Goodwill & Impairment

CORE DEFINITION

Accounting goodwill is the excess of the purchase consideration over the fair value of the identifiable net assets acquired, and it is not amortized but tested for impairment at least annually. Economic goodwill, the concept Warren Buffett and Charlie Munger emphasize, is a company's ability to earn returns well above the cost of its tangible assets, arising from brand, customer relationships or scale advantages that never appear as a separate line. The core proposition is that only the second kind creates durable value. The key qualification is that impairment testing rests on management projections and reporting-unit definitions, so the accounting number lags reality and can be released in one large charge.