It’s always interesting (at least to us financial reporting geeks?) how companies talk about huge impairment charges. Usually the talk is around “non-cash charges”, implying that an impairment charge is meaningless, so let’s drive on.
However the CFO of Energy Future Holdings recently was a bit more talkative oon the subject , saying he was “horrified" to make a large impairment charge.
Paul Keglevic, EFH's new chief financial officer said the above about writing off $9-billion in goodwill. Other charges include $500 million related to the company's trade name.
Keglevic also said:
- The number $9 billion "doesn't roll off my lips."
- When private equity investors bought the company, they calculated it was worth $48 billion, including $23 billion for goodwill and intangibles.
- The goodwill value has declined because the value of other electricity companies has dropped as the stock markets fell and because the value of EFH debt is down.
- The decline is on paper; EFH isn't in financial trouble
- The value of the company is only interesting if EFH owners want to sell, sort of like the value of a home.
- The good news is we aren't trying to sell the company today.
- He is not worried about EFH's cash flow. They will have enough cash flow to pay off the $40 billion in debt taken on to buy the company.
- They expect the recession and decline in the stock market to prompt other companies to take similar goodwill charges
- "This will be the biggest year of goodwill impairment this country has ever seen,"
Other recent big impairment charges:
Novelis $1.5 billion
Gerdau Ameristeel $1.2 billion
Sprint Nextel $1 billion
Kinross Gold $994 million
Barrick Gold $773 million
Chemtura $665 million
Ingram Micro $659 million
Nalco $544 million
Chiquita Brands $374 million
Reasons for impairment cited include:
- Increased market cost of capital, due primarily to the significant deterioration in the capital markets during the third fiscal quarter, when market cost of debt required in impairment calculations is significantly higher than the interest rates on existing debt
- Decline in market capitalization for the issuer and other industry participants
- Impact of the global recession on near-term operating forecasts.
- Closure of underperforming units
2 comments:
Interesting....So are you saying a precipitous decline in the market value of the company was triggering event that required the company to re-evaluate the carrying amount of goodwill? How does one ascertain if the decline is temporary or permanent? What is the time horizon for estimation? Where is this is SFAS 142 and 144 or even 157? Seems to me the FASB or SEC need to clarify. This is a big deal today. Maybe someone can provide some insight....Thanks!
Interesting....So are you saying a precipitous decline in the market value of the company was the triggering event that required the company to re-evaluate the carrying amount of goodwill?
How does one ascertain if the decline is temporary or permanent?
What is the time horizon for estimation?
Where is this is SFAS 142 and 144 or even 157? Seems to me the FASB or SEC need to clarify.
This is a big deal today. Maybe someone can provide some insight....Thanks!
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