General Electric recently booked a $22 billion goodwill impairment charge, reducing the total goodwill for its power generation segment to zero1.  It was the largest writedown since ConocoPhillips’ $25 billion goodwill impairment in 20082, but it is dwarfed by the $45 billion charge that AOL TimeWarner booked in 20033.  Despite soaring corporate profits, the number of goodwill impairments in 2018 increased from the prior year4.

So what causes a goodwill impairment?

A goodwill impairment is the result of a bad investment.

With AOL TimeWarner, there was a failure to see that AOL had no long-term competitive advantage and that its stock price was therefore inflated5.  But before we go further, let’s summarize the basics of goodwill impairments:

  1. Goodwill is only recognized when a company acquires another firm by paying more than the fair value of the target firm’s net assets.
  2. If the fair value of the target firm ever falls below the carrying value of the target firm, you could have a goodwill impairment.

Take the company Oath, which is the combined company created after Verizon purchased Yahoo and AOL.  The fair value of Yahoo and AOL’s net assets was $4.5 billion at the time of the acquisitions, so Verizon recorded the remaining amount of the purchase price as goodwill6.  But Verizon soon learned that Oath simply couldn’t compete with Google and Facebook in the digital ad space7.

As a publicly-traded company, Verizon is required to test its goodwill for impairment annually.  Oath’s declining revenue8 suggested that Oath’s fair value was much lower than its carrying value (the $9 billion Verizon had paid), so Verizon wrote off all of its goodwill – taking a $4.5 billion hit to its earnings9.  In this case, the goodwill impairment could be traced back to a poor business decision:  Verizon should never have paid $9 billion for two internet companies that were on the decline.

But sometimes goodwill impairments are linked to broader economic shifts. 

DowDuPont booked a goodwill impairment related to its agricultural unit, after five straight years of unusually productive harvests reduced demand for pesticides and other agricultural products10.  ConocoPhillips took its goodwill impairment charge during the recession, amidst declining oil prices.

But in most cases, goodwill impairments are linked to an acquisition that simply didn’t work out.

  • Microsoft thought it could enter the smartphone space by buying Nokia, but it failed. End result:  $7.6 billion goodwill impairment12
  • H-P said it was fooled by phony accounting when it bought the company Autonomy. End result:  $8.8 billion goodwill impairment13
View Goodwill Impairment Video

References:

  1. Shumsky, T. (2018, October 30). GE’s $22 billion charge intensifies regulatory scrutiny. The Wall Street Journal. https://www.wsj.com/articles/ges-22-billion-charge-intensifies-regulatory-scrutiny-1540942603
  1. McCann, D. (2018, December 6). GE’s big goodwill impairment draws scrutiny. com. http://ww2.cfo.com/accounting-accounting-tax/2018/12/ges-big-goodwill-impairment-draws-scrutiny/
  1. Grant, C. (2018, December 11). Seems like old times at Verizon. The Wall Street Journal. https://www.wsj.com/articles/seems-like-old-times-at-verizon-11544550654
  1. Shumsky, T. (2018, December 20). Goodwill impairments continue to climb despite strong economy. The Wall Street Journal. https://www.wsj.com/articles/goodwill-impairments-continue-to-climb-despite-strong-economy-11545301801
  1. Byrnes, T. (2002, February 1). Sorting out the recent changes in ‘goodwill’ accounting rules. The Wall Street Journal. https://www.wsj.com/articles/SB1012482210846862520
  1. Krouse, S., & Maidenberg, M. (2018, December 12). Verizon takes $4.5 billion charge related to digital media business. The Wall Street Journal. https://www.wsj.com/articles/verizon-takes-4-6-billion-charge-related-to-digital-media-business-11544538587?mod=article_inline
  1. Krouse, S. (2018, September 7). Verizon’s internet boss Tim Armstrong in talks to leave. The Wall Street Journal. https://www.wsj.com/articles/verizons-internet-boss-in-talks-to-leave-1536321413?mod=article_inline
  1. Krouse, S. (2018, October 23). Verizon adds phone customers but Oath revenue weakens. The Wall Street Journal. https://www.wsj.com/articles/verizon-adds-phone-customers-but-oath-revenue-weakens-1540297875
  1. Krouse, S., & Maidenberg, M. (2018, December 12). Verizon takes $4.5 billion charge related to digital media business. The Wall Street Journal. https://www.wsj.com/articles/verizon-takes-4-6-billion-charge-related-to-digital-media-business-11544538587?mod=article_inline
  1. Maidenberg, M., & Bunge, J. (2018, October 18). DowDuPont to record $4.6 billion charge as agriculture unit suffers. The Wall Street Journal. https://www.wsj.com/articles/dowdupont-to-record-4-6-billion-charge-as-agriculture-unit-suffers-1539902403
  1. Gold, R. (2009, January 17). ConocoPhillips plans $34 billion in charges. The Wall Street Journal. https://www.wsj.com/articles/SB123214269740291587
  1. Gallagher, D. (2015, July 8). Microsoft’s busy signal. The Wall Street Journal. https://www.wsj.com/articles/microsofts-busy-signal-1436380853
  1. Worthen, B. (2012, November 20). H-P says it was duped, takes $8.8 billion charge. The Wall Street Journal. https://www.wsj.com/articles/SB10001424127887324352004578130712448913412

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