Public Companies' Goodwill Impairments Decline on Stock Market Strength
December 02 2019 - 4:53PM
Dow Jones News
By Mark Maurer
The total value of goodwill impairments by U.S. public companies
-- on the rise for the past three years -- could decline in 2019
due to companies' rising stock market values.
Goodwill is an intangible asset created when a company acquires
another business for more than the value of its hard assets.
Companies impair the goodwill if its fair value is less than the
amount stated on the balance sheet.
Major goodwill impairments for U.S. public companies reported in
2019, which doesn't account for the fourth quarter or smaller
impairments, exceeded $33 billion, according to Duff & Phelps
LLC, a New York-based valuation firm.
The full-year picture will be clearer after companies report
fourth-quarter results early next year. But the major goodwill
impairments so far this year are down 19% from the $40.74 billion
reported through the third quarter in 2018.
Impairments remain far above levels reported over the past
decade. Total impairments for full-year 2018 climbed to $78.9
billion in 2018 -- 60% above the annual average over the previous
10 years, according to a Duff & Phelps study slated to be
released Tuesday.
The 2018 total rose to the highest level in a decade as the
global economy weakened while companies struck large-scale
transactions that resulted in losses.
The magnitude of impairments shows that many U.S. companies are
struggling with changes in regulations, their industries or the
economy, said Greg Franceschi, global leader of the financial
reporting practice and the office of professional practice at Duff
& Phelps, which tracked 8,800 publicly traded firms in the U.S.
for its study.
"Companies' expectations for transactions have not been
reflected in the actual results," Mr. Franceschi said, "so there's
been a write-down in these prices." The impairments are highly
correlated with macroeconomic factors in a company's particular
industry, although litigation or product failures can also lead to
impairments, he added.
So far this year, the biggest impairment is Procter & Gamble
Co.'s $6.78 billion charge for the beleaguered Gillette brand it
acquired in 2005. The company cited currency devaluations and
declines in the purchase of razors and blades as reasons for the
impairment. The size of the impairment pales in comparison with
2018, when General Electric Co.'s $22.1 billion charge took the top
spot.
Another hefty write-down this year was CenturyLink Inc.'s $6.51
billion goodwill impairment caused by the technology company's
falling stock price.
Surprise impairments can cause investors to question their trust
in management, said PJ Patel, co-chief executive of valuation firm
Valuation Research Corp. "This is about giving you insight into how
management thinks and how they go to market and in many ways it
reflects on the quality of management," Mr. Patel said, noting the
exception is during market downturns.
The results of the 2020 election in the U.S. and any changes to
the goodwill impairment model in the U.S. or internationally could
have an impact on impairment values in the future.
The cost-effectiveness of the current rules for measuring
goodwill has been the subject of recent scrutiny for two major
accounting standards-setters. Companies have said the existing
rules for goodwill burden them with unnecessary costs and are too
subjective.
The Financial Accounting Standards Board, which sets U.S.
accounting standards, and the International Accounting Standards
Board, which sets standards in more than 140 countries, are
considering revising the rules, which now require companies to test
goodwill for potential impairment each year.
If the FASB were to switch from annual impairment testing to
amortization -- or the write-off of goodwill over the course of
years -- it could dramatically reduce the volume of goodwill
impairments for U.S. public companies, Mr. Franceschi said. The
impairment cost would vary depending on the length of the
amortization period chosen.
Write to Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
December 02, 2019 16:38 ET (21:38 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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