Goodwill is the difference between the combined company's profits over normal earnings for a similar business. Under this definition, the present value of the projected future excess earnings is determined and recorded as goodwill. This concept is very difficult to measure since future earnings have no certainty. Goodwill can arise in two different ways:
1) It can be internally generated or
2) it can be acquired as part of the acquisition of another company. Both types of goodwill have been recorded in the past. However, only acquired goodwill is currently allowed to be recorded.

Purchased Goodwill

Purchased goodwill arising on the acquisition of one business by another is defined as the excess of the purchase price of the acquired business over the fair value of its net tangible and identifiable intangible assets. The pronouncements on accounting for goodwill in the United States and Canada apply equally to goodwill arising upon:

Acquisition of the net assets of a business.
Preparation of consolidated financial statements when the purchase method of accounting is followed for investments in companies consolidated, and
Accounting for investments by the equity method.