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Hi friends-
Has anyone else become really curious about the huge amounts of goodwill and intangible assets that have been capitalized on balance sheets? Many many firms are carrying > 1.5x their equity in goodwill. I mean, look at Broadcom. Anyone that has been regularly buying up firms the last 10 years has ridiculous levels of goodwill at this point.
I understand why some industries carry huge amounts of intangible assets, that makes sense. Like any large biopharma or someone like Qualcomm with tons of ip. But still- 1.5x shareholder equity seems... fishy?
And yes- I am aware of the FASB and their push for straightline declining instead of the annual impairment check- also being pushed partially due to firms complaining about their current accounting costs.
SO- does anyone else think we are we going to be seeing huge writedowns? To me, it looks like a lot of these firms are potentially going to be forced to do so with the current supply and demand shocks. And if not now, it seems like the shoe will have to drop at some point
Buddy- nobody thinks that impairing assets is what leads to a contraction.
But I see what you are saying- it's all priced in with the changing fundamentals, so why worry. I am more curious about the moral hazard of the situation- the same thinking of the CFAI, which I responded with in the comment above.
I appreciate the counterargument- these are the kind of thoughts I was hoping to read.
Just a reminder from Wikipedia-
'The Financial Accounting Standards Board (FASB) is a private, non-profit organization standard-setting body[1] whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest.'
Thanks for the opinion though- I was hoping for some counterarguments
Write-downs are correlated to economic downturns- so if there was ever a time it was not priced in, I think we may be coming to one of those periods.
Check out the chart in this WSJ piece (no paywall)
The reason to slash away at financial statements- the FASB may again require amortization instead of the annual impairment check. This was mandated in the past, and a few years ago private firms were once again allowed to do so if they wish.
CFAI has commented...https://blogs.cfainstitute.org/marketintegrity/2020/02/04/the-push-to-revisit-goodwill-accounting/
They agree the system is rotten with moral hazard, but that amortization is a crude fix. If firms were all of a sudden required to do so- we would see hits to GAAP earnings. Of course they would still report operating earnings, so it is potentially all priced in?
That sure was not the case for AOL in 2002-2003 though...
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Exactly- this is my line of thinking too. Check out the link in my response above to see where CFAI comes down on it.