Back To The Future: FASB To Reverse Goodwill Accounting
— February 3, 2021
By Baruch Lev
Because in an interview with the Wall Street Journal (January 4, 2021), the Financial Accounting Standards Board (FASB) chair stated that goodwill accounting will be a priority for the U.S. standard-setting body in 2021. Accounting goodwill, to remind you, is the difference between the total price paid in a corporate acquisition and the fair (market) value of the assets acquired minus liabilities. Goodwill, therefore, reflects the total value of the unrecognized acquired assets — mostly intangible assets which are difficult to value separately, such as brands, big data, unique organizational capabilities (e.g., Amazon’s (AMZN) and Netflix’s (NFLX) recommendation algorithms), etc. In today’s economy, the acquired assets “buried” in goodwill are among the main value-creators of enterprises.
So, goodwill is an important asset! The problem is how to value goodwill on the balance sheet after acquisition. Since the value of an asset depends on the future cash flows (or cost savings) it generates, and since in an uncertain business environment, particularly as related to intangible assets, no one knows how to reliably estimate future cash flows. The exact value of goodwill, post-acquisition, is difficult to impossible to estimate.
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Baruch Lev is the Philip Bardes Professor of Accounting and Finance.