Jds Uniphase Accounting Practices

Jds Uniphase Accounting Practices

Problem:

The problem is whether the company overpaid for the acquisitions and what does the existence of goodwill on the finical statements tell investors about the economic position of the company.

Decision:

The company should recognize the remaining balance of goodwill impairment in accordance with the new accounting rules which will better reflect the company’s position in the existing marketplace. JDS Uniphase’s overpaid for the numerous acquisitions, but the fact that the mergers were financed with company stock, verses cash, will not have a detrimental impact on the company in the long run.

Analysis:

Based on JDS Uniphase’s acquisition history, the total purchase price for the 14 companies acquired between June 1999 to February 2001 was $66,482.2 million of which $60,640.7 million consisted of goodwill. That’s a markup of roughly 91%. The goodwill was recorded because "hard assets" of the companies acquired could not be identified. The companies, as well as investors, bought businesses that showed potential promise, but didn't have anything of substance; thus when they were purchases, the only thing to book was goodwill. At the time, the company’s management was optimistic that the future income flow from the mergers will offset the premiums.

JDS Uniphase used over-inflated company stock to make the acquisitions. In this sense, no monetary value was deducted from the cash flow statement. Had they used cash instead of stock to make these acquisitions, the company would be more accountable to its shareholders. Since goodwill charge doesn’t represent a cash outlay, many investors ignore it when valuing a company’s performance.

Nevertheless, goodwill is reflected on the Balance Sheet under assets and amortized on the Income Statement under Operating Expenses. The periodic write-down of amortization reduces the company’s operating earnings. The company had an option of adopting a 40 year maximum timeframe to amortize goodwill. Instead they opted to capitalize it over a 5 year period. The rationale behind this decision is unclear; however, choosing the 40 year stance would have minimized the periodic earning effects by decreasing the amount charged towards gross profits.

With the new accounting rules, goodwill is carried as an asset without periodic reductions. Companies have to assess for impairment losses on annual basis. If goodwill is impaired, its carrying amount is reduced and a loss is recognized. This will help the company in the future since the new rules will better reflect the value of the acquired assets in the current market. Instead of using straight-line depreciation, the goodwill write-offs will be more reflective of the market’s conditions by periodically comparing the book value of goodwill versus it’s