In regard to a thread a while back about toughest technicals, what causes Goodwill to be impaired/written-down?
http://www.wallstreetoasis.com/forums/hardest-tec…
Delirium2let me take a stab at the two questions:(a) Goodwill does not affect net income, unless it's written down (impaired).
(b) Since cash flow is the driver of firm value, whether you capitalize or expense R & D should not affect value as the cash position in both cases remain the same.
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if the fair value of the item (including goodwill) is less than its carrying value, then you have the potential for goodwill impairment/impairment loss.
A foreign article, but still a decent one. May help answer your question.
http://www.thehindubusinessline.com/mentor/2008/04/28/stories/200804285…
Goodwill write-offs arise after closing (Sprint-Nextel, Ebay-Skype, etc.) when a buyer over pays for a target and the acquired reporting unit is unable to realize the projected synergies/cost savings that was allocated to the goodwill. In such a case the goodwill on the books will be impaired.
SFAS 142 requires that you test your goodwill for impairment annually, and your auditor will probably probe you about this anyway before he signs off on your statements.
SFAS 142 essentially says that if the FV (BEV value, reporting unit) of a reporting unit is less than its carrying value, then the reporting unit must be tested for impairment.
The first step is in calculating the FV via a DCF or a comp spread to get the enterprise value of that unit. After closing, your CFO should have already allocated the capital structure (debt, equity, minority interests, retained earnings, tangibles, intangibles, etc.) at the reporting unit level, and you'll use these numbers to get the carrying value for the business unit.
If the FV is less than the carrying value on the books for that unit proceed to step 2.
The step 2 exercise entails revaluing all all identifiable assets (tangibles, intangibles) for that reporting unit (just as you would a SFAS 141 PPA, but this exercise is just for an impairment analysis, not an allocation of purchase price which should have already been performed after closing) and this can be very costly, especially of you fail step 1.
The excess of the reporting unit's fair value (calculated in step 1) over the fair value of all identifiable assets (step 2) will be allocated to a new goodwill for that reporting unit.
The original goodwill on the books should be higher than this new goodwill from step 2, so you must write-down the carrying value goodwill on your balance sheet.
So in the next period, you will recognize a non-cash impairment charge on I/S which hits the R/E account as a non-cash charge on right side of B/S and the goodwill on the left (asset side) is written down as well so the balance sheet ties out.
The other assets won't change, and they'll continue to amortize/depreciate as usual, so only the goodwill is written down in this case.
Hope that helps.
thadonmega... thanks.
Any chance you can accompany me on my interview as a translator for the hearing impaired?
To add to thadonmega:
Pre 2002 goodwill was amortized, which gave a huge incentive for firms to declare really high IPRD so as to lower their future amortization costs (IPRD being automatically written off goodwill). Now goodwill is impaired so there is no more incentive for huge IPRD write downs (Those are recognized on the BS and taken straight out on the income statement)
For IFRS you impair goodwill first when looking at a cash generating unit, as it is considered a "softer" asset. The impairment test for IFRS is pretty much the same as the one for the impairment of an asset under IFRS.
Really I didn't add much to your question. But I wanted to sound smart considering I studying this bs all year long.
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If Goodwill declines in BS, does that mean impairment / write-off? (Originally Posted: 04/16/2010)
If Goodwill declines in BS from 2008 to 2009, does that mean there was impairment / write-off of Goodwill ?
If so, does that mean in the 2009 SCF, Goodwill write-off would be added back to NI (assumes standard indirect method of OCF)?
Thanks.
From a strictly accounting perspective, there are no cash flow effects when writing off goodwill (although there is definitely an economic loss). You don't have to "pay cash" to get rid of it.; SFAS 142 deals with goodwill impairment.
abd, you are right. Goodwill isn't amortized anymore, so if it decreases, you can be pretty sure that it was due to an impairment. When goodwill decreases, you must recognize an expense. Since the expense will effect net income in the period, but does not involve cash, you would be correct to add it back to reconcile operating cash flows.
Goodwill Impairment (Originally Posted: 11/01/2013)
I've been doing research into a particular company, and I've found that they reported a large goodwill impairment number due to some acquisitions 5 and 8 years ago. When this news was announced the stock went up, because they beat EPS (the impairment excluded). All the research reports i read pretty much ignored it or wrote two lines dismissing it. So i have a few questions...
Does an asset/goodwill impairment have an effect on the fair valuation of the company? From my understanding the impairment, in this case, lowered stockholders equity (book value) by 25%.
Does book value or these impairments matter? I understand that these impairments don't (for the most part) effect future operations and that there a non-cash item, but those fact make it insignificant?
Any other elaboration on this topic that you think would be worth knowing?
Thanks in advance.
I'd wager to say goodwill was excluded from the original analysis, thus any impairments don't affect much.
Without knowing the situation I don't think you can make a blanket statement that "No, a goodwill impairment doesn't matter" or "Yes it does."
The goodwill impairment in and of itself doesn't change the value of the company at all. All it does is recognize formally, on the books, that the fair value of what the company acquired is less than what was previously on the books. Presumably the effects of the acquisition have already been accounted for in expected cash flows. Again, hard to say without knowing the circumstances, but if this were a major acquisition that has performed poorly then likely investors already know that fact and the effects are already priced in.
Value investors certainly care about book value but for the most part they would discount or eliminate non-tangible assets, like goodwill, anyway. It's when a company is trading below tangible book value that it's really interesting.
I have heard Goodwill described as "how much a firm overpays for a company".
As other posters have said, the market often figures out a goodwill impairment before the accountants do.
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