Wednesday, January 14, 2009

Got Goodwill?

Companies that carry goodwill on their financial statements could face a major task when completing their audited financial statements this year. The markets in general have dropped about 40 percent. Company share prices and market cap declines could be a signal goodwill impairment testing done at an interim period (many companies use July 1 or September 1) is no longer valid.

Recent market events in many cases constitute one or more indicators of impairment. Goodwill of a reporting unit must be tested for impairment between annual tests if an events or circumstances indicate a reduction in a reporting unit's fair value. Such events or circumstances include adverse changes in the business climate, an adverse action or assessment by a regulator, loss of key personnel, expectation that all or a portion of a reporting unit will be sold, testing for future recoverability of value of a assets, goodwill impairment loss in a subsidiary.

Share price/market cap declines, commodity price declines, drops in revenue, loss of market share, regulatory oversight, layoffs, and sale of assets to raise cash could all be considered impairment indicators.

Following is a chart showing a comparison of the market cap of some corporate sectors to the book value of their equity:

[Table from Mercer Capital]

The one sector where book value is higher than market cap is financials, and anyone following recent market events knows the troubles in that industry.
There is a huge increase in the number of companies in the technology, services, industrial goods, health care, consumer goods, and basic materials sectors where book value exceeds market cap. Auditors will generally use this as a reason to ask for a recalculation of interim tests.
This will be the first part of a few posts on this subject. More tomorrow.

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