Introduction
On May 1, 2023, JPMorgan Chase bought most of the assets and deposits of First Republic Bank from the Federal Deposit Insurance Corporation (FDIC), which California regulators had appointed receiver of the failing lender that morning. The consideration, including a $50 billion five-year note issued to the FDIC, came to $67.9 billion at fair value. The assets and liabilities JPMorgan took on were worth, net, $70.7 billion. Instead of goodwill, it recorded a gain of $2.9 billion after tax, the reverse of what almost every other acquisition produces.
Most deals go the other way. Buyers usually pay more than the fair value of everything they can identify, and the excess becomes goodwill, often the largest asset an acquirer carries. Understanding what that residual contains, and what it means when it turns negative, is central to reading any acquisition.
How Goodwill Is Calculated at Closing
Goodwill is measured on the acquisition date as the consideration transferred, plus the fair value of any noncontrolling interest and of any stake the buyer already held, minus the fair value of the identifiable net assets. Each input is measured at fair value except where the standard, Accounting Standards Codification (ASC) 805, says otherwise, as described in the acquisition method. Goodwill is never valued directly. It is whatever is left once everything else has been measured.
That makes goodwill sensitive to every other figure in the allocation. Shares issued as consideration are valued at their price on the closing date, so a rise in the buyer's stock between signing and closing increases goodwill. Every intangible asset the valuers identify reduces it. And in a stock deal, the deferred tax liabilities recorded on asset write-ups increase it dollar for dollar, the mechanism explained in asset write-ups and the deferred taxes they create.
What the Residual Contains
When the Financial Accounting Standards Board (FASB) developed the current model, it described goodwill as a mix of components. Two it regarded as core goodwill: the going-concern value of the target's existing business, beyond the sum of its separable assets, and the value of combining it with the buyer, chiefly the expected synergies. The rest are byproducts of measurement: assets the target owns that the allocation did not capture, any overvaluation of the consideration, such as shares issued at an inflated market price, and plain overpayment, for example in a competitive auction.
The accounting cannot separate these components, and it does not try. A goodwill balance built from realistic synergies and one built from an auction premium look identical on the balance sheet. The difference shows up later, in the impairment tests covered in goodwill and goodwill impairment.
What Drives the Size of Goodwill
The target's business model matters most. A software company's value lies largely in its people and its growth, which cannot be recognized separately, so goodwill often takes half or more of the price. An oil producer's value lies in reserves that can be valued field by field, so goodwill is small or absent: Chevron recorded none on its $48 billion acquisition of Hess in 2025, as its 2025 annual report shows. Beyond that, the size of the control premium, the share of the price assigned to identifiable intangibles in the purchase price allocation and the deal's tax structure all move the residual.
Bargain Purchases
Occasionally the fair value of the identifiable net assets exceeds the price. The result, sometimes called negative goodwill, is a bargain purchase, and under ASC 805-30 the acquirer records the excess as a gain in earnings on the acquisition date, attributed entirely to the acquirer rather than to any noncontrolling interest.
- Bargain purchase
A business combination in which the fair value of the identifiable net assets acquired exceeds the consideration transferred plus the fair value of any noncontrolling interest and previously held stake. After reassessing its identification and measurement of every element, the acquirer recognizes the remaining excess as a gain in earnings.
Because a gain on buying something is counterintuitive, the standard first demands a second look. Before recognizing it, the acquirer must reassess whether it has identified every asset acquired and liability assumed, then review the procedures used to measure the net assets, the noncontrolling interest, any previously held stake and the consideration, as Deloitte's guide to measuring a bargain purchase gain explains. An apparent bargain can disappear in that review, when a missed liability or an overstated asset value surfaces. Any gain that survives must be disclosed, with the reasons the transaction produced it.
Why Bargains Happen
Genuine bargains usually involve a seller that could not wait. Banks sold by the FDIC as receiver are the classic case: the agency's aim is to resolve the failure quickly and at the lowest cost to the deposit insurance fund, and a buyer who absorbs the risk on a weekend's notice can negotiate a discount. Other sources include sellers forced to divest by regulators, distressed owners needing cash and the measurement exceptions in the standard, such as deferred tax assets on a target's losses, which are measured under the income tax standard, ASC 740, rather than at fair value.
The First Republic Allocation
JPMorgan's final allocation, after the one-year measurement period closed on April 30, 2024, shows how the gain arose:
| Line item | Amount |
|---|---|
| Amounts paid or due to the FDIC, net of cash acquired | 13,555 |
| Purchase money note to the FDIC, at fair value | 48,848 |
| Settlement of JPMorgan's deposit and other related party balances | 5,447 |
| Contingent consideration, shared-loss agreements | 15 |
| Purchase price consideration | 67,865 |
| Securities | 30,285 |
| Loans | 153,242 |
| Core deposit and customer relationship intangibles | 1,455 |
| Indemnification assets and other assets | 7,415 |
| Total assets acquired | 192,397 |
| Deposits | (87,572) |
| Federal Home Loan Bank advances | (27,919) |
| Lending-related commitments, payables, other liabilities and deferred tax | (6,163) |
| Fair value of net assets acquired | 70,743 |
| Gain on acquisition, after income taxes | 2,878 |
Source: JPMorgan Chase 2024 Form 10-K, Note 34. The gain is the 70,743 of net assets less the 67,865 of consideration.
Two features of the deal show the bargain at work. The FDIC agreed to absorb 80% of credit losses on large parts of the acquired loans through shared-loss agreements, and it accepted a $50 billion note at a fixed 3.4%, worth only $48.8 billion at prevailing rates. JPMorgan's initial estimate of the gain was $2.7 billion, raised to $2.9 billion by $63 million of adjustments in 2023 and $103 million in 2024, the measurement period refinements described in its 2024 annual report. The gain sat in other income, net of the tax effects of the deal, which lowered JPMorgan's effective tax rate for 2023.
What Bankers Look For
In most deal work, goodwill is read as a measure of the premium paid for what cannot be identified. Goodwill as a share of the purchase price, compared with recent deals in the same sector, shows whether an allocation is aggressive or conservative, and a large balance relative to the target's earnings signals impairment risk if synergies do not arrive. Bargain purchase gains belong with the other items in one-time items: restructuring, impairments and gains and are removed from adjusted earnings.
For a buyer, the goodwill recorded at closing is also a commitment. It cannot be amortized away by a public company, so every dollar stays on the balance sheet until an impairment test shows it is no longer supported. The larger the residual, the more of the deal's case rests on synergies and growth that the accounting cannot see.
