What is goodwill impairment?

1. What is goodwill?

Goodwill, the full English name is Goodwill. The literal meaning in English is a good reputation that can bring favor to others. The Chinese translation of "goodwill" in "goodwill" means that the first thing that comes to mind is reputation and credibility. Reputation refers to the capitalized value that has brought excess profits to business operations in the past time period. 2. Where does goodwill come from?

Generally speaking, the goodwill of listed companies is generated from the merger or merger of other companies, which is also called consolidated goodwill. In other words, if there is no merger, there will be no goodwill. The calculation of goodwill The method is the investment cost used in the merger and acquisition minus the net assets of the acquired company. 3. How is goodwill calculated?

Goodwill = investment cost - net assets

For a simple example, listed company A spent 300 million to acquire company B with net assets of 100 million in 2018. , the resulting combined goodwill is: 3-1=200 million. In other words, the visible net assets of the acquired company B are 100 million, and the invisible goodwill is 200 million, which is considered goodwill. Capitalization. 4. Why is goodwill impairment so explosive?

Let’s continue to take listed company A as an example. The consolidated goodwill is due to the investment expenditure of the acquisition, which itself is an integral part of the expenditure. When listed company A makes provision for goodwill, it will affect the listing. The company's net profit.

To understand simply, the net profit minus the "goodwill expense" is the part. When the net profit value of listed company A is greater than the goodwill, even if the goodwill is impaired, it will still be profitable; vice versa; , when the net profit value is less than the goodwill, the net profit of listed company A will change from profit to loss, resulting in the so-called "explosion of goodwill impairment".

For example, the net profit of listed company A in 2018 is 500 million, and the acquisition of company B generates 200 million goodwill. After all goodwill is accrued, the net profit is 5-2 = 300 million. The net profit is has declined, but it will not turn from profit to loss; if the net profit of listed company A in 2018 is 100 million, then 1-2=-100 million, that is to say, after accruing 200 million goodwill, the net profit becomes The loss was 100 million, and the change from profit to loss was shocking. Of course, the provision for goodwill was less, 50 million. The net profit of listed company A in 2018 was 1-0.5 = 50 million, and it was still profitable.

In other words, the extent of goodwill accrual is a factor that affects whether it is profitable after goodwill accrual. Having said that, if a listed company has a huge amount of goodwill, there will always be hidden worries. Therefore, for investors, Said that listed companies with huge goodwill should still be avoided. 5. Where can I check the goodwill of listed companies?

Of course, in fact, there are different ways to calculate goodwill, and it is more complicated. For ordinary investors, just check the value of goodwill in the financial statements of listed companies. The goodwill of a listed company can be seen in the balance sheet of the financial statements of the listed company. A listed company with a reasonable level of goodwill has a safety margin for investment. On the contrary, a goodwill level that is not within the safe range has a potential risk of being stepped on. . Before we understand the reduction of goodwill, we first need to understand what goodwill is.

Goodwill is actually a by-product of the mergers and acquisitions of listed companies. For example, if A is a listed company and acquires a startup company B, B has net assets of 200 million, but A spent 500 million to acquire it, so the extra 300 million yuan spent is goodwill. Goodwill reflects the brand value of the acquired company. After understanding goodwill, it is actually easy to understand the meaning of goodwill reduction

If the market environment is not good and the economy is sluggish, the acquired company may slow down its performance growth or even lose money. In terms of finance, This requires impairment of goodwill. For example, 300 million may be reduced to only 200 million after impairment. Then in finance, it is a key point in adjusting profits - in order to avoid losses, impairment provisions are not made when it is time to make provision. If you can't handle it, you suddenly make a one-time provision for impairment in a certain performance report. value reserves, resulting in huge losses for listed companies. Goodwill Black Swan appeared last year, Jian Rui Wo Neng, Dragon Power Creatures and Youjiu Game are all very clear examples!

According to the goodwill impairment warning risk released not long ago, as of the third quarter report of 2018, the goodwill of A-share listed companies reached 1.4484 billion yuan.

Therefore, we need to be very careful about companies that have reduced their goodwill holdings. Once the bear market goes into a deeper decline, business reductions will be like a negative. If the stock you hold not only has goodwill reduction but is also at a high stock price, it must be a huge risk! !

No mergers and acquisitions, no goodwill.

Give me an example!

1. Suppose my company is a listed company, and I am now interested in an Internet company that makes mobile phones and pets, so I go to acquire it. To put it bluntly, I am buying this company. The company bought it.

2. When I opened the balance sheet of this company, I saw that the net assets were very small. The system only consisted of a few desks and computers. The total of the miscellaneous items amounted to less than 100,000 quick dollars. Find an agency to evaluate it. Yes, the fair value is 100,000 yuan.

