What effect does negative goodwill have on a company's profit or loss?

Negative goodwill occurs when a company acquires another business at a price that is less than the fair value of its net identifiable assets. This often indicates that the acquired company might be undervalued due to any number of reasons, such as financial distress or a lack of demand for its products or services.

When negative goodwill is recognized, it typically results in an immediate gain in the acquiring company's financial statements. This is because the difference between the fair value of the net identifiable assets acquired and the purchase price paid represents a surplus that effectively increases the company’s profit. It is recorded as a gain in the income statement at the date of acquisition, which has the effect of inflating the profits of the company.

This accounting treatment reflects the fair representation of the economic benefits realized from an advantageous acquisition, making the outcome clearly beneficial to the acquiring company’s bottom line. Thus, recognizing negative goodwill effectively boosts the profit or loss in the acquiring entity's financial results.