A brewing battle over how to treat more than $5.5 trillion in assets on company books is pitting investors against businesses, investment advisers against academics and even banks against their own trade association.
At issue is an accounting term known as “goodwill,” which is the premium a company pays when it buys another for more than the value of its net assets. An unprecedented five-year boom in mergers and acquisitions has added urgency over how to account for the financial concept, The Wall Street Journal reports.
When Amazon.com Inc. bought Whole Foods Market Inc. for $13.7 billion in 2017, the e-commerce giant paid $9 billion more than the value of the supermarket’s stores and other net assets. That amount was added to Amazon’s books as goodwill.
As things stand now, Amazon is supposed to evaluate, or test, that $9 billion every year to see if its value still holds. If not, it has to write down a portion of it, a move that cuts profit.
The Financial Accounting Standards Board, the accounting-rules maker, is weighing whether to continue to assess goodwill by tests—or return to a similar approach to the guidelines of nearly 20 years ago, when companies wrote down a set portion of goodwill each year for up to 40 years. The FASB has asked for comments on the possible change, and companies haven’t been shy about weighing in.
Many companies argue the test approach is costly and subjective. However, critics say the old approach, the so-called amortization of goodwill year by year, allows companies to mask problems and costs investors valuable information. Read the full story.
