Goodwill: why does it become impaired?

When performing analysis on a company that has changed / is changing ownership, goodwill is a balance sheet indicator to watch. In its simplest sense, goodwill is the purchase price of a company less its book value; or sum of total assets less total liabilities. My question is; can goodwill amortize? According to Statement 142 from the Financial Accounting Standards Board (FASB), it cannot. Instead, the acquisition is tested annually for impairment, which predominately occur irregularly and in varying amounts.

Goodwill as a term was used to reflect the fact that an ongoing business had some “intrinsic value” beyond its assets, such as the reputation the firm enjoyed with its clients. The accounting sense of goodwill followed as a plausible explanation of why a firm sells for more than the value of its net assets.Goodwill is difficult to assess in cases where personal contact is important. An accountant who sells his practice would not be able to guarantee that all of his clients would transfer to the buyer. When purchasing a business of this nature it is important to be sure that provisions are made for an adjustment in the sales price after an initial trial period to see if the client base has eroded.- Goodwill - Wikipedia 

This brings up a question: if goodwill is amortizing; or at least being impaired on a year-to-year basis, what is causing it? Is it the loss of a trade name? Did a principal / rainmaker decide to leave after acquisition? Was the company overvalued? The answer depends on the industry, type of company, and etc.If you have feedback, please get the discussion going.

Technorati Tags: banking, goodwill, impairment, commercial, industrial

Posted on May 11th, 2007 | By: David Litsky | Filed under Banking

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