Ge Accounting for Good Will and Good Will Write Offs

Goodwill, in essence is a noun that means friendly, helpful, or cooperative feelings or attitude, of someone, which we have seen so little recently in the world of political and economic environment. However, that same term has evolved to become, also, an accounting and business noun representing the established reputation of a business regarded as a quantifiable asset, e.g., as represented by the excess of the price paid at a takeover (acquisition) for a company over its fair market value.

From a more technical perspective, goodwill is an intangible asset, recorded in the acquiring company's books, when associated with the purchase of one company by another. ... The value of a [acquired] company's brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill.

Goodwill is also part of the intangible assets recognized in the accounting books of a company. Early this year, the company Kraft Heinz Co food disclosed a $15 billion write-down on its marquee brands. From the Company's site, they disclosed that during the fourth quarter, the fair values of certain goodwill and intangible assets were below their carrying amounts. As a result, the Company recorded non-cash impairment charges of $15.4 billion to lower the carrying amount of goodwill in certain reporting units, and certain intangible assets, primarily the Kraft and Oscar Mayer trademarks.

A charge of $15.4 billion is in absolute terms already significant. In relation to the company annual sales, it represents almost 50% while in relation to the total of goodwill and intangible assets recorded in the balance sheet, it is around to 15%. After such adjustment, the Company remains with a goodwill and intangible assets recorded in total a figure of plus $85 billions, representing around 85% of all company assets. Yet, adding equity and long-term debt we arrived at plus $ 80 billions. So, the company is made of goodwill and assets. Unless proven the opposite, it is most likely that all these figures are fully compliant with accounting and auditing rules, now, and before the adjustment.

So, what happened. Almost 20 years ago, we also observed a similar circumstance with several dot.com companies having significant write-offs of goodwill and intangibles. Whether those were derived from acquisitions, or IPOs, they were subsequently perceived as far beyond reasonable, as they lack essence and substance for being an asset when not generating revenues (or derived from revenues). Any asset that is not directly derived from revenues and cost stream, not resulting from profiting on its businesses or its cash flows, would be severely challenged for an accounting and auditing purposes.

Towards 2018 year-end, from an article in the Financial Times, we read that GE newly empowered chief executive said it would write off $23bn from the value of one of its core divisions, the business supplying equipment to the power industry. Most of the charge relating to its 2015 purchase of the energy businesses of Alstom (France) for $10.1bn, which then raised a question that has been widely asked: How is it possible to take a write-down that is greater than the cost of the acquisition? Again, unless proven the opposite, all these figures originally recorded and then restated, are to be fully compliant with accounting and auditing rules.

The existence of significant goodwill and intangibles in the financials of large corporations varies. Some have ended up having an important figure in that caption while others not. For instance, Apple doesn't even have a caption of goodwill and intangibles in its balance sheet; Amazon has goodwill reported of $ 13.3 billion, representing only 10% of its total assets; Microsoft has a total of goodwill and intangibles of around $50 billion, about 20% of total assets; Walmart has goodwill of $31 billions representing 15% of total assets; Royal Dutch Shell has intangibles of $23 billions representing less then 10% of total assets; and Berkshire Hathaway of the famous Warren Buffett, has goodwill and intangibles totaling $87 billions, represent little less than 10% of total assets.

After all, we may have an issue here. In many cases goodwill and intangibles became too large of an asset of a company, representing more than its real value generating, in cash flow.

What is this accounting rule for goodwill and intangibles that lead to so many adjustments, some timely, others retroactively? Company accountants and auditing firm professionals are very high qualified and experienced. Yet, these major adjustments have occurred and are not rare in businesses community, leading one to believe that the accounting rules need a thorough and deep understanding, but more than that, it needs a closer link to reality, in a timely fashion.

Accounting and auditing organizations will have to take a deeper look into this subject in the near future in order for such rule to be more appropriate under real business circumstances and provide a safer approach for the capital markets as a whole.

Ge Accounting for Good Will and Good Will Write Offs

Source: https://www.linkedin.com/pulse/company-accounting-goodwill-its-flaws-jarib-b-d-fogaca

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