#79 Goodwill written off ( Part II)

In previous Goodwill written off post, we posted a question for our reader whether the goodwill should be written off after the Company and its subsidiaries has switched its businesses.

Goodwill is considered the premium the Company pay , during acquisition, in anticipation of future economic benefits. In the above case, Company A paid higher premium for Company B's existing customer base in computer hardware industry.

Company A and Company B have shifted its focus to computer software business, the goodwill the Company A paid for no longer exist. As such, the goodwill should be written off accordingly! There's no probable ground that the future economic benefit is going to flow into the Group.

#78 Goodwill written off

Company A acquired Company B in 2006. Net asset of Company B amounted to S$3mil, while Company A acquired the Company B with a purchase consideration of S$4mil. Management explained that the S$1mil excess ( which was subsequently considered as goodwill) is attributable to the goodwill paid to shareholder of Company B for existing customer base of Company B in computer hardware industry.

Year-over-year, Company B has shifted its focus to computer software industry. For the year ended 31 Dec 2008, Company B's ( which is a subsidiary of Company A) earning is at break-even stage. It has no more businesses in computer software, neither nor Company A.

What has happened to the goodwill Company A previously paid for ? Should it be written off even if Company B is not in loss-making position?