3. But can I buy this company for only 100,000 yuan? It's impossible. They won't sell it to me. If I only offer 100,000 yuan, they will send me to the office furniture store. The value of this company is not based on net assets, which means that the balance sheet does not reflect the full value of the company. This company also has technology, team, sales network, game users, etc. This is what I want, and these things will ultimately reflect future sales profits.

4. Finally, after we negotiated, I offered 100 million to buy the company. Then the direct difference between this 100 million yuan and the company's fair value of 100,000 yuan is goodwill - 99.9 million yuan.

5. Why should I pay such a high price? Because I think this company can give me an annual profit of 10 million yuan in the future. However, after the three-year performance commitment period, this company can only make a profit of 5 million yuan. Once the goodwill impairment test is performed, my goodwill will have to make an impairment provision of 50 million yuan.

6. But I was lucky enough to catch up with the Internet craze! Suddenly the direct Internet project became popular! ! So I packaged the company and sold it, portraying it as a future unicorn. Sure enough, it was robbed by several listed companies. The last company offered 1 billion to buy the Internet company. Goodwill was $999.9 million. As a result, after the three-year performance commitment period passed, it could still only achieve an annual profit of 5 million yuan, so the goodwill was devalued by 940 million yuan.

Goodwill, many people think of it as "business reputation", which is a bit meaningless. It is mistakenly believed that some well-known large companies have high reputation, but in fact it is quite the opposite. What is goodwill?

Goodwill, remember one sentence: no mergers and acquisitions, no goodwill. Goodwill is the excess value given to one business when it merges with another. For example, when Company A merges with Company B, Company B's net assets at that time were only 100 million, but Company A believed that Company B was very valuable and would bring high profits to itself after the merger, so it spent 1 billion to acquire Company B. Mergers and acquisitions are coming. Among them, the excess of 900 million is goodwill. This goodwill of 900 million was actually paid to the shareholders of Company B when Company A purchased Company B. Therefore, in A's financial report, there will be a goodwill record of 900 million. What is goodwill impairment?

It’s just that the 900 million that A spent in excess cannot be recovered. It turns out that when A merged with B, it was estimated that B would make an annual profit of 300 million, and the goodwill of 900 million would be recovered in three years. But after the merger and acquisition, it only made a profit of 1 million in the first year, and even lost money in the second year! Then we must make an impairment provision for the 90 million goodwill, because the extra money paid was wasted and given to the shareholders of Company B. Therefore, at the end of the year, all 900 million will be recorded as impairment at one time, which is equivalent to the loss of 900 million.

Some time ago, didn’t some celebrities set up almost empty shell companies, and then a listed company acquired the company at a high price, and finally made a provision for “goodwill impairment”? It is best to avoid any company with a high reputation.

To put it simply, the impairment of goodwill means that the value of the enterprise acquired at a high price has shrunk in the overall operation, so there is an impairment of goodwill. Maybe it's not easy to understand. For example, it may be better to understand. If you go to the market to buy a piece of clothing, how much will it cost? It's 5,000 yuan. It can be understood that the current market price of this dress is 5,000 yuan, and anyone who comes to buy it will pay 5,000 yuan.

But when I went to the wholesale market, I saw that the exact same clothes were from the same brand. The wholesale price was 3,000 yuan, and the price in the entire wholesale market was 3,000 yuan. There is an intermediate price difference, how to calculate it? Even as goodwill.

What if you want to understand the goodwill of a listed company? If a listed company acquires a company with a market valuation of 1 billion yuan, but the registered capital, fixed assets, and actual assets only reach 100 million yuan, then there will be a goodwill of 900 million yuan. In other words, the acquisition is based on market valuation, not the actual value of fixed assets, and the difference is treated as goodwill by the listed company's finance.

Now that we understand goodwill, how do we understand goodwill impairment?

To understand the impairment of goodwill, you need to understand that the listed companies acquired by listed companies may not necessarily be able to make money. There may also be losses and a decline in valuation. If the valuation declines, then for goodwill That's a huge impact. For example, if the valuation of a company acquired by a listed company decreased by 1 billion in 2018, what is the goodwill impairment of the listed company? That’s 1 billion. Because there are major changes in valuation, operation, etc., goodwill will also change every year and every quarter. Under such changes, there will be impairment of goodwill. In the case of substantial goodwill impairment, there is also a stock price risk, which involves the overall valuation of the listed company. For listed companies with high goodwill impairment expectations, avoid them during the annual reporting period.

