(Editor’s Note: This story is part of an occasional series on the reaction of CFOs to planned changes to goodwill and other aspects of M&A accounting.)
Scott Royster knows a good thing when he sees one.
As CFO of Radio One, a firm that has been using acquisitions to grow by leaps and bounds since going public in May 1999, he acknowledges that FASB’s planned elimination of the need to amortize goodwill will “dramatically increase our reported bottom line.”
But Royster, whose Lanham, Md.-based firm currently owns 63 radio stations in 22 states, denies the pending rule change has had any influence upon the decision-making process.
“We’re not all that focused on earnings,” he said. “[FASB’s action] is not unwelcome, but at the end of the day, all that matters is cash flow.”
The effect of GAAP changes in question, which may take effect as soon as July 1, is twofold.
By eliminating pooling as a method of accounting for acquisitions in favor of the purchase method, the resultant changes will hurt many bottom lines.
On the other hand, the elimination of the requirement to “automatically” amortize goodwill is widely seen as offering an incentive to acquisitive firms.
Kellogg’s recent $4.3 billion purchase of Keebler Foods, which relies on the purchase method, envisions $150 million of annual costs due to the amortization of goodwill. The new rules will add $150 million annually to Kellogg’s reported earnings.
For other firms, such as Johnson & Johnson, the presence of assets on the books from both both purchase and pooling, means a mixed effect upon corporate earnings.
Valuing Radio Licenses
But for Radio One, the blessings are not mixed.
The firm makes acquisitions “almost monthly.” Its most recent purchase was Blue Chip Communications for about $16 million, and its largest so far has been Clear Channel Communications, which cost $1.3 billion.
According to Royster, much of this cost is being amortized on an ongoing basis by taking the estimated commercial value of each radio station license and writing it off over 15 years.
“Every radio station basically has the same hard assets,” he notes.
Goodwill is the value of a firm or product line above and beyond such hard assets as microphones and transmission towers, Royster said. All that’s left is the broadcast license’s value, which can vary greatly, depending upon “the economics” of the station.
Since radio licenses are renewed by the FCC every seven years in a procedure Royster says is “effectively automatic,” the CFO contends his goodwill will be effectively safe from “impairment” under the new rules.
“One would be hard-pressed to come up with examples of non-renewal,” he said. “It’s almost never done unless you’re committing some kind of fraud.”
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