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The recent global recession resulted in a dramatic increase in both the number mid size of goodwill impairment charges since it began. For example, several large companies wrote off significant amounts of goodwill, including Time Warner Inc. ($25 biUion) and ConocoPhilHps ($39 billion). No sector was safe from the downward spira of the economy, but some industries were especially hard hit. In the retail industry, Neiman Marcus ($291 million), Bon-Ton Stores Inc. ($17.8 million), American Eagle Outfitters ($6.7 million), Dick's Sporting Goods ($193.4 million), and Ann Taylor Stores ($286.5 million) were just some of the retail companies that reported impairment charges related to goodwill. Companies in other industries have also been faced with impairments. Park-Ohio Holdings Corp. recorded a $95.8 million goodwill impairment charge and Sinclair Broadcast Group Inc. reported a $193.5 million charge related to goodwill.
The most highly publicized write-downs of goodwill have been in the banking sector. Wachovia alone reported a goodwill impairment charge of nearly $19 billion in the third quarter of 2008. The phenomenon was not limited to U.S. banks. The Royal Bank of Scotland Group wrote off £15.5 billion of goodwill in 2008 related to series of mergers, including £7.7 billion for ABN AMRO, £4.4 billion for Citizens and Charter One, and £2.7 billion for NatWest.
These results raise the question about the underlying causes of these write-offs. One explanation is that prior to the recession and resulting credit crunch there was an abundance of cheap credit available. This allowed companies to grow through acquisitions and, in some cases, overpay to acquire the target. The economic downturn has forced acquirers to face the fact that their newly acquired businesses have not and perhaps never will perform as expected; in some cases, they must admit that they simply overpaid for the target.
The massive goodwill impairments recognized recently also raise the question of whether the accounting for goodwill is misleading to investors. To address this issue, the authors examine the nature of goodwill, how it is measured, and how it is reported.
Accounting for Goodwill
The accounting guidance related to goodwill is provided in FASB' s Accounting Standards Codification (ASC) 350, (formerly SFAS 142, Goodwill and Other intangible Assets). The basic principle is that the purchase price of an entity...