Negative goodwill may not mean a bargain purchase

Acquisitions of struggling banks are producing record profits due to negative goodwill ‘bargain purchase gains’. The Q1 2023 earnings of Citizens Bank was $9,504m compared with $264m in the same period last year, largely due to its Silicon Valley Bank deal.

Negative goodwill arising from business combinations is reported as an immediate profit under both IFRS and US GAAP; but does it really represent an increase in shareholder value? We explain the meaning of negative goodwill, its relevance for investors and why we think (at best) only part should be recognised as a profit.

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Goodwill accounting – Investors need something different

Once every decade or so accountants fret over goodwill and reconsider how best to report it in financial statements – should it be amortised, impaired, amortised and impaired, or something else? There is no obvious right answer, positions are entrenched, and debate usually gets nowhere.

The problem is that neither amortisation nor impairment provides much help for investors. The debate needs to move on to what really matters – reporting about business value. There are already encouraging moves in this direction. It is time to apply similar innovative thinking to goodwill.

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