Valuation of goodwill often comes about in the context of business selling price allocation. In the past, business goodwill was one of the intangible assets recorded on the books when the company changed hands. This acquired asset was then amortized over time.
The new rules of handling goodwill have been published in 2001 by the Financial Accounting Standards Board (FASB). The rules state that goodwill is no longer amortized. Instead, goodwill is assumed to have indefinite life.
Goodwill impairment – is your business value holding up?
Businesses now conduct the so-called goodwill impairment test, at least yearly. You determine the overall value of the business and compare it to the carrying amounts of business assets. If the business value falls below the sum total of all the business assets, the value of business goodwill is reduced by an appropriate amount.
This means that business goodwill continues to be shown on your company’s books as long as the company’s value is high enough. If the business value drops, you can write off all or part of the business goodwill accordingly.
The write-down is against the company’s earnings for the year and reflects the drop in the company’s value.
Goodwill impairment or amortization – which one is best?
Whether this accounting strategy is an improvement on goodwill amortization is debatable. You now avoid the reduction in business earnings due to the amortization charge. On the other hand, goodwill write-downs are not exactly good news as they clearly state that the company’s value is going down.
Six of one, half a dozen of the other? You decide.
Most professional business valuations these days are done in compliance with the Uniform Standards of Professional Appraisal Practice, or USPAP for short. The USPAP standards have evolved to keep pace with the changing demands of the appraisal profession.
The requirement for reliable, defensible, and transparent business valuation has led the USPAP standard authors to develop a set of guidelines under the so called Ethics Rule. In addition to the management of appraisal engagements and ensuring client confidentiality, the Ethics Rule specifies a set of professional conduct rules.
Considering taking on a business valuation engagement? These are the guidelines of what it takes to complete a professional business appraisal that makes the grade under the USPAP standard:
You must perform business valuations in an objective, impartial manner and without seeking to satisfy your personal interest. The standard specifically states these requirements:
- You must show no bias in your valuation analysis.
- You must not act as an advocate of any party, including your client.
- You should refrain from agreeing to a certain valuation result before your analysis is complete.
- You must steer clear of any attempts to mislead or defraud the recipients of your business appraisal.
- No fake business valuation reporting is allowed.
- You must not be influenced in your valuation conclusion by any considerations as to the personal attributes of client or other parties such as race, ethnic background, religious preferences or gender.
- Your business valuation must demonstrate the appropriate level of due diligence and prevent negligent mistakes.
- You should have no ownership interest in the business being valued to avoid conflicts.
Essentially, a business appraiser should conduct valuation at arms length and remain impartial throughout the project. Any bias or motivation to arrive at a predetermined result is obviously suspect and you should avoid it. This holds true even if you have had a long term relationship with the client and are quite familiar with the needs behind the business appraisal.
Buckling to your client’s pressure to come up with a figure is a bad idea. Your client would be better served if you prepared an objective business valuation and communicated the results and reasons behind them clearly.
You can then help your client understand what can be done to enhance their business value and develop a plan to achieve these goals over time.