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U.S., International Groups Move in Tandem On Goodwill Accounting

Oct. 17, 2019, 2:08 PM

U.S. and international accounting rules for the intangible assets that roiled the financials at Kraft Heinz Co. need to stay the same, the chiefs of the accounting rulemaking bodies said.

“We need to stay the course,” Financial Accounting Standards Board Chairman Russell Golden said at a CFA Institute panel in New York. “And if we—collectively, both boards—believe we should change goodwill, we should change goodwill. And if we don’t then we shouldn’t.”

The FASB and its London-based counterpart, the International Accounting Standards Board, no longer move in lockstep to try to produce global accounting rules. The two boards, however, have informally committed to keeping accounting rules they developed together largely intact.

“It’s very important,” IASB Chairman Hans Hoogervorst told Bloomberg Tax after the panel. “If we were to diverge—if, for example, we were to do amortization and the FASB would not—it would really tear the two standards wide apart.”

The remarks from the two chairmen are unusual because the FASB and IASB diverge on the thorny issue of goodwill accounting. FASB is considering allowing companies to amortize, or write down, the value of goodwill, while a majority of the international board says such a move is a non-starter.

Getting a panel of seven Americans and more than a dozen international accounting standard-setters on the same page adds a new wrinkle to the effort to overhaul the accounting rules. The chairmen of both boards at separate points referred to the “glacial” pace of accounting standard-setting. If the rulemakers were to take action, it wouldn’t be for several years.

Shining Light on Acquisitions

When one company buys another, it adds up the fair market value of all the assets it acquires, such as warehouses, heavy equipment, and patents. The company then compares the value of those assets to the sticker price of the deal. What’s left over is called goodwill. It represents hard-to-pinpoint assets like the purchased company’s brand name, its skilled workforce, and—most importantly—the potential for the new business to make money.

Many investors look skeptically at this number. Bob Pozen, senior lecturer at the MIT Sloan School of Management and former president of Fidelity Investments, said at the panel that he often derisively referred to goodwill as “air.”

The acquiring company must keep this intangible asset indefinitely in a separate section on its balance sheet. It’s an accounting maneuver introduced in 2001 that proponents say helps shine a light on overpriced business acquisitions. Unlike other intangible assets, goodwill sits there until the business determines there’s a decline in value.

That’s where the accounting gets tricky.

The company must perform annually what many accountants call a costly and complex test to measure impairment. Impairments don’t usually make headlines. But in the past year, major goodwill writeoffs at Kraft Heinz Co. and General Electric Co.— worth $7.1 billion and $22 billion, respectively—shocked investors.

FASB and IASB now find themselves in a difficult place: balancing complaints from companies, which say the routine impairments take too much time and money to tally, and analysts who worry about companies using relaxed accounting rules to hide overpriced acquisitions. At the same time, other investors say when a company acknowledges that its goodwill has lost value, they’ve gotten clues elsewhere.

FASB in July asked the public for broad-based feedback on whether it should change accounting for goodwill. The early-stage proposal asked whether businesses should be allowed to amortize, or write down over time, the intangible asset. FASB would keep intact the impairment test, Golden said, but write-downs would be less frequent because the balance of the goodwill would be whittled down over time.

“The impairment model would be there, but impairment would be less likely because the balance will be amortized down,” he said.

Few accounting purists agree with the idea of writing down goodwill. Hoogervorst acknowledged the criticisms, calling the amortization of goodwill “ugly as sin” but framed it as the least bad solution for a tough accounting problem.

“We know the impairment process doesn’t work well,” Hoogervorst said. “We see time and again goodwill only gets written off when it’s too late.”

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com