Goodwill Goodwill is a special kind of depreciation that occurs when one company buys another. If the acquirer pays more than the target's book value, the difference counts as goodwill and has to be amortized over a period of years just like a physical asset. Like other kinds of depreciation, goodwill is counted against earnings but doesn't affect cash flow. The effect of goodwill can be significant. In other cases, goodwill from a lot of smaller acquisitions can add up.
Companies sometimes avoid goodwill by using an accounting method called pooling.
However, the accounting authorities are planning to eliminate pooling within the next few years, so goodwill might soon become even more common. Sometimes a company takes a big one-time charge that depresses net income but leaves cash flow unchanged. In a merger, the acquiring company often takes a one-time charge for money the target company has spent on research that will never be used. On the other side of the coin, sometimes a company gets a big credit that boosts net income but doesn't result in cash inflow. A similar thing can happen when a company owns an equity stake in another company that goes public.