Remember the commotion over deterioration of goodwill? Once before the coronavirus dropped the world from its axis, it was a big deal. In fact, in early 2020, regulators were looking to redefine the concept of goodwill (which refers to the difference between the purchase price of an acquired business and its carrying amount) to complete the financial information.
In one of the most notable cases of deteriorating goodwill in recent memory, Kraft Heinz had to withdraw more than $ 15 billion from its book value in early 2019. The huge annotation was one of the chains of misfortune. of the moment for the world food producer. , which also had to cut its dividend and face an SEC investigation into its accounting for internal procurement and controls. Kraft Heinz learned this month that his headaches related to goodwill are not over.
Last week, an Illinois federal judge ruled that a class action lawsuit could be filed stemming from the inadequacy of goodwill. The origins of the lawsuit go back to the 2015 merger of JJ Heinz Co. and Kraft Foods Group Inc. value of its iconic brands and ultimately required the deterioration of the goodwill of $ 15 billion. U.S. District Judge Robert M. Dow denied Kraft-Heinz’s offer to withdraw the lawsuit, noting that the complaint “provides specific (not scattered) examples that support the allegations that defendants they reduce maintenance and quality assurance costs throughout the company and that these decisions caused problems. “
Nor is Kraft-Heinz the only company with legal issues related to the deterioration of goodwill. Sequential Brands Group is currently facing two lawsuits stemming from a deterioration in goodwill revealed in 2017. The SEC filed a lawsuit against Sequential (owner of consumer brands such as William Rast and Joe’s Jeans) in December. Months later, investors filed a class action lawsuit in California federal court.
Both cases stem from allegations that Sequential delayed the disclosure of a goodwill impairment of more than $ 300 million for about 12 months. Coincidentally, the new class action lawsuit includes a claim that the SEC’s lawsuit brought down the company’s share price, which added to the damage suffered by investors as a result of prior announcements about the charge.
The fact that significant impairments in goodwill stimulate investor litigation is not a surprise. These legal actions have become a rural house industry within the legal sector. In addition, the nebulous concept of goodwill leaves ample room for faulty assumptions and creative accounting.
As noted by the chairman of the Financial Accounting Standards Board, Richard Jones, in a recent report, FASB staff members are investigating possible changes in the existing pattern of goodwill impairment. These recent demands indicate that both investors and companies could benefit from an approach that offers greater clarity.
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