Saturday, February 23, 2013

Impairment of Goodwill

Corporations are strange things, these transhuman pseudo-entities that govern our economic life.  And as strange as they are, corporate accounting is even more peculiar.

This morning, I was reading through my newspaper, something I still do because I'm old school.  It's tactile and satisfying, and I'll encounter things that I wouldn't seek if I was just chasing after the things that interest me.

The article that struck me was a meta-article, as the Washington Post reported on the Washington Post's income over the last year.  It wasn't pretty, as the balance sheets reflected a loss of over $45 million.

What was odd, though, was the the source of the loss.  It was a $100 million accounting write-off, reflecting the financial impact of what was being called "impairment of goodwill." Otherwise?  Things weren't so terrible.  To which I said, huh?  "Impairment of Goodwill?"  I'd never heard that phrase, but I know what those words mean.  That couldn't possibly mean what it appears to mean.   You're monetizing how much people like you?

I looked it up.  From investopedia, the definition is given thusly:
Goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset like buildings or equipment.  Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.
So if you screw up, or your brand name takes a hit, you can announce to the world that you've taken a huge loss for the year, even if you've actually and materially turned a profit.  That helps reduce your tax liability, limit how much you might pay out in dividends, and all other sorts of other fun things.

Imagine for a moment if we mortals were allowed to do this.  The belovedspear brand, for instance, is relatively weak.  Should I be able to claim a significant loss, and reduce my tax burden?  If I succumb to a norovirus right smack in the middle of a worship service, and my reputation is damaged, shouldn't that be reflected somewhere on my 1040 this year?

No such luck.

I guess reality is different if you're a corporation.  I will say, though, that learning this did impair my goodwill towards corporate America and generally accepted accounting practices.  I'm sure they'll find some way to monetize that.

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