Impairment of Goodwill

Guys, IF a company impairs goodwill on the income statement, I would assume that the goodwill on the balance sheet should go down by the same amount. However, I was looking at Ebay’s current report where they impaired the goodwill by approx 1.93 billion on the income statement but the Goodwill does not seem to have gone down by the same amount on the balance sheet. Comments ?? Thanks.

good will could have increased as well… if certain things occured. good will is the residual of all other intangible assets that the currently has on the books. maybe ebay’s other intangible assets’ fair market value rose to compensate for some of the 1.93bn write down … the fmv rise can also occur if the company did an acquisition of some sorts and acquired new goodwill in the process.

I don’t think you can take a goodwill “gain”- only an impairment is allowed. My guess would be that they acquired new assets to compensate for goodwill loss.

i’m assuming you looked in the notes? sometimes you can see a reconciliation of sorts there. i other words they might show you all adjustments to the previous balance.

^ | thats my understanding as well. impairment tests are done annually, but under no circumstances are firms allowed to increase the value of the goodwill already on the books. different intangible assets (ie. patents) can increase in value, but these would be categorized seperately from goodwill on a BS.

^ I agree with that. You can’t adjust your goodwill upwards. They didn’t spend anything like a billion dollars on acquisitions to say nothing of spending enough to buy a billion dollars worth of goodwill. Edit: We need to dial 1-800-SUPERI (guess we need another digit there).

Well maybe they adjusted the purchase price downwards to reflect some unattainable contingent form of payment such as an earnout based on skype’s future performance. If there was some sort of earn out based on skype’s future performance, which they probably couldn’t reach, then the purchase price could be adjusted downwards, and goodwill could susbsequently be reduced. In that case, the impairment charge, would be reduced as well. But you’ll have to scour the DEFM for any earn-out arrangements.

That’s interesting… There was a significant earnout on Skype and eBay only paid 1/3 of it (edit: 530M instead of max 1.7B). Goodwill accounting with earnouts is significantly beyond my FSA expertise. How does that work?

Earnouts are instruments used to get the buy (mainly strategic buyers) and sell side to some form of compromise during deal negotiations. The buy side believes it’s offer is fair and infact too high, and the sell-side believes its future value based on expectations is much higher, and not reflected in the purchase price. To arrive at a compromise, earnouts are typically structured to make a bulk payment to the selling shareholders if the acquired subject is able to hit some financial target for example: 1. Reaching a product development milestone. 2. Received FDA approval for some drug. 3. Reached a certain milestone in market share, lower margins, etc, etc. The bankers then model the expected cash flows to fit the performance target at various points and the earnout pay out is calculated at each stage. E.g If you are able to reach 1 million subscribers I’ll pay an additional extra… 1M users -> $500M 2M users -> $1000M 3M users -> $1500M … and so on. The earn-out typically has a maximum payment, and gives the target a finite period to reach the performance target, usually between 1-3 years. In the mean time the contingent payment is kept in an escrow account, ready to be payed out if goals are reached. Otherwise, the buyer keeps the money. The form of payment can also come in form of warrant options, cash, stock, or even debt securities. On the accounting side, the total purchase price including the contingent payment is reflected on the B/S after closing. If performance targets aren’t reached, the purchase price is revised downwards, and the goodwill is adjusted, without a hit on earnings, since the contingent cash, debt, or stock payment is returned to the buyer. Contingent payments are kept in an escrow while goals are reached. Earnouts are a necessary gamble in closing deals especially when negotiations are very heated.

Great - Very nice description, wessun. That makes it tie out more or less. The missing billion dollars of goodwill is the difference between the earnout they actually paid Skype (530M) vs the maximum possible earnout (1.7B).

I always get freaked out when I see those asian companies with negative goodwill.