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Consider the General Electrics 10-K report for 2018. In the statement of cash flows they report 22,136 million of cash gains attributed to (apparently positive) goodwill impairment in the value of companies they acquired. Isn't goodwill some intangible type of asset (like value due to reputation of a company) that can only be estimated vaguely and does not represent actual cash that's available to be spent?

My impression is:

Putting this goodwill value into the statement of cash flows GE seems to skew the picture to seem like they obtain a huge lump of cash out of thin air, which in actuality does not exist in any tangible form.

Am I correct with this conclusion, or am I missing something / misunderstood the reported numbers?

Kagaratsch
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2 Answers2

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The section "Cash Flows - operating activities" starts with "Net earnings" which includes both cash and non-cash items. The non-cash items have to be adjusted with the opposite sign used in the income statement to take their impact on net earnings out of the cash flow statement. The goodwill impairment showing here is undoing its effect on net income. It is not a source of cash.

Consider a hypothetical that would never happen. Revenue, paid in cash of $5. Expenses of $2 for labor and goods, paid in cash. And $1 in goodwill impairment. One took in $5 cash, paid $2 cash and had cash flow of $3.

Income:
Revenue: $5.
Expense:
  Labor and goods: $2 (minus)
  Goodwill impairment: $1. (minus)
Net income: $2

Cash Flow from operating expenses
Net income: $2
Adjustments to reconcile net earnings to cash provide from operating activities:
  Goodwill impairment: $1
Cash from operating expenses: $3
Shannon Severance
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Goodwill is essentially the additional intangible value of an acquired asset. At some point GE bought something for $100 when the book value was only $90, as a result (to balance the accounting) a $10 goodwill entry appears.

This is a great example of what makes financial analysis an art not a science. Reported financial statements are one part business performance disclosure and one part income tax related calculations. As you've noticed, sometimes this leads to results that an investor would deem to be erroneous. In addition to the goodwill accounting entries there are rules about how and when goodwill depreciates.

This is why calculations like EBITDA (Earnings Before Interest Taxes Depreciation & Amortization) are important to investors. While it is not perfect, EBITDA intends to remove these non-business charges and credits from net earnings to get a better idea of how the business is performing.

Rest assured, GE isn't doing anything unique. Bottom-line "net earnings" or "profit" rarely tells the whole story.

quid
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