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23.7 billion quarterly loss? - Wachovia

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October 22, 2008 – Comments (2)

Goodwill is airy-fairy accounting.  It should be illegal. 

How many times do you hear something like, "Oh look the stock is trading for less then book value..."?  Book value should be a number that means something, but with make belief valuations and over priced assets it is nonsense.

If you read my post, "Goldcorp: The Oxymoron of Fiat Creation," I trace the numbers to show how $6 billion of book value was created out of thin air with the Glamous merger.

From Yves

"Wachovia Corp. swung to a large third-quarter loss, as the bank posted $18.8 billion in goodwill write-downs and $8.71 billion in other charges and costs related to market disruption, investing and other crisis-related losses."

2 Comments – Post Your Own

#1) On October 22, 2008 at 11:48 AM, EverydayInvestor (< 20) wrote:

dwot - goodwill is usually not worth much. That being said, requiring expensing of the price of an acquisition above its book value would not be very honest either. Those who wish to ignore goodwill can easily calculate tangible book value. Also, goodwill allows an analyst to quickly see how important acquisitions have been for a company.

However, I do believe that acquisition costs (iBanking fees, for example) should be expensed and not included in goodwill.

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#2) On October 22, 2008 at 6:37 PM, chk999 (99.98) wrote:

dwot - Goodwill is a least bad solution to a problem. When you buy another company, the amount of "goodwill" recorded is the price you paid above the value of the tangible assets. Roughly speaking, it is the value of the acquired company as a going concern. You can't just ignore this, because a company with profitable repeat customers is obviously worth more than the buildings, desks and stuff like that.

The problem is what to do with the goodwill. You could record it as a one time charge and write it off the balance sheet. But that isn't reasonable as the purchased business should be spinning off cash and if well managed will be worth more in the future. Meanwhile the write down will make the income statement look wildly bad for no real good reason.

Under the old accounting rules you could write it down under some schedule and get it off the books in an orderly manner. GAAP changed and you now have to do an "impairment" test yearly to see if the goodwill is impaired and needs to be written down. I've never ever seen anyone report their goodwill as being impaired in the annual report. This is probably less than useful.

If I was on FASB I'd vote for going back to the old scheduled writedown rules as they seemed to perturb things the least. In the mean time, you can recognize that the "goodwill" asset is just the going concern value of the acquired company, which may be worth more or less than it cost. (For most companies vote less as aquirers usually overpay.)

For quick 'n dirty analysis I always subtract off the goodwill and intangible assets from the asset part of balance sheet. (They may actually be worth something, but I need to figure out why.) 

Chris - got 98% for the overall grade in my accouting class

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