Wednesday, March 6, 2013

Something interesting: Warren buffet's comments on goodwill

Just want to share with you some interesting comments by Warren Buffet, a promoninent value investor relating to goodwill.

" ... $15.5illion of goodwill that is attributable to our insurance companies and inlcuded in book value as an asset. In effect, this goodwill represents the price we paid for the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true value, For example, if an insurance sustain large and prolonged underwriting losses, any goodwill carried on the books should be deemed valueless, whether its original cost" (Extracted from Berkshire Hathway- Letter by Warrent Buffet to the shareholders- 2012"

What Warrent Buffet commented is true from a commercial perspective. Goodwill represents the premium a company paid for in an acquisition. The true value on the book could be higher than its book value. If management opined that the true value of the goodwill is lesser than its book value, then the goodwill need to be written down to its recoverable amount. For a company in sustained losses position, it is no easy to proof that no impairment is required for this goodwill.

As a result, as a auditor, we need to perform thorough review on the impairment assessment of goodwill instituted by management.

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