If after the acquisition is completed, Company B's operations fail to meet the profit forecast at the time of the acquisition, goodwill impairment will occur. If performance growth slows down or even results in losses, goodwill impairment will also be required financially. For example: after the acquisition is completed, Company B promises to achieve a performance of 500 million, but the actual income is only 300 million, which means that the value of the acquisition is not completed, then the remaining 200 million will be It must be deducted from the goodwill of 500 million, which is the so-called impairment of goodwill. In addition, if Company B's future operations fail to meet the indicator requirements for assessing the value of the asset group at the time of acquisition, then impairments will continue to appear in the goodwill until the company's goodwill value is impaired to 0.

The impact of goodwill impairment on listed companies is definitely negative. Once the news of goodwill impairment is confirmed, investors’ valuation of the listed company’s stocks will decline, thus It caused a series of selling, causing the stock price to fall. Special attention should be paid to the fact that for high-priced stocks, shareholders have more profit-taking opportunities, and more people take advantage of the opportunity to sell the stocks for arbitrage. If the selling pressure cannot be taken on, it is likely to change the upward trend of the stock price and become Fluctuating or declining trends.

Therefore, for companies that have reduced their goodwill holdings, we need to be very careful when investing in stocks and try to avoid buying such stocks, because in the current environment, these stocks are obviously The risk outweighs the benefit. Even if you are optimistic, you should wait for a period of time before the risks are released before participating.

Goodwill is an accounting concept. Let’s first look at how accounting standards define goodwill:

When an enterprise merges, the cost of the enterprise merger is greater than the acquired value obtained in the merger. The difference between the fair value of the identifiable net assets shall be recognized as goodwill. Depending on the method of business merger: in the case of a holding merger, the difference refers to the goodwill that should be listed in the consolidated statements, that is, the cost of the long-term equity investment and the impact of the long-term equity investment are calculated based on the shareholding ratio on the purchase date and then purchased. Identify the difference between the fair values ??of the net assets; in the case of a merger, this difference is the goodwill that the purchaser should recognize in its books and individual financial statements. For business mergers not under common control, there are merger differences. The enterprise should first review the cost of the business merger and the fair value of the identifiable assets and liabilities acquired in the merger. After the fair value of each acquired asset and liability is measured and qualifying intangible assets are confirmed, the remaining portion constitutes goodwill.

A simple understanding is that company A plans to acquire company B. The book net assets of company B are 10 million yuan, but the purchase price finally reached by the two parties is 15 million yuan. The extra 5 million yuan is the business reputation.

From a commercial point of view, the reason why there is an extra 5 million is usually because Company B has some assets that cannot be determined as book assets according to accounting standards, such as brand premiums, patented technologies, etc. (In fact, they may be some illusory things. In a bull market atmosphere, mergers and acquisitions bring stock prices up, and shareholders can cash out and leave, but retail investors ultimately foot the bill).

Accounting requires that after goodwill is recognized, it is not required to be amortized during the holding period. Instead, its value is tested at the end of each accounting year, based on the principle of the lower of the book value and the recoverable amount. According to measurement, if the recoverable amount is lower than the book value, the impairment standard shall be provided.

The popular understanding is that the premise for Company A to pay 15 million when acquiring Company B is to judge that Company B can earn XX million per year in the next 10 years. However, in fact, due to changes in the market environment, technological changes, etc. , resulting in this judgment being impossible to realize, so goodwill needs to be impaired.

The above are all theoretical impairments of goodwill. What Xiaohua wants to say here is that A-share goodwill continued to explode in January 2019, which can be described as a miracle of the century. However, what we need to reflect on is the lack of regulatory systems.

The result of regulatory oversight of acquisitions is that the market has produced a large number of companies acquiring companies at high premiums. Don’t say silly things like companies are not stupid enough to acquire such high prices and there is a reason for it. , because in essence, the interests of listed companies and small businesses are completely different. Many investors have such a thinking, that is, listed companies and investors are aiming for the company to make more profits, so acquisitions are also for the purpose of making more profits. , it seems to make sense on the surface. If you think this way, it only means that you have not been fooled enough. To give such an example, you can imagine a company with an annual profit of several million but a market value of several billion. The CEO of Shiying Company has two options waiting for it, normal operation and cashing out. The CEO knows very well that cashing out will make much more money than normal operations. In this way, investors and major shareholders of listed companies will still be on the same page. Are they in the interest chain? Absolutely not. Therefore, mergers and acquisitions that generate huge goodwill must be wary of the transfer of benefits.

Erzhao Team: Impairment of goodwill means that a star player just bought by a team went downstairs and sprained his ankle! Can't even play this season. What a loss!

