have received several inquiries recently about the new accounting rule
mandated by the Financial Accounting Standard Board (FASB) and what
effect, if any, it will have on analysis of the financial statements
provided by customers in order to obtain credit. The new accounting
rule is Financial Accounting Standard 142 (FAS 142), Goodwill and
Other Intangible Assets.
is no doubt that the rule change will have an effect on financial
statements as companies adopt the rule. In fact, several organizations
such as Raytheon and AOL Time Warner have already reported quarterly
losses, where they would have reported profits, based on one-time
adjustments to their intangible assets in accordance with FAS 142.
142 addresses financial accounting for and the reporting of acquired
goodwill and other intangible assets such as copyrights and patents,
etc. Under the new rule those intangible assets that have indefinite
useful lives will no longer be amortized over theoretical useful life
(previously up to forty years). Instead, they will be tested annually
for to determine if the previous assigned value is still justified. If
the value of the intangible asset is no longer justified then the
asset is to be written down to its fair value. FAS 142 provides
guidance for testing the intangible asset to determine its fair value.
word intangible is defined as “incapable of being appraised at an
actual or an approximate value.” When reviewing the balance sheet
the savvy credit analyst will deduct intangible assets from total
assets and the corresponding amount from net worth in order to
determine a better representation of the equity section of the balance
sheet. This also provides a more accurate result when calculating the
overtrading and debt to equity ratios. The write down of the
intangible to a “fair value” will have an effect on the equity
section when retained earnings are carried over from the income
statement to the balance sheet. Therefore, the credit analyst will
need to pay particular attention to any reduction in earnings from
previous statements to determine if the reduction is due to changes in
operations or complying with FAS 142.
142 should not have any effect on balance sheet analysis unless, of
course, the analyst is including intangible assets in their analysis.
wish you well.
information is provided as information only and not legal advice. Legal
advice should be obtained from a competent, licensed attorney, in good
standing with the state bar association.