To calculate consolidated goodwill of a company, we first take the investor's goodwill prior to the deal We then add on the investee's goodwill prior to the deal and if this exists, that means your investee or your target company has done an acquisition in the past, creating goodwill You then add or subtract any transaction effects and the first one may look a bit strange You now subtract the investee's goodwill Well hang on, we just added investee's goodwill and then subtracted it again? The reason that we do this is that we need to zero out the investee's goodwill We're going to reallocate it, maybe to asset step ups or step downs Anything that can't be reallocated will then go into the deal goodwill So you take your investor's plus investee's, plus/minus any transaction effects and that now gets you your consolidated goodwill But a question mark arises, how do you calculate deal goodwill? Well your deal goodwill starts off with the equity purchase price, I'm going to buy this company for 120 However, I then look at the shareholder's equity and that's only 100 Clearly I'm paying above the shareholder's equity by 20, where's that extra 20 come from? That's come from deal goodwill, intangible value, off-balance sheet value that we can't quite see An important note here is that for your shareholder's equity, you only include the percentage purchased So you may find the value is 100 but if you've only purchased 95% of the company Then the figure you would use would be 95 So how do you calculate shareholder's equity bought at fair value? Book value is just from the balance sheet, so how do you get to this fair value figure? Well you start off with the investee's shareholder equity at book value Reasonably simple, find it on the balance sheet But you then add on any asset step ups or subtract off any assets step downs This means that the investee may have some assets, maybe some factories, some land, some property and equipment And that needs to be increased or decreased in value. It may be many years since it was last revalued So by making those corrections, you now get to shareholder equity at fair value That then helps you calculate your deal goodwill and helping calculate your deal goodwill means you can calculate the consolidated goodwill