This article is from USA Today 4/5/2002. It does a good job explaining the new accounting rule that the corporations have to start using this quarter.
Buying binge could cost Corporate America $1T
By Thor Valdmanis, USA TODAY
NEW YORK � As if investors needed more bad news, the greatest corporate confession of all time is about to begin.
Dozens of once-hyper-acquisitive companies are expected to admit publicly in coming days that they gambled and lost billions on big deals executed at the height of the bull market.
The final price tag could exceed $1 trillion.
"We are going to get confirmation that hundreds of billions of dollars in shareholder capital has been wasted or destroyed," says David Tice, manager of the Prudent Bear fund, which makes bets that certain stocks will fall.
"Wall Street will say don't worry about it, but shareholders should think again."
Most of the pain is expected to be unveiled with first-quarter earnings as companies are forced to take massive charges under new accounting for goodwill, the premium a buyer pays to acquire a target's assets.
Under the rules, companies are required to write down their goodwill immediately to reflect any permanent declines in value.
Under the old rules, they could write down goodwill gradually, over as many as 40 years.
Already, entertainment titan AOL Time Warner has said it would take a record $54 billion goodwill write-down as a reflection of "overall market declines" since its merger was announced two years ago.
Other major media companies have announced they will follow suit, including Clear Channel, with a $15 billion to $25 billion write-down, and Vivendi Universal, with a $12.3 billion to $13.2 billion write-down.
Struggling telecommunications companies have also warned shareholders about coming massive goodwill write-downs, including Qwest, with $20 billion to $30 billion, and WorldCom, $15 billion to $20 billion.
Some analysts estimate that before it's over, Corporate America could see more than $1 trillion in net worth evaporate. That could have a further chilling effect on a stock market and investors that badly need cheering up.
While companies and Wall Street analysts generally stress that goodwill write-downs are one-time, non-cash charges that have no impact on underlying operations or cash flow, many accounting experts argue they are significant � an admission that the investments companies once made are no longer worth as much. Moreover, a company with atrophied assets and a ballooning debt-to-asset ratio may find it harder to borrow.
Believing their own growth stories and enjoying high stock valuations that gave them pricey stock to swap for acquisitions, many companies engaged in an orgy of dealmaking.
Many of the prices paid now look excessive.
"The serial acquisitions many companies made are not going to generate the revenues they anticipated. That suggests management made some bad deals," says Lehman Bros. accounting expert Robert Willens.
I believe that Intuit is exposed. Let's assume that Bennett paid a "fair price" for Intuit's small-fry acquisitions. The "fair price" was prior to the time that the bubble burst. By today's standards, that "fair price" was overpaid. The accounting standard has changed for reporting goodwill. You can no longer write good will off over a 40 year period, ergo a writeoff is coming. How much remains to be seen. Only time will tell.
My earlier note writing, of the change in the accounting standard (FASB 142) was just to let my friends, on this board, know that there is a risk to the bottom line. How deep is the cut? Don't know.