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Goodwill comes in many forms, including a company’s reputation, brand and domain names. Despite being intangible, goodwill is quantifiable and an important part of a company’s valuation.

According to International Financial Reporting Standards, the only accepted form of goodwill is acquired externally through business combinations or acquisitions.

For example, Facebook bought the domain “fb.com” for $8.5 million from the American Farm Bureau Federation. The domain had no other benefit than its name, thus the amount paid can be considered goodwill that Facebook can recognize on its balance sheet.

The formula to calculate goodwill is:

Goodwill equals consideration transferred plus amount of non-controlling interests plus the fair value of previous equity interest, minus net assets recognized.

Non-controlling interests can be measured as fair value, which is known as the full goodwill method. Or it can be measured as the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets.

Suppose A Corporation buys B Corporation, and to obtain 90% of the interest, A agrees to pay $150 million. The fair value of B’s net identifiable assets is $140 million. The fair value of non-controlling interests is $16 million. No equity interest exists. Under the full goodwill method, the amount of goodwill is $26 million, or $150 million plus $16 million minus $140 million.

Under the second method, the goodwill value is $24 million, or $150 million plus $140 million multiplied by 10%, then subtract $140 million.

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