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stockcommander (96.73)

Goodwill and creative accounting

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January 23, 2009 – Comments (3)

How can we make a fair assessment of goodwill?

Should it be amortized immediately as a safeguard against creative accounting?

Take Royal Bank of Scotland Group (RBS) as an example: They just reported massive write downs, most of which was a huge write down of goodwill.

I would love to hear some thoughts on this – personally I believe that companies should be required to write down goodwill over a period of maximum three years. Goodwill is so intangible, and its value vaporizes whenever there is a downturn in the market, that it makes a good case for immediate amortization of its value.

Currently goodwill counts as an asset.

Companies are to assess goodwill for impairment at least annually. If goodwill is impaired, its carrying amount is reduced and an impairment loss is recognized.

One of the really big problems I have with this is that companies are doing their own assessments and this leaves an obvious playground for creative accountants.

3 Comments – Post Your Own

#1) On January 23, 2009 at 12:07 PM, WeenTang (25.96) wrote:

You've hit on the absurdity of the whole fair value accounting trend.  I am a CPA and am currently working on my Company's goodwill impairment test.  The impairment test is based on future cash flows, which is based on many many many assumptions.  Some of which are extremely sensitive.  This allows me to defend any impairment I choose in a huge range of values.

I'm 99% certain RBS (or any company in a similar situation) knew they were going to miss target.  So they just took as big as write off as possible to set themselves up for the future.

Goodwill impairment is a non-cash item, which makes it practicly meaningless going forward.  They are basically saying "yeah, we're not going to make as much on our past acquisitions as we originally thought, but you already knew that."

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#2) On January 23, 2009 at 12:49 PM, Mary953 (84.45) wrote:

Good Grief.  I thought I was beginning to understand all of this. I really did.  EPS100momentum is talking about his streamer list of stocks, whatever that is.  Now you are talking about goodwill and it is not the charity.  WeenTang, I know you gave an explanation that should be enough for a reasonably intellegent person.  Can you or stockcommander break this down a bit further for someone who has never encountered the term before in this context.  Thanks much.

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#3) On January 23, 2009 at 1:11 PM, stockcommander (96.73) wrote:

Thanks to WeenTang ...

Mary953:

The following should be rather enlightning:

http://www.nysscpa.org/cpajournal/2004/1004/essentials/p30.htm

As you can see this process requires a very high level of personal integrity.

Anyway, if for some reason the expected value of a purchase fails to materialise, I for one would like that information to materialise inside a reasonable timeframe.

I recognize that there are cases that justify the current practice, but those are really few. In most cases the value should materialize inside a three year timeframe, or the balance sheet should reflect that the buyer probably paid far too much for the acquisition.

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