Published February 20, 2009

Lower goodwill impairments for local firms

By LYNETTE KHOO

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SINGAPORE companies are likely to see lower goodwill impairments on past transactions than their global peers, based on a study by audit firm Ernst & Young (E&Y).

'...the goodwill element becomes more susceptible to volatility and write-downs...' - Jim Eales, E&Y's global head of valuation and business modelling services

It found that in corporate transactions worldwide, an average of 47 per cent of enterprise value (EV) was ascribed to 'goodwill'. Only 23 per cent was attributed to identified intangible assets such as brands.

But looking at transactions by Singapore companies, the proportion of goodwill was much lower at 28 per cent of EV.

The global survey looked at 709 transactions disclosed in companies' 2007 annual reports and other public sources across 13 industries in 21 countries. Nineteen Singapore companies were part of the study.

Goodwill is the difference between the price paid for a business and the fair value of its identifiable assets. It stems mainly from synergies and future prospects.

But goodwill could also turn out to be pie in the sky. Companies have to make impairments on goodwill during volatile market conditions under fair value accounting.

'In the current difficult economic conditions, the goodwill element becomes more susceptible to volatility and writedowns, which can have a significant impact on investor confidence and on the company's financial health,' said Jim Eales, E&Y's global head of valuation and business modelling services.

Andre Toh, E&Y's partner for transaction advisory services, noted that Singapore companies could be less willing to pay for goodwill than their global peers because most of their transactions take place in the Far East.

'These transactions happen in the same backyard - that's where Singapore is. Singapore companies are, hence, more reluctant to pay for any strategic footprint or penetration into the Far East market,' Mr Toh said.

There appears to be more synergy when there are no overlapping markets.

Given current poor conditions, companies now are probably less willing to pay for goodwill, the E&Y partners said.

The global survey also found that companies did not usually disclose the methods used to value recognised intangible and tangible assets.

The consumer products sector had the highest average allocation of EV to goodwill at 65 per cent. The technology sector was next with 60 per cent.

The most commonly identified intangible assets are customer relationships and contracts - cited by buyers in 44 per cent of the deals surveyed.

These assets are particularly important in the insurance and telecommunications industry, where transactions are often motivated by the purchase of a client portfolio.