SWM - Mark Moore

The second of the two accounting policies deals with distortion. The analyst performingthe accounting analysis identifies and evaluates the key policies the firm uses to measure itsfactors and risks. Distortions occur in the form of goodwill, foreign currency risk, pensions andother post retirement plans, and research and development. It is very important to analyzeeach of these areas where potential distortions have been identified to create a true andaccurate picture of the firm.Type 2 Accounting PoliciesGoodwill Goodwill is used to reflect the portion of the book value of a business entity not directlyattributable to its assets and liabilities. Goodwill occurs when a business acquires anotherbusiness for more than it is worth. Goodwill in turn shows the capability a firm has in providinga higher profit than would come from the sale of such assets. As stated, goodwill appears onthe balance sheet when an asset has been purchased for more than it is worth. In anacquisition, when a company buys another company or makes a substantial purchase of anasset, they may pay more than the fair market value of that asset. This excess cost becomesgoodwill on the financial statements. Goodwill is also an intangible asset; which means it cannotbe touched, seen, or physically measured. In essence, it is nothing more than a numberplugged into the balance sheet and is disguised so that the company does not look to haveoverpaid for an asset. It is recorded as an asset and accountants record goodwill as a write offfor the company in the financial reports.Goodwill is no longer amortized under GAAP; companies are now required to value thereporting units using present values of future cash flows and compare it to their carrying value.If the fair value is less than the carrying value then goodwill needs to be reduced so the fairvalue is equal to carrying value. The impairment loss is reported as a separate line item on theincome statement, and the new adjusted value of goodwill is reported on the balance sheet.The chart below shows how Schweitzer-Mauduit’s goodwill took a spike in 2008 from theprevious four years. In January 2008, two of the company's French subsidiaries purchased28 percent minority interest in LTRI. The purchase price of 35 million Euros, funded byborrowings under the company's Euro Revolver, was allocated to the fair value of the assetsacquired and liabilities assumed, including an allocation of $10 million to identifiable intangible55