Marketing Accountability and SFAS 142

Part I in a Series Managing Your Intangible Assets
By: Elise M. Neils, Principal of AbsoluteBrand.com

In January of this year, AOL Time Warner warned that it expected to take a $54 billion write-off to reflect overall market declines since the AOL Time Warner merger was announced in January of 2000. "This charge will reflect the cumulative effect of adopting the accounting change," the company said at the time.

Qwest management noted in a recent filing that it could wind up taking a charge of between $20 billion and $30 billion to write down the value of assets as a result of the impairment tests required by the adoption of FAS 142. It stated "Qwest is currently evaluating the impact of adopting the standard and believes the effect of adoption could be a loss from a change in accounting principle of approximately $20 billion to $30 billion." The huge charge stems from the company's $36 billion merger with U S West in 2000. "Since we first announced our merger with U S West, we have a very different economy and lowered industry demand for telecom services, which has resulted in our having to write down goodwill," said Qwest CEO Joseph Nacchio. 

The vast charges taken by AOL Time Warner and Qwest reflect the volatility of intellectual property values. But, how is it that a company can reduce its assets by billions of dollars in a note to their financial statements?

Not only is this permissible, but it is required by the Financial Accounting Standards Board. The mission of the FASB is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. 

In accordance with this mission, FASB changed the rules for the mergers and acquisitions game as of June 30, 2001. Companies can no longer use the pooling-of-interests accounting method for business combinations, nor will they account for mergers on their financial statements under the traditional purchase method, which required them to amortize goodwill assets over a specific time period. Instead, purchased goodwill will remain on the balance sheet as an asset subject to impairment reviews. Under Statement 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment, or more frequently, if impairment indicators arise. 

Statement 142 provides a model and methodology to test for and measure goodwill impairment to be applied by both public and non-public companies. The two-step model provides a test for potential impairment (Step 1) and, if necessary, a measurement of the impairment (Step 2). Statement 142 also provides specific guidance to test intangible assets not being amortized for impairment, creating what is essentially a lower of cost or fair value model for these assets.

The upshot of the implementation of the new FASB rules is a greater emphasis on management accountability with respect to the value of a company’s intangible assets. Because goodwill must be reviewed for impairment at least on an annual basis, and more frequently if events or changes in circumstances exist, companies are now obligated to report to investors how the value of their intangible assets are affected. 

Your company can leverage the requirements imposed by the accounting rules to improve marketing accountability. For example, the requirement to monitor goodwill for impairment can be accomplished by creating a financial model that tracks the drivers of your company’s value. By identifying what it is that drives demand in your company's specific sector, it's possible to estimate and monitor the value of your intangible assets. 

Internal management controls are imperative in the current economic environment. Such controls can serve many purposes, from compliance with accounting and SEC rules, to ensuring investor confidence in your company’s accounting records. 

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