Posted in Finance, Accounting and Economics Terms, Total Reads: 752
Definition: Impairment Charge
A specific reduction on the balance sheet of the company to adjust the value of the goodwill, in case the goodwill is overvalued. Impairment charges get a lot of attention during times of weak economy and bad stock markets, due to the increase in concern of balance sheets of large corporations.
Under the new regulations, goodwill is to be charged to all units that can benefit from that goodwill. Then a test is done to determine whether that goodwill is greater than its fair value. If fair value of the goodwill is less than the carrying value, then the goodwill is impaired, and is hence charged off. This leads to reduction in the goodwill on the balance sheets.
The Advantage of this is it provides investors and others more valuable information while analyzing the company. It gives good judgment about not only investment opportunity but how the management of the corporation operates. If huge sums of money are written off as goodwill, then it shows that the management has not taken very good decisions in the past.
The disadvantage in this is there is enough room for manipulation of accounts by the companies, to give a wrong picture. It could also reduce equity levels significantly in some cases.
McDonalds had goodwill write-offs to the tune of $ 99 million in the early 2000’s because it felt that its goodwill was overvalued.