McDonald's Corp. signage stands outside of a restaurant in Peru, Illinois, U.S. Photographer: Daniel Acker/Bloomberg
McDonald's Corp. signage stands outside of a restaurant in Peru, Illinois, U.S. Photographer: Daniel Acker/Bloomberg © Bloomberg

I agree with Jonathan Ford’s excellent analysis on the valuation of goodwill on corporate balance sheets (“ Fog of goodwill”, The Big Read, June 19), but have a few additional comments that may complete the picture.

While it is intelligent to be sceptical of the value of goodwill, it is also true that many companies have assets that current accounting rules do not permit to be recorded. For example, a company cannot capitalise as an asset an imputed value for its employees and human capital, although that is now generally the largest asset of most companies.

Moreover, many global companies such as McDonald’s, Nike and
BMW cannot capitalise their brand or logo as an asset, which if they were to sell themselves would be one of the largest assets recognised by the acquirer. The best way to ascertain whether goodwill has any economic value, not simply accounting value, is to examine one of the other major financial statements, the statement of cash flows, which is required to be prepared.

If a company has positive and increasing cash flows from operations, with sound investments in fixed and human assets over time, then one can likely infer that goodwill retains some value on the balance sheet. If not, then it is likely impaired reflecting poor management decisions regarding capital allocation and investors should avoid the investment.

Mark A Sherman
San Francisco, CA, US

Letter in response to this letter:

The market in the shares will value the brand / From David Damant, Stamford, Lincs, UK

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