"The reality is that you have already spent the cash," says Tom Manley, CFO of Burlington, Massachusetts-based Cognos Inc., which recently acquired planning-software provider Adaytum for $157 million in cash. "I think shareholders understand that impairment is not going to be an incremental cash expense." However, he adds, "it is obviously a very big negative if a company is writing off a substantial amount of goodwill because [the acquisition] is not living up to expectations."

Despite the notable charges by some firms last year — which, not coincidentally, could be attributed to a one-time accounting change — the perceived and actual risk of impairment seems low for many companies. Cognos, for example, will amortize $27.5 million in intangibles over the next five to seven years, but as a midsize company, it has only one reporting unit. Thus, Cognos's market value would have to fall below the company's book value before the Adaytum goodwill would be subject to further impairment testing. "Although it is a lot of goodwill on our balance sheet, it is small relative to the value of our company. It would be very difficult to find an impairment, given that I have one reporting unit," says Manley, who nonetheless brought in outside valuation experts for the Adaytum deal.

Large companies with multiple units would seem more vulnerable, but those units can often provide a substantial cushion against impairments. "Hopefully, the accounting isn't influencing how people do acquisitions," observes Manley.

Goodwill accounting is, however, influencing the way the SEC looks at companies. This may be the most powerful argument for getting outside help. While external valuations do not absolve companies of liability, regulators are likely to view them more favorably.

Moreover, valuation firms offer a structured process and a paper trail that can come in handy if a company's valuation practices are challenged — as they increasingly are. In February, the SEC released a review of 2002 filings by Fortune 500 companies, noting that goodwill impairment was among the critical disclosures that often "seemed to conflict significantly with generally accepted accounting principles or SEC rules, or to be materially deficient in explanation or clarity." Among the additional information the SEC demanded were clearer descriptions of accounting policies for measuring impairment, as well as better information on how reporting units are determined and how goodwill is allocated to those units.

Immortal Danger

Under FAS 142, identifiable intangibles must be recognized separately from goodwill. But that doesn't necessarily mean they must be amortized. Assets considered to have indefinite lives — powerful brand names such as Coca-Cola, for example — can escape amortization.

But CFOs should think twice before considering that a plus — declaring an intangible to be immortal subjects it to regular impairment testing. "You could be replacing periodic, known amortization with a lot of lumpy, unpredictable impairment," notes Paul Barnes, managing director of Standard and Poor's Corporate Value Consulting unit. Paragraph 11 of FAS 142 requires that "no legal, regulatory, contractual, competitive, economic, or other factors" limit the asset's useful life. And unlike goodwill or intangibles allocated to business units, there's no way to cushion an indefinite-lived intangible. "The indefinite-lived intangible asset stands naked in its impairment testing, so its impairment could be very visible," says Barnes.

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