Let’s mash up the news: Crypto is crashing and goodwill is good for now
There is too much going on to keep up well but I thought I would grab these two topics and share my thoughts.
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Happy Father’s Day to all who celebrate!
Mine, who took the high road to Loch Lomond in 2017, was our hero:
He was also a joker. Here he is making all his grandchildren laugh.
I thought I would comment on some stories that were in the news this past week, topics I have written about before and where there has been a change or update.
Goodwill
So many stories, so much time wasted on this topic. Despite its key significance to so many balance sheets, it’s one of those issues, like fair value accounting, that’s a perennial political economy football.
Goodwill is the number on the balance sheet that represents the premium a company pays when it acquires another for more than the carrying or book value of the net assets acquired.
I wrote that definition in February of 2020. The Wall Street Journal had reported that members of the House Financial Services Committee and the outgoing-at-the-time Financial Accounting Standards Board Chairman Russ Golden were talking about goodwill in a hearing on January 15, 2020, more than two years ago:
“The Financial Accounting Standards Board, the accounting-rules maker, is weighing whether to continue to assess goodwill by tests -- or return to a similar approach to the guidelines of nearly 20 years ago, when companies wrote down a set portion of goodwill each year for up to 40 years.”
FASB Chair-at-the-time Russ Golden’s prepared testimony underplayed the fraught nature of the discussion that was going on. The WSJ reported, based on data from research firm Calcbench, that as of the end of September 2019, all U.S. public companies had more than $5.5 trillion worth of goodwill, an asset, on their books. (Russ Golden went through the revolving door after 16 years at FASB and, before that, 11 years at Deloitte. He’s now acting as an outside advisor to PwC.)
On June 15, Bloomberg’s Nicola White and Amanda Iacone reported that FASB had “suddenly” halted its four-year project to supposedly “overhaul” the accounting for the intangible asset called goodwill.
Maybe the decision seemed abrupt but consensus was easy because the writing has been on the wall for a while.
The Financial Accounting Standards Board voted unanimously to discontinue work on the plan.
“This is something that will need to get addressed but I’m not convinced right now that it has to be the top priority,” said board member Marsha Hunt.
The vote was an unusual reversal of what once seemed like an inevitable change to accounting for the tricky intangible asset.
There was no consensus, however, that this change at this time would accomplish the goal of better informing investors. A December 2021 report from the CFA Institute authored by Sandra Peters and based on a survey in November 2020 of its membership— members who are portfolio managers and analysts — said few wanted a change.
…58% of respondents support retaining impairment, with 38% saying that they want improved disclosures related to the initial recognition and subsequent measurement as first steps and 20% wanting improvement in impairment accounting. Only 31% thought bringing back amortization would be beneficial to investors.
And then, this past February, the SEC’s Acting Chief Accountant Paul Munter noted “the significant diversity in views expressed by investors and other stakeholders regarding the FASB’s Identifiable Intangible Assets and Subsequent Accounting for Goodwill project—particularly regarding whether goodwill should be amortized.”
When the news came out this week that the project was shelved, I tweeted:
The quote in that tweet is actually from the CFA Institute’s Sandra Peters in a comment letter to FASB on the subject.
When Warren Buffett says, “Who cares?” you have to wonder why anyone spends any time on the subject.
In 2003, Buffett told the annual shareholder meeting attendees:
[When goodwill was required to be amortized,] we ignored amortization of goodwill and told our owners to ignore it, even though it was in GAAP [Generally Accepted Accounting Principles]. We felt that it was arbitrary.
But Buffett doesn’t care about the debate between amortization of goodwill vs. impairment because he ignores impairment, too.
Berkshire first invested significantly in H.J. Heinz Holding Corporation in 2013 and now owns 26.7 % of Kraft Heinz, accounted for using the “equity” method because Berkshire is part of the control group.
“I was wrong in a couple of ways about Kraft Heinz,” Buffett told CNBC’s Becky Quick on Squawk Box at the time. “We overpaid for Kraft,” he said.
What Buffet did next tells you what he thinks of the goodwill impairment test. In its fourth quarter 2018 earnings release, Berkshire Hathaway recognized a $3 billion hit for its share of the Kraft Heinz $15 billion write-down of goodwill and intangible assets that reflected deteriorating brand value.
Kraft Heinz, where Berkshire Hathaway has a controlling interest, also reported a non-GAAP metric in its earnings release to add back the negative impact of its $15 billion loss. The company also adjusted out the nearly $27.6 billion net loss on its investment portfolio for just one quarter. But Buffett fought the SEC about actually writing down its investment in Kraft Heinz in the first quarter of 2019 to reflect the impairment of acquisition-related goodwill.
(Buffet hates to admit a loser.)
In a comment letter dated May 9, 2019 the SEC wrote that in reviewing the company’s 10-Q as of March 31, 2019, it noted:
…the carrying value of your equity method investment in Kraft Heinz exceeds its fair value by approximately $3.1 billion as of March 31, 2019. Please tell us how you considered the guidance in ASC 323-10-35-32 in determining that this loss in value of your investment was not other than temporary.
Berkshire responded that the standard, ASC 323-10-35-32, says:
A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. However, a decline in the quoted market price below the carrying amount or the existence of operating losses is not necessarily indicative of a loss in value that is other than temporary. (Emphasis added.)
Berkshire Hathaway has yet to adjust the carrying value of its investment in Kraft Heinz. (However, based on my reporting, the SEC did get Berkshire Hathaway to say more about its goodwill balances.)
What’s going on here?
Goodwill, the premium companies pay for acquisitions over the fair value of the net assets acquired, is propping up a lot of public company balance sheets. Now that the Fed’s support for the asset bubble is waning, maybe FASB did not want to be the one to finally stick a sharp fork in it? Berkshire Hathaway carries $51.08 billion in goodwill on its balance sheet, material to its financial position at 5.3% of total assets.
Nicola and Amanda pin the tail on this donkey:
Whittling down goodwill in tidy increments also would wipe out a sizable chunk of the assets the largest US companies hold on their balance sheets. Public companies have almost $4 trillion worth of goodwill on their balance sheets, FASB member Frederick Cannon said.
Crypto is crashing (A story in pictures and tweets.)