Accounting News

Tuesday, August 14, 2012
Wave of Goodwill Write Downs

The Wall Street Journal is reporting that there is an increased level of write offs for goodwill this year. There has already been multi-billion dollar write offs at Microsoft, Hewlett-Packard, and Boston Scientific. Other companies that might be facing a write down are Frontier Communications and Republic Services.

Goodwill is added to a companies books when the cost paid for an acquisition exceeds its book value. The is supposed to represent the value of the brands and trademarks of the company. If the acquisition is successful and the joint operations are successful this percentage drops. However, in most cases, the acquisition fails to meet the expectations and the goodwill is overvalued.

Accounting rules require a public company to review their goodwill account at least annually. In the case like Frontier Communications, Republic Services, NASDAQ, and Level 3 Communications where goodwill exceeds market value it is almost certain that write downs are forthcoming.

The write downs to goodwill show up as expenses on the companies P/L. Since it does not impact the cash flow of the company it is not significant to many investors. However, it does indicate that management has made some mistakes in respect to company acquisitions.

If you are thinking about an acquisition it is a good time to consult your CPA. They can perform an independent review of the target company and prevent overpaying. An independent review without the emotions involved with mergers and acquisitions is invaluable. This is even more so for business owners that might only do this one or two times in their career.

Labels: ,