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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