This is an English adaptation of a FoodBud historical article originally published on June 11, 2022.
Hosen Capital, in a 2022 analysis by Zhou Ge, examined the long-running debate around goodwill: what it is in theory, how it appears in accounting practice, and why goodwill impairment can alarm regulators and investors.
For foodservice-chain operators, the topic matters because acquisition-heavy growth, roll-ups, and brand portfolio strategies can all create goodwill on the balance sheet. The article’s core point is that goodwill is not always a clean measure of brand strength or future earnings power. In practice, it often becomes a residual number produced by transaction accounting.
In theory, goodwill reflects expected future economic value from excess profits. It is an expectation, not something that can be precisely quantified or separately recognized in the ordinary course of business.
Over time, many items once loosely included in goodwill have become identifiable intangible assets, such as patents, trademarks, copyrights, and proprietary technology.
In practice, however, goodwill is usually just the difference created in an acquisition. When a buyer pays more than the fair value of the acquired company’s identifiable net assets, the excess becomes purchased goodwill. Before a transaction quantifies it, the company may have internally generated goodwill, but current international accounting rules generally do not recognize internally generated goodwill.
That creates the paradox: if goodwill is theoretically an unquantifiable expectation, why does accounting practice calculate it at the point of consolidation by subtracting one number from another?
The article explains this through a basic commodity logic:
As a result, balance-sheet goodwill is not like other intangible assets that sit as a relatively stable component of net assets. It is measured as the difference between transaction consideration and valuation of identifiable net assets. That makes reported goodwill a composite of many known and unknown factors.
The article argues that what investors see as goodwill on the balance sheet is therefore a narrow accounting construct. In many cases, goodwill impairment does not necessarily mean excess profit potential has vanished; it may mean that an unstable mix of transaction assumptions previously recorded as goodwill is being written down.
The theoretical status of negative goodwill remains debated. In practice, it arises through the same mechanism as positive goodwill, except the calculation produces a negative number: the purchase price is below the fair value of identifiable net assets.
Views differ on how to define it. Some treat it as a negative asset, some as a positive liability, and others as a gain or loss.
Accounting treatments also differ:
1. Offset negative goodwill against specified non-current assets, then defer the remaining amount. 2. Make no adjustment to net assets and defer the full amount of negative goodwill.
According to the article, US accounting standards use the first approach, international accounting standards use the second, while Chinese accounting standards use neither. China’s rules require negative goodwill to be recognized directly in current-period profit or loss as non-operating income. This has led to regulatory inquiries from the China Securities Regulatory Commission when listed companies appear to use negative goodwill to adjust reported profits.
The article notes that despite its negative-sounding name, negative goodwill can, under certain conditions, create short-term EBITDA and investment return in acquisition-and-resale structures, especially when combined with non-monetary asset contributions.
The article uses a simplified case to show how different goodwill treatments affect a consolidated income statement.
Assume Institution A plans to combine Company P1 and Company P2 into Company P3, then sell the package to Institution B. P1 and P2 have no related-party transactions, and the acquisition has a reasonable commercial basis.
If P1 acquires all equity in P2 for RMB 2 million, equal to the fair value of P2’s net assets, then P3’s consolidated EBITDA is:
RMB 1 million + RMB 100,000 = RMB 1.1 million
No goodwill is created on the balance sheet.
If P1 acquires all equity in P2 for RMB 2.5 million, then P3’s consolidated EBITDA remains RMB 1.1 million.
However, the transaction creates RMB 500,000 of goodwill.
If P1 acquires all equity in P2 at a discount for RMB 1.5 million, then negative goodwill equals:
RMB 2 million - RMB 1.5 million = RMB 500,000
That RMB 500,000 is recognized in current-period profit or loss. P3’s consolidated EBITDA becomes:
RMB 1.1 million + RMB 500,000 = RMB 1.6 million
If P1 uses exchanged assets valued at RMB 1.5 million as consideration to acquire all equity in P2, then P3 records:
P3’s consolidated EBITDA becomes:
RMB 1.1 million + RMB 500,000 + RMB 500,000 = RMB 2.1 million
The article adds that under non-monetary asset contribution structures, the effect on consolidated net assets can differ depending on whether the acquisition is structured as a purchase of existing shares or a capital increase. The example only illustrates the income-statement impact.
For chain operators, goodwill should not be read simply as a proxy for brand value, store economics, or acquisition quality. It is partly an accounting residual shaped by purchase price, fair-value measurement, and consolidation rules.
In acquisition-led growth, especially where assets are later packaged for resale, negative goodwill and non-monetary contributions can materially change short-term EBITDA presentation. Operators, investors, and counterparties should therefore separate recurring operating EBITDA from transaction-driven accounting gains.
Note: all transaction figures and accounting examples above are historical illustrations from the 2022 source article.