Linda Keith CPA Lender's Q&A Blog

  1. Character is key in a loan decision. What does it tell us?

    Linda Keith CPA helps lenders say 'Yes' to good loans. Through virtual and in person training on tax return analysis and financial statement analysis, lenders/underwriters/analysts learn to qualify the borrower, understand the business and make good loan decisions.

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  2. Linda Keith CPA answers a loan officers question about Inventory Write-Downs on Financial Statements. Can these be added back?

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  3. A lender asked how to take needed capital expenditures into account when considering debt payment capacity and calculating debt coverage ratio.

    Linda has worked with financial institutions all over the country for over twenty years to make good loan decisions for businesses and farm operations. She shares four ways she has seen it done.

    Linda Keith CPA helps lenders, underwriters and analysts say "yes" to good loans. Through in person and virtual training she helps you understand the business and other sources of income and qualify the borrower if ti is a good loan.

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  4. *Did the buyer guess right?*

    The first problem with goodwill is that we are counting on the acquiring company to have guessed at the amount correctly. Do they have the knowledge and judgment to assess the reputation, brand, personnel and other intangible value of the acquired company accurately.

    *You cannot use it if the loan goes bad.*

    The second problem is that as an intangible, if something goes wrong, it is not collateral you can get your hands on. Most lenders and credit analysts attending my Financial Statement Analysis training tell me they subtract intangible assets when calculating Return on Assets or any ratio that includes assets in the mix.

    *Goodwill can change very quickly.*

    The third problem is that these intangibles can change based on what the acquiring company does. A company can enhance reputation by their actions. But they also can kill it.

    Have you ever been in a store that recently changed hands and decide you won't be back? Or been pleasantly surprised? That is because what the new owners have done has either detracted from or enhanced customer service, product selection, cleanliness of the store, or something else that is important to you.

    *What it does tell you…*

    If the Balance Sheet is based on Generally Accepted Accounting Principles (GAAP), the existence of Goodwill in the asset section shows the company acquired another company. And in this company's judgment, the other company was worth more than the value of the tangible assets (inventory, equipment, buildings) included in the purchase.

    Good to know, but I would not read a lot more into it unless you have a great deal of confidence in the judgment used and are comfortable that nothing has eroded that goodwill.

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  5. Mark’s Question:

    On the balance sheet of a Media Production Company, total assets are reported at $4,048,395 and consist primarily of goodwill of $3,312,324. When asked, the management team of the company stated “goodwill was established at the time when investor dollars were sought to enhance the company”. This company has one 60% ‘partner’ and 51 other partners. Can they just ‘book’ goodwill?

    My Answer:

    It sounds similar to real estate development companies where there is the developer owner and the other 51 are the investors. So I can see why the 60% owner would need to show the value to entice the investor partners. But booking goodwill is not the way to do it.

    More from the borrower

    The borrower’s management team went on to say: “In essence, we created the company to show investor capital and business activities moving forward. The goodwill dollars are based on existing company contracts, sales, and net income figures from the prior years.”

    Okay, that’s their story. Here are some variations on the GAAP (Generally Accepted Accounting Principles) definition. Without more information, it does not look right to me, but maybe I am missing a critical piece of information.

    Three definitions of goodwill

    Here is the Investopedia definition:

    An intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company’s balance sheet.

    And one of my favorite resources, Wikipedia!

    Goodwill in accounting is an intangible asset that arises when one company acquires another, but pays more than the fair market value of the net assets (total assets – total liabilities). The goodwill amounts to the excess of the “purchase consideration” (the money paid to purchase the asset or business) over the total value of the assets and liabilities.

    And from InvestorWords.com

    An intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company.

    This company must have acquired another company

    Notice all three reference the acquisition of the company. So if there is substantial goodwill on the media production company’s balance sheet, that should indicate an acquisition of another company. One does not simply get to ‘book’ goodwill to try to indicate value in the absence of an arms-length transaction. Otherwise, we all could simply add goodwill to the books.

    Heck, I have a good reputation with you, Mark, and that is worth something! I think I’ll book another $10,000 goodwill. See the problem?
    Who established the goodwill?

    So, Mark, I do not understand the comment that goodwill was established. By whom? I do not disagree that they enticed the investors with the ‘value’ of the business opportunity when encouraging them to invest. But that would be a ‘market value’ balance sheet, not a GAAP Balance Sheet.

    As you get more info on this, Mark, I would love to hear more about this explanation. Did this media production company acquire another company? Maybe. If so, that is where the goodwill is coming from.
    Tell me what you learn

    Remember, Mark, your payment for this great advice is to keep me in the loop should you find out something that clears it up. I am curious!

    Featured Online Module

    Goodwill is a Balance Sheet item. For more on the other aspects of the Balance Sheet that help you understand the resources the company has and how they are leveraged, take our self-study online module:

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