Please, respond to the attached two classmate discussion posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add information or comment about their response. No citation required)
Thank you
Instructions for the classmate classmate response (around 125 words each) Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add information or comment about their response. No citation required) Thank you Classmate discussion posts Discussion 1: David Greco The concept of goodwill refers to payments made to a company to purchase assets, in excess of the value of those assets. Payments like these are often made due to above average expected value resulting from a brand name or reputation (Subramanyam, 2014). For example, if Nike were to purchase an up and coming shoe manufacturer to bring the brand under their umbrella, they might pay $150 million even when the company’s assets only total $100 million. This excess payment would be made for the expected value and increased sales as a result of bringing a successful company into the fold. The excess payment would be referred to as goodwill. Analysts should be careful when goodwill constitutes a significant portion of total assets. Goodwill can be a sign of a valuable asset being added to a company’s portfolio, but it can also be a sign that a company overvalued assets. Paying more actual money for potential future sales can be savvy, but can also be poor management if the sales do not materialize (Subramanyam, 2014). Analysts should take steps not just to examine goodwill totals, but also to gain an understanding of there the goodwill originated. Further, goodwill totals can by subject to estimates and forecasts, and can include financing costs and legal fees (Subramanyam, 2014). Auditors recently looked at the financial statements of News Corp and ADP. News Corp, who owns The Wall Street Journal, had significant goodwill balances on their financial statements. Auditors did a thorough examination of the controls and processes in place with respect to goodwill impairment (Murphy, 2019). ADP, similarly, had substantial goodwill reported in its assets. When auditors investigated, they found that ADP’s executive management had made substantial judgements about the forecasted future revenues of a unit that had very little historical data (Murphy, 2019). Issues like these are ones that analysts must be cognizant of when reviewing financial statements and assessing goodwill. Companies might use the flexibility of goodwill to inflate their asset portfolio. References Murphy, M. (2019, October 4). Critical audit matters: What firms are reporting. Retrieved from Journalofaccountancy.com: https://www.journalofaccountancy.com/news/2019/oct/cpa-firm-reporting-critical-audit-matters-201921907.html Subramanyam, K. (2014). Financial Statement Analysis . New York: McGraw-Hill Education. Discussion 2: Emily Pittenger Not all assets on a company’s balance sheet are cash, receivables, and other physical items. There is a whole other category of assets known as intangibles. These intangible assets are “rights, privileges, and benefits of ownership or control.” Two characteristics of these and part of what defines them as intangible are high uncertainty of future benefits and a lack of physical existence. Goodwill falls under intangibles as an unidentifiable asset, meaning that it cannot be separately identified or linked with specific rights or privileges (i.e. patents and copyrights). Unidentifiable intangibles are those assets that are developed internally and usually have indefinite benefit periods. When one company acquires another company or segment, the entire amount paid will need to be allocated to all identifiable assets. Goodwill is the excess of cost over the fair market value of net assets that are acquired in a purchase transaction. Goodwill implies earning power, meaning that it can translate to future excess earnings above normal earnings. These excess earnings are similar to residual income or abnormal earnings. Analyzing a company’s goodwill can be a challenging task. Corporate balance sheets can include billions of dollars in goodwill, which can represent a substantial part of net assets, or sometimes even exceed total equity. Many analysts will associate intangible assets with riskiness, so caution and understanding are encouraged during the analysis. Despite this, in many cases, “goodwill is nothing more than mechanical application of accounting rules giving little consideration to value received in return.” Goodwill on corporate balance sheets usually fails to reflect a company’s entire intangible earning power. Good will by itself it not a bad thing because it is simply a representation of the premium over estimated market value. It is, however, an often-overlooked aspect of the balance sheet. This is a mistake because goodwill can offer important insights into a company. It can signal several things such as over payment, reckless spending, and the potential for damaging write-downs in the future. When analyzing goodwill, we should track it to see the effects it has. One potential affect is that higher goodwill results in lower returns. Goodwill is created during acquisitions and sometimes these acquisitions can be overpriced. This excessive goodwill can create risks in the event of a market crash and can lead to long-term under performance. Because of these possibilities, goodwill should not be analyzed by itself. “For both individual companies and the broader market, high levels of acquisition activity and Goodwill can be a sign of future impairments and under performance.” Overall, goodwill is not a bad thing, but should be considered when analyzing the financial statements. It is also important to be aware of any potential fluctuations in the reporting of goodwill because that could signal underlying financial issues. References: McBride, S., & Garg, A. (2019, March 8). Too Much Goodwill: A Red Flag For Your Portfolio. Retrieved from https://www.newconstructs.com/much-goodwill-red-flag-portfolio/. Subramanyam, K. R. (2014). Financial statement analysis (11th ed.). New York, NY: McGraw Hill Education.