What effect does a higher write-up of intangible assets have on goodwill during an LBO?

In the context of a Leveraged Buyout (LBO), the treatment of intangible assets is significant for understanding how goodwill is calculated. Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in a business combination.

When there is a higher write-up of intangible assets, this means that the fair value of these assets has been reassessed and increased. Because goodwill is computed based on the identifiable assets' fair values, a higher write-up of intangible assets effectively increases the total fair value of the net identifiable assets. As a result, the difference between the purchase price and the fair value of these identifiable net assets (including the adjusted intangible assets) decreases.

Consequently, when the fair value of the net identifiable assets rises due to the write-up, less goodwill is needed to bridge the gap created by the purchase price. Therefore, a higher write-up of intangible assets leads to a decrease in the amount of goodwill generated during the LBO. This reasoning illustrates how the accounting treatment of intangible assets directly impacts the computation of goodwill.