Goodwill is an intangible asset on a company’s balance sheet as it lacks physical substance but has value due to certain rights, privileges, or advantages.

In accounting, goodwill typically arises when a company acquires another business for a price higher than the fair market value of the acquired company’s identifiable tangible and intangible assets minus liabilities assumed. The excess purchase price is attributed to goodwill.

Goodwill represents the reputation, customer relationships, brand value, intellectual property, and other non-physical assets that contribute to the acquired company’s value. It’s considered an asset because it represents the premium paid for the expected future earnings and growth potential of the acquired business.

Goodwill is subject to periodic impairment testing, where companies assess whether the carrying value of goodwill on their balance sheet exceeds its fair value. If impairment occurs, companies are required to write down the value of goodwill, which reduces the asset’s value on the balance sheet and may impact financial performance.

While goodwill is considered an asset, note that it cannot be bought or sold independently like tangible assets. Instead, it represents the overall value of a company’s intangible attributes and is recorded on the balance sheet as part of the company’s total assets.