Reading this story/opinion artical in HP this morning really made me mad as it is a typical misapplication of how Goodwill is valued in any company and I am sure it will be picked up by the usual suspects as evidence that the end is near for certain TBTF banks...
http://www.bloomberg.com/...
So in typical fashion the opinion makes this statement...
Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.
So do you want to know how valuation of goodwill works in the real accounting...if so then keep reading...if you want to keep on believing the negative hype...then stop reading...
So goodwill by definition is the difference between the purchase price and the fair value of the total net assets of the company being purchased.
Then goodwill must be re-valued and determinations must be made for impairment whenever situations change that would make that premium worth less...
So the opinion author then states this false fact...
Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill.
The value of goodwill is not related to a brand, it is related to cash-flow and/or profits from the group of assets acquired. Indeed if any amount of the purchase price had been allocated to the trademarked/copywrighted name "Countrywide" then that amount would need to be written off immediately upon the decision to retire use of that name.
So the question becomes not how are the assets performing but how are they performing compared to when the assets were purchased and the goodwill was established? So if the current income/loss is in line with the original projections then the goodwill is not impaired.
Finally, during the quarters, there is a less rigorous test for goodwill impairment than at year end which requires outside valuations. So the details of the goodwill on the books for BOA will be evaluated at year end and any impairment will be booked...
Finally it is important to note (and to his credit the opinion author makes this point) that goodwill has no bearing on the strength of the bank from a solvency POV and is not counted towards capital requirements. Similarly when goodwill is impaired it is a non-cash charge that while it affects earnings it does not change their liquidity cash position. Frankly it is irrelevant to the bank's solvency and is only relevant to investors...
The final point is that BOA's working capital and bank rating are solid by independent agency ratings...
http://www.bankrate.com/...
http://www.bankrate.com/...
And the opinion artical that BOA is basically about to fail is hyperbole at its worse...