GOODWILL IMPAIRMENT- MARSHALL & STEVENS

In the past five months, we have performed Goodwill impairment tests for many clients in a variety of industries, many of whom are experiencing their first impairment. These impairments have ranged from the Millions to over One Billion dollars. Some of this could have been avoided, much of it could not. Working with a financial advisor experienced in FAS compliance could have helped predict the impairment, reduced its impact on market perceptions of the company and alerted management, directors and shareholders that an impairment was imminent due to market forces rather than poor planning, acquisition due diligence or purchase price allocation.

How did we get to this point?

Under SFAS 141 - Business Combinations, Goodwill remains an unamortizable asset until and unless impaired. Under SFAS 142 - Goodwill Impairment is defined as the point at which market value drops below book value, assuming a company is carrying Goodwill on its balance sheet. At the time when book value of the reporting unit holding the Goodwill exceeds its market value, the impairment exists and the company must then determine the market value of all the tangible and intangible assets of the impaired reporting unit and adjust them accordingly. The impairment is measured by the difference of the Fair Value of all the assets in the reporting unit in relation to the new Fair Value of the business itself.

A number of factors beyond poor operating performance may require a company to write-down asset value(s):

1. The company made a decision when acquiring its target not to have a complete purchase price allocation performed as prescribed by SFAS 141. In such cases we often observe that the book value of the target's tangible assets was carried over (with or without an upward adjustment) without a proper physical due diligence and valuation of the acquired assets.

This frequently leads to lower-than-market values being booked for the acquired assets, the existence of Ghost Assets (assets that exist on the books but are not currently in use or possession) and a higher-than-true Goodwill value. Impairment under this scenario could lead to a valuation increase of some assets that do remain in use, requiring a compensating write-off of Ghost assets and a writing-down of Goodwill.

2. The target was acquired and maintained in a single-member reporting unit. Acquiring a target and segregating it into its own reporting unit leaves it more vulnerable to impairment if initial projections are later not achieved.

3. A "synergistic acquisition" was made, a high(er than) market value was paid for the target and therefore much Goodwill was acquired. Impairment of Goodwill is imminent if aggressive projected returns for the acquired unit/assets are not achieved in year 1.

4. The company's market value as a whole was severely affected by the current market value declines of its broader industry (lending institution, construction, etc.) at the time of the impairment test, which is often conducted at year-end.