Entercom Suffers Loss Due to...

[Garrett Wollman]

<<On Wed, 01 Aug 2007 18:36:43 -0400, Roger Kirk <rogerkirk@ttlc.net> said:

> R&R today reported that Entercom's net income per share dropped in Q2 to 
> a loss of 32 cents a share because of a $45+  million charge for 
> "impairment of goodwill."

> Anybody on the list that can explain "impairment of goodwill"?

IANAA, but sure.

When one company purchases another, or buys, sells, or exchanges
businesses, there are generally two values involved.  The first value
is the value of the asset as an operating business, with whatever
presence in the marketplace it may have.  If the purchaser paid cash
for the other business, then this value is equal to the consideration
paid.  (Things get squidgy when you have exchanges of
supposedly-equal-valued assets, but that's what they pay the accounts
the big bucks to figure out.)  The second value is the value at which
the asset is actually being carried on the seller's books, or "book
value".  This value does not reflect, for example, the value that a
station gets from name recognition, hiring good talent, its sales
force, and so on, but just the economic cost of acquiring and
maintaining the business, both tangible (e.g., real estate,
transmitters, studio furniture) and intangible (e.g., licenses).

As the foregoing suggests, it is normal for these two values to
disagree.  In accordance with the principles of accounting, however,
no transaction can create or destroy value; all bookkeeping entries
must balance out to zero.  So if company B purchases business C from
company A for $10 million, but the book value C is only $8 million,
the other $2 million must somehow be accounted for.  The way modern
accounting does this is by presuming there is some intangible asset
associated with C that made B's presumed-rational executives pay more
than book value for it, and that asset is called "goodwill".

Under current accounting practice, this goodwill remains on the books
of the acquiring company until either the business it is associated
with it is sold, or some business event or new understanding of the
marketplace requires the company to reduce its estimate of the value
of the business.  The resulting reduction is called "impairment of
goodwill".  (There are specific accounting rules about how and when
this is supposed to happen.  Previously, goodwill was depreciated like
other assets, but for various reasons the financial standards people
decided that this was not a good idea.  Now public companies must
"test for impairment" of goodwill in certain circumstances and
promptly report material changes to shareholders.)

-GAWollman
(Proving once again that one can learn a lot by reading the annual
reports of companies one invests in.)