These two days are the days when listed companies release their 2018 annual reports. All kinds of stories are flying everywhere. There has not been such a disastrous performance thunderstorm in more than ten years. Judging from the data, the main reason for the performance of listed companies is the impairment of goodwill.

What is goodwill impairment?

Let’s first look at what “goodwill” is. Goodwill means that when a listed company purchases a company, the book net assets of the purchased company are only worth 200 million. As a result, we bought it at a premium of 300 million, and the extra 100 million spent is called "goodwill." It's like you run a team and the owner just changed recently and gave you a lot of money, so you spent a lot of money to buy a star player. The player's original annual salary is 2 million, and you pay him 3 million in order to poach his annual salary. The extra 1 million will be included in your team's account as "foot credit" (goodwill)!

The sky is unpredictable, and people are prone to misfortune and fortune. The golden right-footed player was impressed by you, but on the first day he came to work, before he even showed up, when he was going downstairs, the golden right foot stepped on a watermelon rind and sprained his foot. When he was sent to the hospital, it was found that he had a broken bone and he was out for the season. This transaction is a loss. It doesn't matter if we cut his salary. The problem is what should we do with the premium "foot-reputation" (goodwill) we include in our books? How do I explain this to my boss? At the year-end summary meeting, we can only say that the premium was not done well and was impaired.

When listed companies buy other companies, their bosses are reluctant to sell them, so we have to pay a premium and pay more to buy them. The extra money you pay buys "goodwill." "Goodwill" is also an "asset" we buy. Of course, an important premise for this is that the company you buy does have good development prospects and can make money.

The economic situation and stock market in the past two years are as you can see. That is simply a case of good fortune and misfortune. The current situation is that the economic environment is sluggish and the overall profitability of enterprises has declined. If the company you buy doesn't make any money, it's definitely not worth the premium (goodwill).

Under the double blow, the only option is to reduce the value of goodwill.

In fact, it is not a bad thing. After all, long-term pain is worse than short-term pain. Making a relatively large impairment may also be a more feasible way to release risks.

Erzhao team: May knowledge bring you health! Goodwill is the premium of the consideration paid during the acquisition relative to the fair value of the net assets

There are three ways to deal with goodwill in accounting internationally: deal with it at the beginning, amortize it year by year, and amortize it when it occurs. Make impairment; let’s talk about them separately below:

1. Dispose of it from the beginning

When the acquisition is completed, it will be offset against the owner’s equity, which will result in a decrease in total assets. And it has a great impact on current profits.

2. Year-by-year amortization

Treat goodwill as intangible assets. The commonly used amortization in accounting is fixed assets and intangible assets. Fixed assets are machinery and equipment, buildings, transportation, etc. For tools, etc., the amortization period is 5 to 40 years. Intangible assets are intellectual property and brand value, etc., and the amortization period is 5 to 20 years. s

It is normal to regard goodwill as an intangible asset and amortize it year by year, smoothing out the impact on the company's profits.

3. Impair goodwill when it occurs

This is the accounting standard currently used in our country. When a merger or acquisition occurs, the premium is recorded in the accounting term "goodwill" Under the subject, an impairment test is done every year. If there is a factual impairment, the impairment treatment will be done in accounting, that is, the goodwill will be removed. The advantage of this method is that after the merger and acquisition, the company will be greatly enhanced. Profitability, if you acquire a company/project, your revenue and profits will generally increase, but the cost of your acquisition is not calculated as a cost, and the performance will be very good.

The disadvantage is that once impairment occurs, the impact on current profits will be very large. The effect is what we see now. For example, Tianshen Entertainment has a pre-loss of 7 billion yuan, and all goodwill is disposed of at once. Financial bath.

The future accounting standards will change to amortization. The specific time for implementation depends on the actions of the Ministry of Finance. Before the formal document policy is implemented, goodwill impairment will still be required. If you are optimistic about the stocks in your hand, how do you look at the goodwill? Find the balance sheet of a listed company. The next line under the accounting account "intangible assets" is usually "goodwill". Give an example of Huayi Brothers and Feng Xiaogang using goodwill to cash out

In 2015, Huayi Brothers acquired Feng Xiaogang’s Dongyang Lanai Company for 1 billion yuan. The net assets of this company were audited by accounting to be 1.3 Ten thousand yuan, Feng Xiaogang has achieved financial freedom perfectly. In the last exchange with Xiao Cui, he said that he had created hundreds of millions of tax revenue for the country. This was a little bit like that. Why did he forget about his Latin American company? Use your goodwill to cash out, and finally make impairments. Shareholders contracted the financial expenses of your acquisition of Latin America. While you pretend to be a good person, you use various rules to achieve "cash out" and "tax avoidance". Although it is legally considered a It's compliant, but it's not authentic to advertise yourself like this. This Latin America is not beautiful at all. It would be better to keep a low profile.

