Under what condition would goodwill increase in a company's balance sheet?

Goodwill on a company's balance sheet represents the premium paid over the fair value of identifiable net assets during an acquisition. This intangible asset reflects elements such as brand reputation, customer relationships, and other factors that contribute to the company’s earning power beyond its tangible assets.

When a company acquires another business and pays more than the fair value of the acquired net assets, the excess amount is recorded as goodwill. This situation typically arises in mergers and acquisitions where the purchasing company sees strategic value—like synergies, market position, or intangible assets—that justifies paying a premium over the fair market value of the identifiable assets and liabilities acquired.

In contrast, significant liabilities, selling part of operations, or experiencing a market downturn would not lead to an increase in goodwill. Liabilities indicate financial obligations that do not create goodwill, while divesting assets can reduce the overall valuation, and market downturns typically decrease asset values, impacting goodwill negatively rather than increasing it. Therefore, the circumstance that leads to an increase in goodwill is specifically tied to paying more than the fair value of acquired assets.