What Happens When A Company’s Goodwill Goes To Zero?

 Michael D. Moberly    January 10, 2012

Goodwill represents an (intangible) bond between a company, its products and/or services, and its employees, clients, customers, investors, suppliers, distributors, and shareholders, in other words, stakeholders.  

Goodwill also represents a substantial underlying factor to a company’s profitability and sustainability?  After all, it’s an economic fact that 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability lie in – evolve directly from intangible assets, one of which is goodwill which accounting principles recognize on balance sheets and financial statements.

Of late though, there is evidence that, with more frequency, companies are opting to play, what I refer to as the goodwill (impairment charge) write-off card in which other intangible assets are not distinguished as standalones rather merely lumped together, for accounting purposes as goodwill

 Putting aside for the moment, the accountancy and tax upsides relative to goodwill impairment charges, my question is; won’t there be some adverse consequences and/or reactions occurring from stakeholders at some point, as companies consistently opt to write-off large portions of their goodwill, or when their goodwill goes, figuratively speaking, to zero?

Are stakeholders oblivious to this, or have their reactions been neutralized and/or offset in some manner?  Or, perhaps more importantly, do stakeholders care? 

Quite understandably, if you are a stockholder in a company whose stock price plummets which the company in turn attributes (whole or in part) to diminished (impaired) goodwill and opts to write-off it off, there will eventually be consequences occurring at some point..  One of which is  a shareholder now holds less value in the company today than they did yesterday.

(This post was inspired and modified by Michael D. Moberly from a CFO.com article titled ‘Goodwill Hunting’.)

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