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HP/Autonomy-Type Accounting Issues Likely to Proliferate and Trigger Tougher FASB Rules

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Capitalized goodwill and the costly effect of non-cash writedowns. Let the subprime mortgage saga be your guide to how this will play out.

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Over the past several years, as global growth has slowed, however, companies have been forced to write down the value of their goodwill. Up until very recently, however, analysts, investors, and even boards of directors have shrugged off these impairments because they are "non-cash." In fact, earlier this summer, when HP wrote off more than half of its acquisition cost of EDS -- an $8 billion charge -- one analyst even offered, "This is just an accounting thing."

Whether criminal fraud ultimately is concluded, what last week's Autonomy news has revealed is both lax due diligence and heroic management forecasting on the part of Hewlett Packard. Even more, the financial media, the analyst community, and investors have now awakened to the fact that goodwill impairment tests are forward-looking. They are now focused on acquisition-related goodwill as a concern and are beginning to challenge corporate leaders' forecast assumptions and to ponder what write-downs mean for future earnings and corporate cash flow.

Given the past decade's boom in global M&A, there will be plenty to look at. If events unfold as the recent housing crisis suggests, corporations will need to be much more forthcoming with their acquisition-related assumptions, and should goodwill write-downs snowball -- as auditors, audit committees, and investors take a much harder look at the balance sheet values of intangible assets -- the FASB won't be far behind with stricter rules for mergers and acquisitions much like the group was with securitization accounting principles in 2009.

And if things really deteriorate, you can bet that Congress will weigh in with something akin to "Son of Sarbanes Oxley" too.

If at the peak, corporate M&A was shrugged off by the bottom, under stadium lighting and with more refs on the field, no stone will be left unturned. That is what falling confidence does; and corporate leaders and boards of directors would be wise to prepare for what is ahead.

Like the subprime mortgage crisis, the Autonomy situation won't be contained. When confidence turns, the worst simply hit first. We saw that in loan quality five years ago, and we are seeing it now with corporate intangible assets.

Peter Atwater's groundbreaking book "Moods and Markets" is now available for pre-order on Amazon and Barnes & Noble.

"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world." -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation


Twitter: @Peter_Atwater
No positions in stocks mentioned.
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