Corporate Law

• Delaware Cases Contain Surprises On Fee Advancement Bylaws

Securities Enforcement & Fraud

• Regulators Seek To Protect Retirees From Securities Fraud

Global Markets

• US, UK, And Australian Regulators Address Short-Selling Concerns

• Culture And Language Impediments To IFRS Universality

Securities Regulation & Disclosure

• Tips From The SEC On Using Corporate Websites For Disclosure

Financial Reporting, Taxation, & Accounting

• Changed Rule On Timing Of Deferred Compensation Now In Full Effect

• As Stocks Decline, Companies Bid Farewell To Goodwill

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On the chopping block. Welcome to the financial crisis: many companies whose depressed stocks sell below book value are writing off goodwill to improve their balance sheets and appease regulators and shareholders. Companies that have already put goodwill on the chopping block include travel website Orbitz, Morris Publishing Company, and Griffon Corp. By early December of 2008, reports S.L. Mintz, more than one in six S&P500 companies—including well-known names such as Alcoa, International Paper, and Motorola—had joined the ranks of issuers with market capitalizations below book value. The prospect of lower cashflow increases the probability that other companies with depressed shares will join them.

Pros and cons. In the past, issuers have written off goodwill for a variety of purposes, from allowing a new CEO to get a fresh start to compensating for losses. These days, it is a logical alternative for companies seeking to adjust book values downward. Unlike depreciable assets, goodwill can remain on balance sheets indefinitely and cause an earnings drag. In a tough business climate, managers may perceive it as expendable, but observers disagree about whether writing off goodwill in response to declining stock prices is a wise move. Most financial executives believe that declining share price alone does not provide sufficient reason for a writeoff, since stock prices may not necessarily reflect corporate fundamentals. At the same time, the author acknowledges, Wall Street often does not take that view, equating market value with fair value. Keeping investments on the books at cost, as Japanese companies did two decades ago, postpones the need to address overvalued assets and may slow down recovery.

Reaction varies. Financial professionals will no doubt have concerns about the effect writing off goodwill will have on the stock price. Investors may perceive it as a fair way to eliminate visible problems such as bad receivables or other baggage; but the action could also reveal previously unknown bad news. In either case, regular communications with the shareholders can help minimize the impact, the author advises. In down markets, when significant damage has already been done to share prices, investors barely notice goodwill writeoffs. According to one study, average goodwill writeoffs in the first half of 2008, when the stock market was buoyant, trimmed stock prices by 4% on the first full trading day. Some companies saw smaller drops, while others even experienced gains. A writeoff also allows a company to close the book on massive deals with no cash impact, as Sprint did last year when it wrote down $30 billion in goodwill from its acquisition of Nextel.

Consider other factors. The market's response is not the only concern. Companies considering a writeoff should also anticipate reaction by lenders, who may view the move as a sign of increased risk. Under some legal contracts, a goodwill writeoff is a violation of the asset-based covenants. Decisionmakers must also look at the potential tax consequences, cautions the author. Unless the transaction that produced goodwill was completed as a taxable purchase of target assets, it may not generate any tax benefit.

Abstracted from CFO, published by CFO Publishing Corp., 253 Summer Street, Boston MA 02210. To subscribe, call (800) 877-5416; or visit www.cfo.com.