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What is goodwill impairment? Let’s look at it from a financial perspective and look at it from two aspects: goodwill and impairment.

1. Goodwill. Goodwill originally refers to the company's reputation, which is the reputation formed by the company's long-term operations. It currently belongs to the asset accounting account of accounting and is mainly reflected in the consolidated statements. Generally speaking, there are internal goodwill and external goodwill. , internally generated goodwill is its original definition, because it is difficult to meet the definition of assets, mainly because the cost of internally generated goodwill is difficult to accurately measure, so the value of internally generated goodwill is not allowed to be recognized under Chinese accounting standards, including international Neither accounting standards nor US accounting standards allow the recognition of internal goodwill. Therefore, generally speaking, goodwill has the second meaning, that is, external mergers and acquisitions of non-related third-party companies, which constitute control and are included in the scope of consolidation. In this case, the merger and acquisition When the consideration paid by the acquiring party exceeds the fair value of the net assets of the acquired party, the difference that the acquiring party should enjoy in proportion to its equity is called goodwill.

Generally speaking, as the parent company, the acquirer will prepare consolidated statements to incorporate the acquirer, and the goodwill will be reflected in the consolidated statements. The parent company's own financial statements will only include long-term equity investments and not Goodwill.

2. Impairment. According to current accounting standards, goodwill cannot be amortized, but an impairment test must be done every year. If there is any sign of impairment, impairment provisions must be made and the goodwill is reduced to its recoverable cost. The recoverable cost is basically based on Calculated using the discounted cash flow method. The basic formula is that the acquired party can be regarded as an asset group, and its annual estimated cash flow is discounted at a discount rate, and the discounted amount in each year is summarized. If the amount exceeds the acquired party's acquisition date If the fair value is lower than the fair value, there is no sign of impairment. If it is lower than the fair value, impairment has occurred and impairment provisions must be made. Generally speaking, before doing an impairment test, you will first check whether there are any signs of impairment. Signs of impairment are generally divided into internal and external. The internal ones are mainly serious losses of the acquired party, insolvency, instability of the core management, and company strategic decisions. Major mistakes, etc., external factors are mainly the economic, policy, legal, social, and technological environment that have a significant negative impact on the acquired company, and the uncertainty of future economic income increases. When the above signs occur, impairment will be made. test.

Well, based on the above, let’s talk about the recent large amount of goodwill impairment in A shares.

1. First, are there reasonable factors for the impairment of goodwill? Yes, there is. According to the current economic environment, which is not very good, consumer investment and exports are somewhat weak. Coupled with the factors of the trade war with the United States, it is reflected in the economic entity, which shows a relatively sharp decline in operating income expectations. While maintaining a discount, As long as the current rate (capital cost has not dropped significantly) remains unchanged, the numerator in the impairment calculation formula will become smaller, resulting in a reduction in the predicted overall recoverable cost. When n-many listed companies construct concepts and therefore acquire a large number of various types of When a company is in business, goodwill impairment will naturally occur due to a significant drop in revenue expectations.

2. Is there the possibility of financial fraud? It is entirely possible. First of all, there is motivation. The expected launch of the Science and Technology Innovation Edition registration system will lead to a decline in the shell value of listed companies. In the past, in order to preserve shell resources, they had to insist on not making goodwill impairments and take various compliance and irregular measures. Compliance measures are taken to achieve profitability and avoid being delisted or having an ST title. Now that the shell value has dropped, there is no need to hold on. The goodwill that has not been impaired for several years can be fully impaired. Secondly, there is an opportunity. Listed companies will definitely not say that they make provision because of the decline in shell value. Nowadays, it is common knowledge among entrepreneurs that the economic environment is not good, and the trade war will indeed cause a decline in corporate income. Such a good reason is not Look for opportunities in the future. Finally, there is a method, the goodwill impairment test itself is based on management’s assumptions. One of the key assumptions is the assumption of future revenue growth rate, and the other is the assumption of discount rate. If these two assumptions are slightly changed, the predicted future There will be a huge difference in the discounted cash flow data. It is simple, easy and reasonable to operate. The current economic environment completely provides the most reasonable reason to modify the income growth rate assumption. In this case, why not do listed companies? Only the company itself knows whether the magnitude of the impairment is reasonable.

The above is my simple analysis. Due to my limited knowledge, there may be errors. Please forgive me, thank you!