This story was written by Keith Dawson for the Media Unspun email newsletter and is Copyright 2002 by Keith Dawson.
M E D I A   U N S P U N
Goodwill Hurting

AOL's annual report is out, and the media giant is likely to report one of the biggest quarterly losses in corporate history due to a writedown of $54 billion -- a figure comparable to the "gross national incomes" of countries like New Zealand and Hungary, Reuters helpfully pointed out.

Wall Street yawned. The Washington Post reminded us that the "paper figure" has "no bearing on the company's cash flow or day-to-day operations." "This is less than a nonevent," the paper quoted a Bear, Stearns & Co. analyst. Last January AOL had said it expected to write off between $40 billion and $60 billion in "goodwill" for its purchase of Time Warner over two years ago. Hey, ten billion here, ten billion there, pretty soon it adds up to real money.

The Post gave a succinct definition of this less-than-obvious accounting term: "Goodwill represents how much a deal's purchase price exceeds the book value of the acquired company's assets." Companies used to be able to depreciate goodwill over 40 years, but new accounting rules went into effect in January that require goodwill to be adjusted every year.

MarketWatch ran a helpful sidebar on the meaning of goodwill for investors, quoting several analysts who said the new rule provides a clearer picture of a company's financial health for investors. A PricewaterhouseCoopers accountant opined, "Investors ought to be looking at write-offs and asking questions as to why ... Companies are going to do a better assessment of acquisitions than they've done in the past."

So does this mean that analysts will take a harder look at inflated acquisition prices? Dream on. The Post quoted a First Albany Corp. analyst who recently upgraded AOL's stock to "strong buy," because he expects the company's revenues and earnings to be flat in the next quarter. So maybe goodwill doesn't hurt after all. - Keith Dawson

AOL Time Warner Has Charge of $54 Billion

AOL to take $54 billion quarterly charge (Reuters)

AOL sees record $54 billion charge
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No more goodwill games
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