KPMG Study Shows Tapering Off in Goodwill Impairment
It appears the mass scale writedown in goodwill is finished, at least for now, according to a recent KPMG study of more than 1,700 U.S.-based public companies.
The Big 4 firm studied goodwill impairments from 2005 through 2009 and discovered impairments declined significantly in 2009 from 2008, with 20 percent fewer companies writing down goodwill.
Goodwill is an intangible asset that arises on the corporate balance sheet as a result of a merger or acquisition. It represents the amount a company pays to acquire a business that exceeds the fair value of the collective net assets of the target business. Accounting Standards Codification Topic 350, Intangibles, requires companies to check the value of goodwill each year and write it down if it is no longer supported by market values.
KPMG’s study shows goodwill impairment charges across the 1,700 companies fell from $340 billion in 2008 to $92 billion in 2009. Only 12 percent of companies in the study took a charge for goodwill impairment in 2009 compared with 17 percent in the prior year, the study said.
The study showed the technology hardware sector accounted for 23 percent of total goodwill impairment charges in 2009, followed by telecommunication services. Banks had the highest level of goodwill impairment charges in 2008, but represented only 4 percent of the total goodwill charges in 2009, the firm said.
Gary Roland, managing director at consulting firm Duff & Phelps, said he’s not surprised by the data. Impairments are declining because writedowns in 2008 left less goodwill for companies to impair and market capitalizations for many companies are recovering, he said. As market cap improves for a company, it means a larger gap between fair value and whatever value may be on the books for goodwill.
“If the market cap has increased for a company, there’s that notion of reconciling at some level to market cap,” Roland said. “As market caps increase, presumably those values reflect the value of the company as a whole.”
Duff & Phelps conducted an electronic survey of 2,500 members of Financial Executives International in October 2009 and discovered more than two-thirds of those companies reported taking a goodwill impairment charge. The firm has plans to update its study later this year, Roland said.








“The underlying problem here, of course, is a lot of classes of securities have inactive, problem markets,” said FASB Chairman Robert Herz. “There’s no single silver bullet, except get all the information you can and make a judgment. We’re trying to help people through that process.”
Seidman said the new guidance will not provide an escape from FAS 157’s call for an exit price, or the price an entity would receive in an orderly transaction, in establishing fair value. “It doesn’t mean I’ve identified a distressed transaction and now I can estimate cash flow any way I want to,” she said. “Your objective should not be essentially to derive a fair value that’s based off the transaction price we just said is distressed. Don’t use that data point alone any more. Instead, use other sources of information and estimate fair value that still represents fair value.”
“The frustration was an assertion that we had done nothing in recognition of these issues over time,” he said. “That’s absolutely not the case.”
While the reporting problems are especially pertinent for financial institutions, other public companies can run into problems as well, says Jeremy Perler, co-head of an accounting research group at RiskMetrics. Companies reporting their interests in other companies, for example, may assert that depressed values are temporary, he says. “If you own this company, you want to know the potential that that impairment is not just temporary,” he says.
Rick Ueltschy, a partner with Crowe Horwath, says the broad findings generally support what his firm has seen in practice. “The study indicates that credit losses have been a much greater contributor to bank weakening and failure than losses on investments recorded because of fair-value accounting,” he says. “While banks have taken some investment related hits, the credit losses have been more significant, except for certain, rare cases where banks had concentrations of investments in particularly troublesome securities.”
Cindy Fornelli, director of the Center for Audit Quality, said in a prepared statement that she’s pleased to see the study calls for improvements to rules, but not a retreat from fair value. “Any changes should be proposed and dealt with through the independent standard-setting process,” she said.