New FASB rules for goodwill accounting

P

praetorian2

Does anyone fully understand the new rules on FASB accounting for goodwill as they change very significantly.

http://www.fool.com/news/foth/2002/foth020103.htm

http://www.bobermarkey.com/cajully01.html

Does this mean that if a company pays 15m for a company with assets worth 10m, that instead of amortizing that 5m over a 40 year period that they instead take a charge of 5m upfront and then have no amortization expenses? Or does anyone else understand this fully? I certainly dont.
 
No, they don't take the 5m charge up front. It's still recorded as goodwill like before. The only change is instead of a straight-line 40-year depreciation of goodwill, the acquisition needs valued each year and if it's value is below the book value on the books a charge for the difference needs made on the next quarterly financial statement. Some companies will report higher earnings the first year because they can discontinue writing down "old" goodwill in some cases, saving amortization expense that year. In no case will companies be allowed to increase earnings directly if their acquistions increase in value over the book value. The bottom line is a more timely reflection of true value will occur.
 
but in the above example, wouldn't the company be worth 5m less than the price paid so there would need to be a 5m charge? Or is it have nothing to do with goodwill anymore, just the present value of the asset as opposed to last year's stated value?
 
The initial year of purchase they use the "Purchase Price" as the market value, even though the true market value may be less. This is because a recent sale is given the most weight for valuation purposes. I believe within the next year the 5m could be completely written off after an impairment review is done in a later quarter. And yes, they still use goodwill as the plug to make the balance sheet balance.
 
when they write it off, do they need to take a large one time charge? I really think that thses new rules will really be major and some co.'s will report rather impressive new income numbers even though cash flow remains the same. I'm surprised that more people aren't commenting on this and that it hasn't received more publicity.. I just found out about it yesterday for instance.
 
When they do write it off, it could be a large charge. It's separately stated on the Income statement as a Change in Accounting Principle, so it's distinguished from operation income. Many companies are going to see increased earnings going forward because their FMV exceeds their book value, and they will no longer need to amortize goodwill which has been written down excessively in some cases.
 
Thanx. I mention this mainly b/c I am building a monster position in THV because i see a big improvement comming in the stock. About 80% of their book value is goodwill. After the writeoff it should add about 23c or so a share to earnings annually. Which is quite a difference for a stock trading at 90c.
 
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