Hello all!
I am unable to understand the concept of how goodwill creates a reduction in future residual income of a company.
In words of CBOK :-
“If an acquirer overpays for an acquisition, the overpayment should become evident in a reduction in future residual income.”
It would be great if anyone can share their thoughts on this.
One logic behind the same might be, if an acquirer overpays the target, he did the same for goodwill. Goodwill is subject to impairment test annually ( say). So, an inflated goodwill will result in impairment expenses on the balance sheet, which in turn might lower NI. RI = NI – EQ charge. So, a lower NI might lead to a lower RI