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January 23, 2009 7:20 PM

Business, Retail

Goodwill Punting

For better or worse, accounting doesn't inspire that much interest. It's easy to see why, with all the numbers and yawn-inducing rules that are just this side of impossible to understand. But when big-name players like Jones Apparel Group start...

For better or worse, accounting doesn't inspire that much interest. It's easy to see why, with all the numbers and yawn-inducing rules that are just this side of impossible to understand.

But when big-name players like Jones Apparel Group start registering losses in the hundreds of millions of dollars, it opens some eyes, even for the most mathematically challenged among us. First, just a bit of accounting explanation, then, some big picture stuff:

Jones took an $810 million after-tax noncash charge to write down goodwill and trademarks in the fourth quarter, which is expected to lead to a loss of $10.07 to $10.11 a share.

Goodwill is basically a balance sheet stand-in for the intangible value of something that was acquired, like a brand or a business reputation. Jones bought Nine West and Maxwell Shoe Co. over the last decade and the price it paid above and beyond the tangible assets, such as inventory and office equipment, was counted on its books as goodwill. Since 2001, after the dot-com bubble burst, companies have been required to evaluate goodwill annually and no longer amortize it.

That Jones has to write off goodwill is a function of its declining stock price. The market says the company isn't worth as much as it claims on its books and the accountants have to sort it out. Many other firms, including Macy's Inc. and Sears Holdings Corp., are in the same boat.
So what? It's a noncash charge. It's not money the company is actually losing, it's value accountants assigned and then unassigned and it's tied to something nobody could touch or smell or pick up.

That's a line of thought many share, and they're right in a way. Losses on paper are just that — numbers on paper — and investors routinely ignore noncash charges for that reason.

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                          What do you think of companies' use of goodwill?
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But in a larger sense, value here has been diminished. The importance of that depends on who's paying attention — banks might see a chance to trigger clauses in credit agreements, investors might see sins from acquisitions past.

"It doesn't mean the acquisition was bad strategically," said Ed Henderson, vice president and senior analyst at Moody's Investors Service, speaking about goodwill charges generally.

"Given this market, it just looks like almost everybody overpaid. The amount that is reflective of that is goodwill."

Losses on paper might not be the same as losses from operations -- when a company spends more money than it brings in — but they can't be overlooked entirely. If we choose to ignore them completely, we throw away the accounting rulebook, which was updated to provide transparency and put companies on an even footing, even if it does so in its own inscrutable way.

It might not be perfect, but it's better than just guessing. Just ask that guy you knew who was a millionaire before the dot-com boom went bust.
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