Understandably, Enron's ugly tale dominates the business news these days. However, it is overshadowing the impact of some new FASB (Financial Accounting Standards Board) rulings whose quiet footfall thus far will likely land with a thud come June 30.This is because FASB 142: Goodwill and Other Intangible Assets mandates that, effective on date of adoption, all recognized goodwill on corporate balance sheets be tested for impairment, and then requires companies to write off the impairment amount. Following adoption, companies must also then perform regular impairment checks on goodwill and other intangibles, such as brands, customer lists, and technology. Under earlier rules, goodwill was allowed to be amortized, spreading the hit out over time.
In recent days, media conglomerate Vivendi Universal announced it was writing down $13 billion of goodwill as a result of overpayment on various acquisitions. They're not alone. AOL Time Warner, AT&T, and Viacom may collectively have to write down up to $1 trillion of goodwill. In coming weeks and months, more companies will begin to test for impaired goodwill, and more epic-sized write-downs will result.
Impairment is a two-step process. Companies must take the first step of their impairment test within six months after adoption, and disclose the results in a quarterly 10Q report. In step two, companies have one year from adoption to disclose the amount of the impairment loss, its causes, the business unit recognizing the loss, and the amount of any remaining goodwill. All charges taken within the first year after a company adopts the new approach may be written off as the result of an accounting change. After that, goodwill-impairment charges must be disclosed as an operating expense, and reflected as a hit to earnings.
With disclosure being the word of the day, many are following the smart IR strategy of taking the primary hit for impairment now rather than later in the year. This is wise because companies that recognize charges after the first quarter following adoption must restate financial results for preceding quarters. Investors are also likely to look askance at impairment charges if they are announced later on.
In any event, IR and PR pros at acquisitive companies should start focusing on investor reactions right away. Giving investors information about goodwill and intangibles will help them value companies more accurately. Heretofore, a company's balance sheet provided little useful information on intangibles.
Examples of intangible assets that meet the criteria for recognition apart from goodwill include trademarks, internet domain names, customer lists, artistic, literary and musical works, licensing agreements, leases and operating rights, advertising, construction, management, service or supply contracts, franchise agreements, broadcast rights, employment contracts, patents, unpatented technology, computer software, databases and trade secrets, and formulas and recipes. In other words, almost everything except the screws, buttons, and widgets.
As intangible assets account for up to 75% of a company's market capitalization, breaking them out can only help analysts offer sounder investment advice, and help investors with decisions. Moreover, research performed by Interbrand and many academics has demonstrated consistent positive correlations between investment in intangibles and future earnings.
For IR and PR pros at companies whose value - and reputation - depend heavily on intangibles, the new FASB rulings are a huge positive. Will it mean more work for your company? Absolutely. And, no doubt, your CFO is wondering who's going to do all this stuff.
But is it good news for your company? Absolutely. In the short term, acquisitive companies may take the goodwill impairment hit, but longer term, breaking out intangibles from goodwill may actually change the way your organization allocates and manages resources. Importantly, it affords all of us an opportunity to create our own form of "goodwill," by offering analysts, investors, and the general public detailed disclosure of where our companies' assets and liabilities lie, and allowing for sounder investment strategies. Given that candor has been in short supply lately, the new FASB rulings give all of us a nudge in the right direction.
- Regina Milano is the director of marketing & PR at branding consultancy Interbrand, and authors of the annual ranking of The World's Most Valuable Brands. Interbrand has prepared a report on the new FASB rulings entitled FASB Statements No. 141 & 142: The impact on intangible assets, including brands. To obtain a copy, please e-mail regina. firstname.lastname@example.org.