SWM - Mark Moore

The ability to do this gives firms the option to enhance or distort their financial statements.Firms that need to improve the appearance of their net income can capitalize the expensesrelated to the realized asset, which would also increase their assets on the balance sheet.Evaluation of Accounting StrategyBecause of the discretion given to managers through accounting flexibility, theaccounting strategy differs across companies in the industry. The evaluation of each company’saccounting strategy is necessary to determine whether or not a manager’s accounting flexibilityis used to “either communicate their firm’s economic situation or to hide true performance”(Palepu and Healy). This can be determined by establishing whether or not they are highlydisclosed, meaning they provide sufficient information on how they apply their accountingstrategies in regard to their key accounting policies; or if they have low disclosure, meaningthey only disclose the minimum set by GAAP. This will help when assessing if they areconservative or aggressive in its choice of accounting policies. Having a conservative policy canlead to lower reported earnings, while an aggressive approach would lead to higher reportedearnings.GoodwillTo evaluate the accounting strategy of goodwill, analysts must first determine whetherthe company contains high disclosure or low disclosure. Goodwill is the excess of the purchaseprice of an acquired business over the fair value of net assets. It must be tested forimpairment annually and should be impaired if the book value of the goodwill exceeds its fairvalue. Firms in the industry test for goodwill impairment in the fourth quarter. Schweitzer-Mauduit International, Inc (SWM) evaluates goodwill by performing a two-step test. The firsttest is to compare the book value of the reporting unit to its fair value. If the book valueexceeds the fair value then “we determine an implied fair value of the reporting unit’s goodwillby allocating the fair value of the reporting unit to all of the assets and liabilities other thangoodwill. The difference between the total fair value of the reporting unit and the fair value of65