Auditors now accounting for bull market
overspending as valuations drop
According to Kris Peach, KPMG National Audit
Partner, the current reporting season will include the impact of
the decline in the financial markets and general economic climate
which began in late 2007. This is likely to bring a raft of 'goodwill impairment' announcements, she says.
Ms Peach believes a number of entities are
now likely to have to admit that their company either 'overpaid' for an acquisition during the bull market times of
recent years, or that their newly-merged business has not
performed as expected.
The value of goodwill - classed as the
difference between the total price paid for an acquisition and the
value of the tangible and identified intangible assets purchased -
is assessed on an annual basis and Ms Peach said her own
anecdotal insights lead her to believe that a large number of
balance sheet write-downs (called goodwill impairment) could be
inevitable.
She explained 'At the height of the bull
market, companies were required to meet the market price in order
to be successful in completing acquisitions. While the market
continued its bull run this "premium" to secure the
acquisition may have been masked. In light of the current downturn
in the market the issue of such a premium, or even an under
performing acquisition, is firmly in focus, with accounting
standards requiring the value of goodwill to be assessed.
Owning up to this can be a chastening
experience. Sadly, current market conditions mean that it is
something which more and more companies are likely to be
experiencing for the first time in a number of years.'
Australian Accounting Standards require
goodwill to be assessed for impairment at each reporting date.
Where the value of goodwill is not recoverable, an impairment loss
results, which is generally recorded as profit and loss.
The current economic conditions may give rise
to situations where the value of goodwill recorded may no longer
be sustained. This would result in a charge to the current
period's profit and loss.
Even though an acquisition may have attracted
a premium in a prior period, if market conditions supported the
amount of goodwill as recoverable, then Australian Accounting
Standards would not require an impairment loss to be recorded. In
times of strong market conditions this may be the case. However,
in times of declining market conditions issues may arise.
Ms Peach says 'the current sense I have of
the market tells me that plenty of goodwill impairment
announcements are just around the corner. However, it is going to
be a decidedly uncomfortable experience for companies that have
had a healthy stock market for the past five years.'
This article appeared in Thomson's Alert24 -
Accounting & Auditing, 24th July 2008.
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