Back To The Future: FASB To Reverse Goodwill Accounting

Baruch Lev
By Baruch Lev
In April 2020, Tapestry, Inc. (TPR) (luxury goods) announced a goodwill write-off of $211 million related to its line of Stuart Weitzman (shoes). Investors’ reaction was swift and harsh, Tapestry’s stock price decreased by 12.7% on the announcement day. There was other news in Tapestry’s announcement that likely affected shareholders’ reaction, but the goodwill write-off was definitely a contributing factor. Studies examining investors’ reaction to goodwill write-offs report an average negative reaction of 3-5%. Why do I tell you this?

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.

Read the full Seeking Alpha article.

Baruch Lev is the Philip Bardes Professor of Accounting and Finance.