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Author: RoyalScribe Two stars, 250 posts Ticker Guide CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3916  
Subject: A Question on Amortization Date: 11/9/2011 11:43 PM
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I am going back to the basics of financial statement analysis and have a question on amortization. Here is what I found on the topic:

"Amortization is the write-off of an intangible asset over time. Similar to depreciation, amortization reflects the declining value of an asset over its useful life. Under GAAP (generally accepted accounting principles), intangibles should be amortized over at least 5 years and not more than 40 years."

Here is my question: If goodwill is amortized over a period no longer than 40 years, is the value of the brand no longer present on the balance sheet?

As an example to further explain my question, if I were to buy Coca-Cola Corporation today, I would surely pay more than book value due to the great brand. As I continue to operate this company and time goes on, I am slowly amortizing away the goodwill, which at the moment is considered an asset. If the value of the brand is not decreasing and yet I am still amortizing the goodwill, does brand value just move off the balance sheet, or am I just looking at this from the wrong angle?

Regards,

Kyle
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Author: TMFMoosie Big gold star, 5000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3847 of 3916
Subject: Re: A Question on Amortization Date: 11/10/2011 2:03 AM
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Under GAAP (generally accepted accounting principles), intangibles should be amortized over at least 5 years and not more than 40 years."

Goodwill is no longer amortized, but instead periodically reviewed, and impaired, if necessary. So goodwill needn't ever decline in certain situations like KO's brand.

http://en.wikipedia.org/wiki/Goodwill_(accounting) :

Goodwill is no longer amortized under U.S. GAAP (FAS 142)[5]. FAS 142 was issued in June 2001. Companies objected to the removal of the option to use pooling-of-interests, so amortization was removed by Financial Accounting Standards Board as a concession. As of 2005-01-01, it is also forbidden under International Financial Reporting Standards. Goodwill can now only be impaired under these GAAP standards.[6]

Instead of deducting the value of goodwill annually over a period of maximal 40 years, companies are now required to determine the fair value of the reporting units, using present value of future cash flow, and compare it to their carrying value (book value of assets plus goodwill minus liabilities.) If the fair value is less than carrying value (impaired), the goodwill value needs to be reduced so the fair value is equal to carrying value. The impairment loss is reported as a separate line item on the income statement, and new adjusted value of goodwill is reported in the balance sheet.[7]


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Author: RoyalScribe Two stars, 250 posts Ticker Guide CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3848 of 3916
Subject: Re: A Question on Amortization Date: 11/10/2011 9:43 AM
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Thanks Moosie, that makes a lot more sense. I guess that is what I get for using 10 year old information!

Regards,

Kyle

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Author: TMFMoosie Big gold star, 5000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3849 of 3916
Subject: Re: A Question on Amortization Date: 11/10/2011 1:19 PM
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Hi RS,

You're welcome. That wikipedia article was the top google hit for "goodwill amortization". Not saying you shouldn't have asked, just that there's a ton of good info out there. You might try investopedia.com, too, for definition of terms, and explanations.

But if you really want to sharpen up your (ten year old?) finance chops, put a couple of books on your Christmas list :)

Valuation -- Koller, et. al.

Investment Valuation -- Aswath Damodaran

The Koller book is the McKinsey Consulting classic, now in at least the fourth revision (I'm using the 4th).

If you're the curious type, these two books are interesting to use in tandem. They take very different approaches to the same topic. Both are "correct". I learned a LOT by trying to reconcile seeming contradictions between the two.

Even though both do both, Koller is a higher level, starting at 30,000 feet, and drilling down. Damodaran is the opposite.

I know, you just asked a simple question, and didn't plan to make it a career :) I'll leave you alone now.

Cheers,
-joe

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Author: RoyalScribe Two stars, 250 posts Ticker Guide CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3850 of 3916
Subject: Re: A Question on Amortization Date: 11/10/2011 1:48 PM
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Hey Joe,

Hehe, I am actually looking to make it a career :) It is not that I have 10 years experience in the field, I was simply using a series of posts here on TMF that were penned around 2000. I will definitely pick those books up and start working with them. I would be interested in any other resources you find helpful on this topic. Thanks again, and keep the good info rolling!

Regards,

Kyle

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Author: zoningfool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3851 of 3916
Subject: Re: A Question on Amortization Date: 11/10/2011 2:47 PM
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Another good site to use for accounting-related questions is: http://www.fasb.org

Just type your term into the search box (on right)--you should get the latest pronouncements on an issue.

For example, here is the direct link to the change in goodwill amortization policy--including a discussion of the background and reason for the change:

Summary of Statement No. 142

Opinion 17 presumed that goodwill and all other intangible assets were wasting assets (that is, finite lived), and thus the amounts assigned to them should be amortized in determining net income; Opinion 17 also mandated an arbitrary ceiling of 40 years for that amortization. This Statement does not presume that those assets are wasting assets. Instead, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without the constraint of an arbitrary ceiling.

Previous standards provided little guidance about how to determine and measure goodwill impairment; as a result, the accounting for goodwill impairments was not consistent and not comparable and yielded information of questionable usefulness. This Statement provides specific guidance for testing goodwill for impairment. Goodwill will be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. However, if certain criteria are met, the requirement to test goodwill for impairment annually can be satisfied without a remeasurement of the fair value of a reporting unit....

How the Changes in This Statement Improve Financial Reporting

The changes included in this Statement will improve financial reporting because the financial statements of entities that acquire goodwill and other intangible assets will better reflect the underlying economics of those assets. As a result, financial statement users will be better able to understand the investments made in those assets and the subsequent performance of those investments. The enhanced disclosures about goodwill and intangible assets subsequent to their acquisition also will provide users with a better understanding of the expectations about and changes in those assets over time, thereby improving their ability to assess future profitability and cash flows....


http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&...

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Author: TMFMoosie Big gold star, 5000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3852 of 3916
Subject: Re: A Question on Amortization Date: 11/10/2011 3:29 PM
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Hi Kyle,

For what it's worth, you might find these posts interesting. I wrote these as I was going through both books, building spreadsheet models. They might not seem like all that much, but for me, at the time, it was a mini-epiphany :) There's some stuff about goodwill in there, too.

Calculating ROIC part 1: Invested Capital
http://boards.fool.com/calculating-roic-part-1-invested-capi...

Calculating ROIC part 2: NOPLAT
http://boards.fool.com/calculating-roic-part-1-noplat-279663...

Best,
-joe

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