A premium becomes an asset. Then a loss.
Goodwill is what a buyer pays above the fair value of what it actually gets. It lands on the balance sheet as an asset, earns nothing on its own, and is not written down over time. Illustrative acquisition, figures in Rs crore.
| The purchase | Rs cr |
|---|
| Cheque written for the target | 1000 |
| Fair value of what was actually bought | 400 |
| Goodwill . the premium, now an asset | 600 |
| The write down, two years on | Rs cr |
|---|
| Net profit the business was tracking | 500 |
| Goodwill marked down | 400 |
| Reported profit after the charge | 100 |
| Operating cash flow, before and after | 550 |
The 600 never earned a rupee. It sat at full value because goodwill is not amortised, only tested. The day the deal was admitted to have disappointed, 400 crore hit the profit line and moved nothing in the bank. Profit down 80 pct. Cash flow flat.