XLF, Banking and Financial Sector Stocks

Top 16. Oct 28, 1999 8:22 AM

» JenL_3 - booking goodwill

Rande - read your explanation above again:

the purchase acquisition method where the acquiring company treats the purchase as an investment and any premium paid over fair value is shown on the buyer's balance sheet as goodwill (which is typically amortized over a long period of time as a charge against earnings).

OK - Now I gottit - Thanks ...Jen

-- posted by JenL_3

Top 17. Oct 28, 1999 8:33 AM

» JS_Mill - goodwill

"Goodwill" is the difference between the net assets of a firm, and what the acquirer pays for it.

So, if I pay $100 for XYZ.com, which has net assets of $50, then in order to make the books balance (because I've paid out $100 cash), I have to add into my books the $50 of net assets, plus a "phantom item" of $50, which is tactfully called goodwill.

"Goodwill" is made up of the value of customer relationships, quality employees, brands, etc. Plus, a lot of good old fashioned overpayment dressed up as goodwill.

If I'm American, or a modern Brit I then begin to amortise the goodwill, treating it as an asset to be depreciated over ten to twenty years. If I'm a European, or an old-style Brit, I immediately write it off as a deduction to shareholders' equity. If I'm a bank, I effectively do both (amortise for the published accounts, write off for regulatory accounts).

jsm

-- posted by JS_Mill

Top 18. Oct 28, 1999 9:26 AM

» Kirk - Better?

JS, you state:

If I'm American, or a modern Brit I then begin to amortise the goodwill, treating it as an asset to be depreciated over ten to twenty years. If I'm a European, or an old-style Brit, I immediately write it off as a deduction to shareholders' equity. If I'm a bank, I effectively do both (amortise for the published accounts, write off for regulatory accounts).
jsm

Interesting JS. Which method do you think is better and for whom and why?

-- posted by Kirk

Top 19. Oct 28, 1999 9:42 AM

» JS_Mill - Oh, me and Rande have discussed this a couple o' times

I personally think that the only consistent thing to do is to write off goodwill to reserves, and to construct the accounts anew. Treating goodwill as an asset just sticks in my craw -- the "goodwill" of the acquirer in terms of customers, employees, etc, is not on the balance sheet, so why should the acquiree's be? And since a good chunk of "goodwill" is overpayment which isn't even in principle an asset, it gets even worse. Strike it out and forget about it, I say.

On the other hand, a lot of other intelligent analysts will say that the money spent on an acquisition was shareholders' money, and it didn't just disappear. So, something ought to exist to mark that. Added to that, the expansion of the equity base and charge to P&L makes managers who care about accounting earnings more reluctant to carry out acquisitions, which is considered a Good Thing.

There's points on both sides. Fundamentally, the problem is that, in a cost-based accounting model with double entry bookkeeping, there's no real way to account for it when someone chooses to pay more for an asset than its recorded as being "worth".

jsm

-- posted by JS_Mill

Top 20. Oct 28, 1999 9:52 AM

» DennisL - Got out of banks at the wrong time?

I hope my getting out of that bank sector fund I had been in for 13 years last spring wasn't a mistake. Man, are the bank stocks ever taking off like a rocket today!

-- posted by DennisL

Top 21. Oct 28, 1999 10:16 AM

» Thruhiker - Jen

Bottom line is that pooling may not be permitted to be used on acquisitions starting in 2001, which means that on mergers effective after 2000 goodwill must be booked and subsquently amortized (an additional annual expense). Accordingly, the theory is that any contemplated mergers will take place before 2001 so as to be able to use the preferential accounting treatment.

I like BTO, because IF merger activity is accelerated next year, the discount on this closed end fund should narrow, thus increasing your return.

-- posted by Thruhiker

Top 22. Oct 28, 1999 10:27 AM

» Thruhiker - Discount/Premium

One last comment on closed end funds for those who have never invested in one. Always check the discount/premium before investing. Info can be found in Barons and Mondays WSJ. Discount on BTO was 19% when I invested; last time I checked it was it the 15% range.

-- posted by Thruhiker