Cloudy, with a Chance of Write-Downs: Research Suggests That Many of Europe's Biggest Firms Have Yet to Report the Full Extent of Their Goodwill Impairment Charges on Acquisitions Made between 2005 and 2008. Marc Hayn Offers a Grim Forecast

Article excerpt

Although the global recession has affected almost all businesses, the impact and timing of the poor economic conditions have been different for each industry and company. Several sectors suffered a rapid decline in orders, revenues and profits owing to a drop in demand and an increase in bank interest rates. This was reflected by a downturn in the capital markets until early 2009, when they started to recover.

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Despite this and recent encouraging news about positive GDP growth forecasts in Europe and smaller than predicted increases in unemployment, the economy is not yet back on track. This might be one reason why the combined market capitalisation of companies in the Dow Jones Stoxx 600 index (which comprises only European firms) is still significantly below its 2007 peak.

Only 200 of the Stoxx 600 booked goodwill impairments in 2008. Comparing the adjusted amount for total booked goodwill impairments among companies on the index for that year ([euro]32bn) with the equivalent figures for 2007 ([euro]28bn) and 2006 ([euro]44bn), it seems that the booked goodwill impairments on the index for 2008 have not properly reflected the scale of the crisis. In the light of all the acquisitions made by members of the index between 2005 and 2008, which were worth a combined total of [euro]1.7trn, the relatively small amount of goodwill impairments already booked indicate the tremendous potential for write-downs for the fiscal year 2009.

Economic activity has improved since the first quarter of 2009, with positive indications for this year. The global economy has begun to stabilise, partly as a result of strong political intervention. But does this imply that the economic crisis has had hardly any impact on balance sheets and that, owing to the recovery of the capital markets, the goodwill impairment test is less crucial for this accounting season?

Under international financial reporting standards, goodwill is impaired when a company is not able to recover the book value of a group of assets through either their use or their sale. The higher of the two values counts for the impairment test, so the fair value less selling costs and the value in use are the two valuation concepts that have to be considered here. …