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SFAS 142 & Increasing Goodwill in a Down Climate . . .

September 15th, 2009

            One of the aspects I enjoy about my profession is the continual evolvement of standards used for financial reporting. Usually, they are relatively straightforward and don’t take excessive work to understand the mechanics. In other instances, you find an approach taken by a company, on a standard you may have thought you were clear about, and you’re left scratching your head wondering what you missed. Take for instance the recent 10Q filing by Quiksilver, Inc. (ZQK). In the recent 10Q I noticed that their recorded level of goodwill had increased by $22.1 million, or 7.4% over the last 9-months. According to the company filing, “The increase was primarily related to the effect of changes in foreign currency exchange rates”.

            When I read this I was a bit puzzled as I had not previously seen reported figures where goodwill was adjusted due to a foreign exchange impact. Since I don’t profess to being the accounting oracle, I made a number of calls within both the accounting sector, as well as the private equity sector, which I thought the latter would have definitive insights on anything that would impact goodwill. Of those I spoke with, none were familiar with such a situation or precedent. While SFAS 142 has been straightforward, it was clear that I have some additional homework to do. I’m not calling foul on the reported figures, but it’s certainly an application of 142 I have not previously seen and am a bit intrigued.

            The other part about the filing that was interesting to me is that the company is increasing the recorded value of their goodwill in a period when most are restating. Further, Quiksilver has been divesting non-performing entities over the last year, which were the primary contributors in the increase of goodwill going back to 2004. In 2004 the company had a reported goodwill total of $169.8 million. This amount increased to $449.4 million in 2005 with the acquisition of DC Shoes, Rossignol, and Surfection. Of the $317 million increase, $244 million was attributed to Rossignol, which has now been sold. Interestingly, recorded goodwill is 89% higher now than prior to the volume of acquisitions the company undertook starting in 2004. However, it should be noted that goodwill was reduced between the 2006 and 2008 period by $215 million, from the high of $515.7 million. With that said, and with the current state of the Retail and Apparel sectors, I have to wonder if Quiksilver is a prime candidate for further write-downs in this area as the sector continues to struggle.

            Don’t have a conclusion on the topic at this point, but it’s certainly a reporting issue that creates a great topic of conversation and challenges what we know about the reporting standards in place. I definitely want to find other examples of companies that have increased their stated goodwill, or reduced, in the face of currency exchange. I’m also interested to really dig into the mechanics of the goodwill in this situation and get a better understanding of the application of SFAS 142. I’ve got my homework cut out for me…..

Thanks for reading . . . .

Jeffrey Ishmael

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