logo_partner_duffphelpsUnder accounting rules, goodwill is recorded on the balance sheet when a company buys another company and pays in excess of the fair market value of the net assets of the company being acquired. Euphemistically, we call this excess payment as “synergistic gains” or “goodwill” which the acquiring company expects to realize over the period following a merger. This is a key reason why the excess payment gets recorded on the acquiring firms’ books as an asset. However, once it becomes apparent that the synergistic gains are no longer realizable, under accounting standards, the acquiring company must write-down the goodwill asset and take a hit on its income statement (a non-cash charge). In doing so, the acquirer is explicitly acknowledging that it overpaid for past acquisitions or that the past premium paid is no longer justifiable under current market conditions.

Duff & Phelps and the Financial Executives Research Foundation in 2014 conducted a study on goodwill impairments and found the following key results:

  • U.S. public companies recorded $21 billion of goodwill impairment in 2013, which was the lowest level seen since 2008, at the height of the financial crisis.
  • This decline in goodwill impairment is consistent with the U.S. economic outlook over the same period. S&P 500 Index level surged by 30% in 2013, which is its largest increase in percentage terms since 1997.
  • In 2013, Industrials had the largest percentage of companies that impaired goodwill (7%) followed by Consumer Discretionary and Information Technology (both at 6%).

What are the consequences of goodwill impairments or “failed corporate marriages”? My own research shows they are severe penalties when companies record goodwill impairments. The following is a link to the Duff & Phelps and FEI survey

http://www.duffandphelps.com/expertise/publications/Pages/NewslettersDetail.aspx?itemid=171

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