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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Mike Buckley who wrote (38779)2/1/2001 8:16:20 AM
From: Mike Buckley  Read Replies (3) of 54805
 
100cfm brought to my attention a really important ruling by FASB (Fair Accounting Standards Board) that changes the way a company's financial statements handle acquisitions of other companies. Beginning July 1, companies will no longer be required to amortize good will. (The non-accountant's definition of good will is the difference between the book value and the purchase price of the company.)

For those who are a little fuzzy on what "amortizing good will" is all about, it means that for years a company writes off a portion of the original value of the good will until eventually all of it has finally been written off. Writing off a portion of the good will reduces earnings in the income statement. Under the new ruling, companies won't be required to do that.

Instead, they'll have to show a separate line item on the balance sheet that identifies the current value of the good will. When something happens that affects the value of the good will, that line item will be lessened. All of that makes it possible for investors to see how much of an acquisition is attributed to the value of good will as opposed to the tangible assets that were acquired. And investors will be able to easily see the portion of a company's assets that is attributed to such an intangible item as good will. (A lot of companies already itemize good will on their balance sheets.)

Needless to say (but I will anyhow), this accounting change should be of immense interest to investors in the leading high-tech companies because most if not all of them acquire other companies on a regular basis. As an extreme example of a dramatic change in a company's financial statements, Gemstar will be able to report positive earnings instead of negative earnings due to this new ruling. Regardless, investors need to remember that the company hasn't changed even when the numbers on the bottom line improve as a result of this ruling; it's only the way of reporting the financial health of the company that has changed.

And by the way, if you tend to look at numbers conservatively, don't think the new ruling is an outlandish way of presenting a company's value. It was championed by none other than Warren Buffet.

--Mike Buckley
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