I have been reading a lot
about a new rule change in accounting, scheduled to take effect
Jan. 1, that does away with amortization of goodwill acquired in
acquisitions.
How will this change affect my certified public
accountant-prepared financials, my tax returns and my internal
financial statements?
A: If you do acquisitions, your CPA-prepared
financial statements are going to look different from the way they
have looked in the past.
By CPA-prepared, I mean audited, reviewed or compiled financial
statements prepared in accordance with Generally Accepted
Accounting Principles or GAAP.
On the other hand, the change has nothing to do with taxes or
the deductibility of goodwill.
For the last eight years, the federal income tax law has
required you to amortize (i.e., deduct) goodwill at the rate of
6.67% per year over 15 years, and nothing changes here.
The change will not affect your internal financials, either. You
can continue to use your back-office system as before, expensing
the cost of acquisitions at whatever rate you wish.
However, your CPA will need to ignore the goodwill deductions
when converting your internal financials into the audited, reviewed
or compiled statements that you give to third parties such as your
bank, prospective corporate accounts or -- in the case of public
companies -- the Securities and Exchange Commission.
Goodwill is that portion of the purchase price that exceeds what
you can fairly allocate to tangible assets, covenants not to
compete, client lists and trademarks.
In travel agency acquisitions, most of the purchase price most
of the time is, in fact, nothing but goodwill.
Now, when you do acquisitions, your CPA-prepared income
statement will show more net income, even though you have no more
cash to show for it.
Your spouse and your banker will no doubt be impressed. That's
the good news.
The bad news is that you must re-evaluate the goodwill each
year, and if you find it has been impaired (i.e., gone down in
value), you must deduct the reduction as a write-off or
expense.
This means that your CPA-prepared financials could suddenly show
a huge loss, even though your cash flow has not changed.
Mark Pestronk is a Fairfax, Va.-based attorney specializing
in travel law. He answers your questions in the TWCrossroads Legal Ease forum. To contact Mark directly, e-mail him
at [email protected].