What is it, why is it news, and what is a "charge"?
What is it, why is it news, and what is a "charge"?
I don't know that there are any significant "positives" for taking the write-off... they only did it because they had to, in accordance to GAAP rules. You have to understand the background behind the Goodwill, before trying to understand why the write-off.
It goes back to the announcement of the merger in ear ly 2007, when Sirius agreed to a stock swap of 4.6 shares of Sirius for each share of XM, at a price of $3.79/ share. There were 312,328,183 shares of XM, which became 1,436,709,642 shares of Sirius at a cost of $5.44 billion to Sirius shareholders. ($5.68 billion including preferred shares, warrants and options).
After the merger closed, Sirius allocated this expense to the various assets and liabilities of XM, including making proper adjustments of the assets to current Fair Values. When all was said and done, they had a large chunk left over -- which was allocated to what is called "Goodwill". Sirius noted in the ProForma filing to the last 10-Q that this Goodwill here was about $5.8 billion.
That's a lot of Goodwill to carry on the balance sheet -- and then when the stock price crashed, it became necessary to impair it. That is because the Fair Value fell below the Book Value, making it necessary to take the charge. It gets quite complicated from here, I recommend reading this article on it:
If there's any positive here, I guess it's that Siriu s lowered their Goodwill balance by $4.8 billion, from $5.8 billion to $1 billion. So their balance sheet is less bloated than before.
Last edited by homer985; 11-11-2008 at 10:51 PM.
They adjusted the XM radio goodwill value. I did not like the way they did it but the current financial crisis left them with no other choice I guess.
The following is from Wikipedia.org
Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities.
Goodwill as a term was originally used to reflect the fact that an ongoing business had some "intrinsic value" beyond its assets. such as the reputation the firm enjoyed with its clients. Likewise, a buyer may agree to "overpay" because he sees potential synergy with his own business.
Goodwill in financial statements arises when a company is purchased for more than the book value of the company.
The difference between the purchase price and the sum of the fair value of the net assets is by definition the value of the "goodwill" of the purchased company. The acquiring company must recognize goodwill as an asset in its financial statements and present it as a separate line item on the balance sheet, according to the current purchase accounting method. In this sense, goodwill serves as the balancing sum that allows one firm to provide accounting information regarding its purchase of another firm for a price substantially different from its book value. Goodwill can be negative, arising where the net assets at the date of acquisition, fairly valued, exceed the cost of acquisition. Negative goodwill is recognized as a liability.
For example, a software company may have net assets (consisting primarily of miscellaneous equipment, and assuming no debt) valued at $1 million, but the company's overall value (including brand, customer, intellectual capital) is valued at $10 million. Anybody buying that company would book $10 million in total assets acquired, comprising $1 million physical assets, and $9 million in goodwill. Goodwill has no predetermined value prior to the acquisition; its magnitude depends on the two other variables by definition.
The carrying value of an asset with associated goodwill may subsequently be adjusted by management, either by amortization or by means of occasional adjustments of the estimated value of the associated assets (primarily based upon their ability to generate cashflow and profits). The exact treatment and other details, particularly amortization, will depend on the accounting standards applied.
So what does this "impairment charge" actually cost the company?
Its all in numbers right? All of these people who are saying Sirius "lost" 4.88 billion mean absolutely nothing?
How does this impairment charge affect investors and the books?
ITS TOO BAD THE GENERAL PUBLIC..IE.. REPORTERS DONT UNDERSTAND WHATS GOING ON OR SIRIUS XM BUSINESS IN GENERAL
The loss was due to what would be the decline in value of the XM radio shares. XM radio is an impaired asset. They wrote down the value of the shares but they are still in their balance sheet. It is basically a revaluation under mark to market rules, capisca ?
I borrowed the definition below from one of her books:
Impaired asset: Is a condition in which an asset's market value falls below its carrying amount and is not expected to recover. This means that an asset's market valuation is less than the book value of the asset and the future cash flows to be generated from the asset are less than the net difference of the market value and the book value of the asset. At this point it becomes necessary to write down the value of the asset in the books by debiting a loss account (which will show up as an expense in the income statement) and crediting the respective asset account. This is a common occurrence for goodwill where a company will purchase another company for more than the value of the net assets of the target company. The write down for impaired goodwill occurs on annual basis because it is necessary to valuate goodwill annually according to GAAP.
YEA!!! THATS A GOOD ANSWER.. NOW POST THAT ON EVERY NEWS ARTICLE SINCE THEY DONT GET IT..
I can post that the writedown was "oportunistic"....
By writing assets down Sirius increased the likelihood of blowout earnings down the road because they have nothing that has gone sour to charge against those profits.
Please understand, this was a smart move, hopefully they do not screw up later.