises: the acquisition method and the PPA<\/h2>\n
\n
The purchase price allocation exercise (PPA)<\/h3>\n
Subsequent measurement under the PGC: amortisation over ten years<\/h2>\n
Impairment under the PGC<\/h3>\n
Subsequent measurement under IFRS: no amortisation, annual test<\/h2>\n
The impairment test step by step<\/h2>\n
1. Identify indicators<\/h3>\n
2. Define the cash-generating unit<\/h3>\n
3. Calculate the recoverable amount<\/h3>\n
\n
4. Allocate the loss, with no subsequent reversal<\/h3>\n
PGC, IFRS and LIS: the differences that matter<\/h2>\n