What forces cause a company to write down goodwill?

Question

Consider TimeWarner: In 2002, $128Billion of its $209Billion in assets was Goodwill. What forced them to write down this goodwill to $37billion a few years later?

Answer 1

Goodwill arises from the purchase of one company by another. To continue the use of your TimeWarner example, it may have purchased another company in 1999 for $300Billion. That company--let's call it Tweeter--had assets of $200B and liabilities of $40Billion. Stating that in a different way, Tweeter had a 'Book Value' of $160B when it was purchased for $300B. The difference, which is $140B, is considered "goodwill," which is an intangible asset on the balance sheet of TimeWarner.

Now, how does it get reduced or "written down"? A write down occurs when it has become evident that the goodwill is no longer valued at the original amount. It could be that, for example, Tweeter is no longer a fashionable designer of menswear. It could be that Tweeter is a drug manufacturer and their promising treatment for cancer failed in late-stage testing with the Food and Drug Administration.

In other words, this asset (Goodwill) is no longer worth as much as it once was. Because conservatism is a central part of Generally Accepted Accounting Principals, we (as accountants) do not allow assets on our books (or balance sheet) at an amount that overstates actual value.

Thus, the write down!