Accounting Rule Change There Was Term Paper

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Thanks to a crash in the value of telecom assets, 90% of that net loss (or $45 billion) was due to a charge for the reduction of the value of goodwill carried on its books" (Galarza 2001).

When investors see companies such as JDS Uniphase declare a $51 billion dollar loss, its perception of such losses can lead to a state of no-confidence in the financial markets overall. Many savvy investors knew enough to not use goodwill as any part of the analysis when considering whether to invest in certain companies (or not), but there are plenty of investors that are not savvy. These individuals may see the resulting changes in net income for companies such as AOL as signals to buy, instead of what the signs really are, which are signals to sell.

Many analysts believe the same way and have been attempting for years to get the FASB to set higher standards, while demeaning companies attempts at obscuring the true costs of their acquisitions.

"It's just cosmetics," sneers Prudential Securities analyst Ed Keon. But in a battered market searching for any sliver of hope, investors may unwittingly forget and rush in to buy. Keon's advice: Sell. If companies soar in value for the sole reason of this accounting change, I would take advantage of it and sell those stocks" (Galarza 2003).

Observing the events that have occurred since the implementation of this rule, the rule has had the effect that was initially stated.

"Previous standards provided little guidance about how to determine and measure goodwill impairment, as a result, the accounting for goodwill impairments was not consistent and not comparable and yielded information of questionable usefulness" (FASB 2001).

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Companies are now required to test goodwill yearly for impairment along with other specific guidance (provided by FASB) on the testing process for impairment. The process for the testing is a two-step process beginning with the estimation of the fair value of a reporting unit. The first step that a company should take is to screen for the potential impairment, and the second step measures that impairment, if any is there.

FASB states however that "if certain criteria are met, the requirement to test goodwill for impairment annually can be satisfied without a re-measurement of the fair value of a reporting unit" (FASB 142).

The effect overall of this drastic change in the way that goodwill is initially recognized as well as how it is tested each year places the emphasis on acquisitions squarely on where it should be, the companies doing the acquiring. No longer will executives, accountants and lawyers benefit from paying overly inflated prices for acquisitions with inflated stocks that also benefit from the assets acquired for those overpaid prices.

The standard was changed and those companies that had previously used the standards to their advantage can no longer do so. Investors in those companies can now be more assured that the share prices they are paying for the company's shares are more reliable and accurate than using past standards. This is a benefit to those investors and will do much to support a confidence in company's financial reports, and share prices. That result alone would be well worth the pain that some companies are seeing because of their manipulations.

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