Devotees of goodwill assets and impairments, rejoice! Calcbench and Valuation Research Corporation have just released a “fireside chat” to discuss the growth of corporate goodwill on the balance sheet, goodwill impairment, and techniques financial analysts can use to perform their own assessment of goodwill value.
You can see the video on YouTube, and we’ve embedded it below as well. The speakers are Pranav Ghai, CEO of Calcbench; and PJ Patel, co-CEO the Valuation Research Corporation. Their discussion was moderated by Matt Kelly, editor at Radical Compliance.
Understanding how companies decide on the value of a goodwill asset, and how to identify assets that might be overpriced and due for an impairment sometime in the future — that’s a critical part of financial analysis. We talk about those things extensively in the video.
Why is goodwill so important? For starters, it crops up in corporate mergers all the time. Goodwill is the value an acquiring company places on a target company, above that target’s book value. For example, say Company A has $100 million in inventory and another $50 million in intangible assets (business contracts, trademarks, and so forth), for a book value of $150 million. Company B then acquires Company A for $200 million.
That $50 million extra is goodwill. It might be ascribed to Company A’s reputation in the marketplace, or loyalty of employees, or other hard-to-define qualities that make Company A worth more than the sum of its parts.
As you’ll see in our video, goodwill is an increasingly large part of the corporate balance sheet. Total goodwill assets among the S&P 500 is more than $3 trillion. It rose 38 percent from 2014 to 2017.
On the other hand, goodwill can also be impaired, when a company decides the asset isn’t worth as much as originally thought. Impairments hit the income statement in the period they’re reported, leading to potentially large losses. They’re also embarrassing to the firms that announce them.
So Ghai and Patel review statistics about the growth in goodwill among the S&P 500; preliminary calculations valuation specialists use to assess what goodwill should be; how to find goodwill as part of an M&A deal (Calcbench tracks that stuff, you know); and warning signs that suggest impairment may be coming soon.
Let us know what you think, and if you have questions always feel free to email us at firstname.lastname@example.org. Enjoy!