1. What exactly is “goodwill,” and why is it shown on companies’ financial statements?
When one company is acquired by another, goodwill is the difference between the value of all the acquired assets and the purchase price. If a company is acquired for $10 million, for example, the assets may be valued at $8 million, and the residual amount ($2 million) is considered “goodwill.”
2. How does goodwill affect a company’s balance sheet?
Every year, companies must test their goodwill for “impairment” under a Financial Accounting Standards Board rule referred to as ASC 350. It’s under this guidance that “Intangibles—Goodwill and other” may be written off of financial statements as an expense.
3. Why is this issue a concern to companies?
Most companies are determining their goodwill impairment based on values set when the stock market dropped in the 2008-2009 time frame. As stock prices have declined, the value applied to a company is probably going to be lower. And if values are dropping, there’s a greater likelihood that the goodwill is going to be impaired and will be charged off.
4. What’s been happening with goodwill recently?
Most companies took a large write-off of their goodwill in fiscal year 2008. I believe there was something like $260 billion in write-offs for goodwill that year. The write-offs haven’t been as big for 2009, but we don’t know for sure yet. Chances are they will be less.
5. What trends are you seeing here in Dallas-Fort Worth?
I’ve looked at probably 50 companies in North Texas and would say that probably fewer than 50 percent took a goodwill impairment charge for FY 2009. In 2008, the percentage was probably well over 75 percent or 80 percent. In 2010, assuming things stay where they are and there’s no double-dip recession, the percentage will be even less than in 2009.