Posts Tagged ‘SFAS 142’

Goodwill Considerations & Foreign Entities.

September 16th, 2009 Comments off

            Yesterday’s blog post was one that turned out to be a great example of the value of the network I’ve been able to build up, and tap into, when it comes to subjects or situations that are outside of my experience or knowledge range. Yesterday I wrote about the recent 10Q filing for Quiksilver and the fact that they had reported an increase in their stated goodwill value as a result of favorable foreign currency exchange rates. After pulling a Sherlock Holmes and making some calls to accountants and private equity contacts, I was still coming up short. Leave it to Twitter! One of my contacts in Twitter, a CPA up in the Santa Rosa area, researched the subject a bit more and came up with the necessary guidance.

            In addition to SFAS 142, which covers Goodwill & Other Intangible Assets, Joe pointed me in the direction of SFAS 52, which covers the element of Foreign Currency Translation. While I’m familiar with both of these standards, the combination of the two, and a resulting change in goodwill, which was not associated with an acquisition, divestiture, amortization, or general write-down (as we’ve recently seen), was certainly an approach I had not encountered. I should also clarify that while it is certainly common to see companies reporting the foreign currency impact on their operations, particularly within the income statement and management discussion, the application of this standard to the valuation of goodwill was one I had not previously seen.

            While I have always viewed goodwill as a relatively static number, it’s not until you get into paragraph 101 of SFAS 52 that it provides any specific guidance for this area. Keep in mind that SFAS 52 is 54-pages of guidance, but the section on goodwill is a mere 5 sentences. Regardless, in paragraph 101, FASB states “Likewise, after a business combination accounted for by the purchase method, the amount allocated at the date of acquisition to the assets acquitted and the liabilities assumed (including goodwill) should be translated in conformity with the requirements of this statement”. Given that, it would seem that guidance would call for calculating the adjusted value, based on exchange rates, of the goodwill for a foreign subsidiary, well after the actual business combination.

            I’m always pretty intrigued when I find a topic that is so open to interpretation, and one that can have a material effect on income statement or balance sheet accounts. In this case, the adjustment resulted in a 7% increase in reported goodwill. What will be interesting to see is if the same downward adjustments are reflected in future reporting if the exchange rate becomes unfavorable. Thanks again to my Twitter contact up in Santa Rosa!

Thanks for reading . . . .

Jeffrey Ishmael

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

September 15th, 2009 Comments off

            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