"Impairment charge" is the term for writing off worthless goodwill.
These charges started making headlines in 2002 as companies adopted new accounting rules and disclosed huge goodwill write-offs.
Impairment charges will get more attention as the weak economy and faltering stock market force more goodwill charge-offs and increase concerns about corporate balance sheets.
Accounting regulations that require companies to mark their goodwill to market will be a painful way to resolve the mis-allocation of assets that occurred during the exuberant business period. In several ways, it will help investors by providing more relevant financial information, but it also gives companies a way to manipulate reality and postpone the inevitable. If the economy and stock markets remain weak, many companies could face loan defaults.
Individuals need to be aware of these risks and factor them into their investing decision-making process. There are no easy ways to evaluate impairment risk, but there are a few generalizations that should serve as red flags indicating which companies are at risk:
1. Company made large acquisitions.
2. Company has high (greater than 70%) leverage ratios and negative operating cash flows.
3. Company's stock price has declined significantly.
These charges started making headlines in 2002 as companies adopted new accounting rules and disclosed huge goodwill write-offs.
Impairment charges will get more attention as the weak economy and faltering stock market force more goodwill charge-offs and increase concerns about corporate balance sheets.
Accounting regulations that require companies to mark their goodwill to market will be a painful way to resolve the mis-allocation of assets that occurred during the exuberant business period. In several ways, it will help investors by providing more relevant financial information, but it also gives companies a way to manipulate reality and postpone the inevitable. If the economy and stock markets remain weak, many companies could face loan defaults.
Individuals need to be aware of these risks and factor them into their investing decision-making process. There are no easy ways to evaluate impairment risk, but there are a few generalizations that should serve as red flags indicating which companies are at risk:
1. Company made large acquisitions.
2. Company has high (greater than 70%) leverage ratios and negative operating cash flows.
3. Company's stock price has declined significantly.
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