Can goodwill increase under GAAP?

• A. Yes, when the company is acquired or pays more than the identifiable net assets.
• B. Yes, when the company issues more stock.
• C. No, goodwill can never increase.
• D. Yes, when debt is repaid.

Answer: (A)

Goodwill can increase only in a business combination, when one company acquires another and the purchase price exceeds the fair value of the identifiable net assets being acquired. The excess paid becomes goodwill on the acquirer’s balance sheet, reflecting intangible benefits like synergies, brand value, and assembled workforce that aren’t separately identifiable. Goodwill is not amortized and is tested for impairment, and it cannot be created from operating results or financing activities alone. Financing actions such as issuing stock or repaying debt don’t generate new goodwill by themselves, and internally generated goodwill isn’t recognized under GAAP.