MARKET CAP 1

GOODWILL, SHAREHOLDER EQUITY AND MARKET CAPITALIZATION.

 

SIGNIFICANT STOCK-MARKET VOLATILITY AND A HAZY ECONOMIC OUTLOOK HAVE LEFT MANY STOCKS BADLY BATTERED, THREATENING SOME OF THE BILLIONS OF DOLLARS OF GOODWILL ON CORPORATE BALANCE SHEETS. HALF OF THE 51 COMPANIES IN THE S&P 500 WHOSE SHAREHOLDER EQUITY EXCEEDS THEIR MARKET CAPITALIZATION BELONG TO THE FINANCIAL SECTOR AND CARRY MORE THAN $ 300 BILLION OF GOODWILL.

GOOD WILL IS AN INTANGIBLE ASSET THAT REPRESENTS THE AMOUNT A COMPANY PAID FOR AN ACQUISITION IN EXCESS OF THE IDENTIFIABLE ASSETS IT GAINED.

ACCOUNTING RULES SAY GOODWILL MUST BE TESTED AT LEAST ONCE A YEAR, WHICH TYPICALLY HAPPENS AT YEAR END. THE PROCESS INVOLVES COMPARING THE FAIR VALUE OF COMPANY ASSETS WITH THE CARRYING VALUE OF THE GOODWILL.

GOODWILL WRITE-DOWNS ARE NON-CASH, ONE-TIME CHARGES, BUT THEY CUT PROFIT AND OFTEN SHOW COMPANIES OVERPAID FOR PAST DEALS.

TOTAL EQUITY THAT EXCEEDS MARKET CAPITALIZATION CAN INDICATE LOOMING GOODWILL IMPAIRMENT.

SOURCE : WSJ, November 16, 2011.

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