Like many of us, ConocoPhillips (COP) had a tumultuous 2008. In the 2008 COP annual report, the most dramatic change is a $25 billion decline in assets. Always starting with the balance sheet, I look to the stability of assets because earnings are so volatile. On inspection, COP's balance sheet showed that the decline occurred almost wholly in Goodwill.
Goodwill typically shows up on the balance sheet when a company has acquired another company. The price paid in excess of the tangible assets, such as property and plant, is carried in a category labeled "Goodwill."
Before 1970, this item simply stayed on the balance sheet. After 1970, accounting of Goodwill changed, leading to what Ian Cumming and Joseph Steinberg (co-chairs of Leucadia) described, "too much complexity robs simplicity and thus understanding." Warren Buffett also highlighted how the accounting of Goodwill diverges from economic reality in the 1983 BRK annual report.
FASB, seemingly believing that Goodwill should be eliminated, effectively calls for either its long term writeoff or its short term impairment. But all writeoffs are not alike; some are absurd.
When the stock market declined in the fourth quarter of 2008 (the time for impairment measures), the entirety of the powerful Exploration and Production segment was written off as impaired. To highlight the absurdity, this accounting impairment was identical to an event that occurred last year: Venezuela's expropriation of COP's assets. Is it possible that accounting cannot distinguish between stock market volaility and dictatorial asset appropriation?
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