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And, what are the categories of economically meaningless amortization that are still required under GAAP?
I thought the crude interpretation of the new rule was that automatic goodwill
amortization from acquisitions was no longer required, merely writing down any impaired assets.
But clearly that's not nearly close enough to being right as a rule of thumb.
Half a billion bucks a year in economically meaningless hits is too much to ignore.



OK.
I've been reading up on this. Rather wishing I hadn't.
Here is my revised understanding. No doubt it still has several things wrong, but it's better than my *prior* understanding.
Essentially all of this comes from the changes introduced with FAS 142 under GAAP.

When company A buys company B for one beeeeeliion dollars, the price paid is divided into the following categories.

(1) Goodwill, the amount paid above fair market value.
(2) Identifiable intangible assets with a finite useful life, part of fair market value.
(3) Identifiable intangible assets with an indefinite life, part of fair market value.
(4) Net tangible assets, part of fair market value.

The key thing: FAS 142 removed the requirement to amortize the first category only.

However, things in the second category are still amortized.
Since they have a notionally finite useful life selected, their intangible asset values are amortized over that time period.
e.g., if an acquired firm has an identifiable, intangible, asset of
estimated finite life ten years, each year 1/10th of the value estimated
at purchase time would be lopped off pretax earnings as amortization charge.

The only reason that this amortization would not be economically meaningful is if
there were things proving to have useful lives materially longer than what was identified
at the time of accounting for the acquisition, which I gather is not uncommon.
From Mr Buffett's statements in the recent letter noting that only about 20% of
amortization charges in 2013 were economically meaningful, I presume
that Berkshire has rather a lot of assets proving to have useful lives
longer than "anticipated" when their purchase values were categorized.
Here are some typical things that get stuffed into category 2:
- Trade marks
- Customer lists
- Order backlogs
- Contracts with customers
- Artistic things that would have copyright
- Licensing/royalty agreements
- Other contractual rights: leases, drilling rights, franchise rights
So, to take an example, imagine an industrial firm was bought which had a five year order backlog.
The value of those identifiable but intangible and finite-life
contracts would be estimated at purchase time, and each of the next five
years one fifth of that deemed value would be taken as a hit to earnings of the acquirer.
However, as I understand it, this would happen with or without the firm
making new sales to keep the order backlog pipeline full.
Thus, the write-off would be economically meaningless if there is still a comparable backlog.

Items in categories (1) through (3) are subject to annual impairment tests.
They can be written down, hitting earnings, but never "written up".
Whether or not this happens turns out to be critically dependent on the
overall performance of the business unit to which they are allocated.
Dud goodwill stuffed into a profitable unit will likely never get the appropriate impairment done.
Probably not a big issue with Berkshire, but something to keep in mind.

Jim
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