“Much of the loss was due to $3.3 billion in charges from writing down the value of goodwill and other intangible assets to reconcile its stock price to book value per share.” Why is this company doing that? Yes, when it does that, its book value per share would drop, but why is that necessary as per their reported justification?
It doesn’t make sense to me as written. What is the context?
This kind of scenario serves as a pretty effective test for goodwill impairment – I imagine the company continually had a market value substantially lower than its book value, while still holding on to significant amounts of goodwill and other intangibles. There is a pretty good snippet about this practice in the “Financial Reporting Quality” reading.
I think the journal that wrote this is mistaken. If Supervalu said that they are writing down intangible assets because the stock price is down then THAT is crazy. Supervalu may write down goodwill assets if future prospects for earnings/cashflow attributed to that goodwill are diminished… which may coincide with the stock being efficiently priced down. However, the company shouldn’t be using the stock price to tell it if the future prospects for the assets are better/worse. I think the journalist who wrote this is confused (at least I hope).
Journalist is not mistaken - this is what the company says in the press release. Here’s an article that touches on it a bit: http://www.cfo.com/article.cfm/12834583
During one of my MBA classes this past Fall I had a group project where I was able to talk regularly to the CFO of a company in the midst of bankruptcy. When announcing the bankruptcy they also announced a huge intangible asset writedown because of the same reason. The reason he gave us was that during the annual impairment review for goodwill, one of the ways they had to value it was through the market value approach. The company had about $70/share in book value but was trading in the teens for much of the year. Because of that they were forced to write down book value to be more in line with market value.
Looks like Gannett had to do the same thing: http://cincinnati.bizjournals.com/cincinnati/stories/2008/06/09/daily11.html YRC is facing the same thing: http://cincinnati.bizjournals.com/kansascity/stories/2008/10/06/daily20.html?q=%20stock%20price%20%20impairment%20%20write%20down Scripps: http://www.alleyinsider.com/2008/7/scripps-write-down-possible-on-hobbled-newspaper-business-in-q3 Oh well, I guess the firms at least get to report higher ROA numbers going forward. 
That is just pure silliness then. I wonder if it’s more of an accounting thing or a discretionary thing on the part of management (to make their performance based bonus going forward look better). I guess that’s also the reason analysts have to work so hard to adjust balance sheet values and also why intangibles get discounted so much.
No it’s not silly or discretionary – GAAP requires the write down if impairment is detected. (Testing must occur at least annually, or when certain events occur; events can include “adverse change in the business climate or market, introduction of new competition, action by regulators”.) My ROA comment was a half-joking attempt to find a silver lining. I’ve not seen this happen before, but with current equity risk aversion probably more firms will be subject to this (unless the markets turn around in a hurry). Of course most firms’ MV is greater than their equity BV. These impairments are probably hurting asset-intensive, cyclical businesses because they would have less cushion (between MV and BV of equity).
I understand accountants have to write down intangibles but it is crazy if the accountants just look at the share price and say, “the market thinks the future looks grim so let’s write it down!” Like I said, it’s the reason most people just toss the whole intangible line out when adjusting balance sheets.
From the article referred to by i_suck: “In accounting terms, if the stock price stays below carrying value for 60 days it generally means a triggering event. “We are in that kind of situation now, in which many companies are experiencing depressed pricing for longer than 60 days, and not seeing much volatility on the upside,” says the Duff & Phelps executive.” Like KJH, I was surprised by the stated cause in the original artcile that “writing down the value of goodwill and other intangible assets to reconcile its stock price to book value per share.” That’s not correct. The low stock price is only a “trigger” to investigate the status of goodwill and other intangibles. The company could check for impairment any time, even of the stock price was soaring. But the critical point here is that the same reasons which caused the stock price to go down, may have indeed caused goodwill and other intangibles to go down in price, which rightly calls for writing them down. So, the company is not really reconciling its stock price to its book value, rather the low stock price triggered the company to do an impairment test and to correct the value of its assets. A cause and effect type of confusion by the reporter. This will help improve ROA and ROE in the future.
The reporter is not confused. This is directly from the company’s press release: “The impairment charges were related to the write-down of goodwill and other intangible assets required by Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets”, which required the company to reconcile the stock price to book value per share.” http://investor.supervalu.com/phoenix.zhtml?c=93272&p=irol-newsArticle&ID=1241276&highlight= So if the statement is incorrect, it is the company that is confused. Sorry, somebody has to defend the reporter.
That is weird because stock price is non of the accountants’ business.
I think you can compare it to mark to market accounting. The market is valuing the intangible assets at less than book value so the intangible assets need to be written down.
… just one more reason to question accounting values.