Illwill Toward Goodwill

Microsoft recently took a $6.2 billion goodwill impairment charge related to the $6.3 billion purchase of aQuantive, implying that the entire deal was a bust. But Microsoft was not alone: Rio Tinto wrote-off $8 billion for its purchase of Alcan, the NYSE wrote-off $1.6 billion of its Euronext purchase, and Proctor & Gamble wrote-off $1.5 billion of its Gillette purchase. In this article, Peter Atwater, president of a financial consulting firm, argues that the current accounting method for acquisitions is a free option. If things go well in an acquisition, there is never an accounting cost.  While we would not disagree with Mr. Atwater on the accounting interpretation, we would argue that is it irrelevant (except for taxes). Accounting methods almost never represent the true value of an investment or acquisition. If a company overpays for a target, the cost is the stock price decline associated with the overpayment. Similarly, any increase or decrease in value after the acquisition shows up in the stock price, a much more important determinant of the success of any management decision. As he says, "Who wouldn't want to live in an accounting world like that." We would always prefer to live in a market value world, something the accounting world has never been able to capture. http://www.cnbc.com/id/48053277