Goodwill Explained: Quindell Context

I'm not an accountant, so to put it rather crudely, Goodwill is basically the difference between what you pay for an asset and its net asset value at the time of purchase.


e.g.

I buy a company for £100m, but the net asset value is only £80m. This means that the Goodwill figure in this example is £20m.


In theory, Goodwill is meant to represent the hard to value intangible assets such as: employees, brand name, market share, expertise, etc.


In the case of Quindell, who are having their accounts scrutinised at the moment and are also in the midsts of an FCA investigation, Goodwill is likely to play an important role in the up and coming release of their revised accounts, purely because it has been historically a pretty large percentage of their balance sheet.


If we look at Quindell's Report Year ending 31 December 2013, we find this statement:

"Goodwill recorded in the Statement of Financial Position at the end of December 2013 totalled £235.6 million of which £181.4 million was in relation to the Group’s Services Division and £54.2 million in relation to the Solutions Division."


Now, it's not surprising that Quindell has had some large Goodwill figures in its balance sheets, because they were a very heavily acquisitive firm in the early stages of the company. Nevertheless, I felt that I ought to issue a warning to other shareholders (like myself), because I suspect that there's a decent chance that we could see some impairment charges to this Goodwill figure (downward revisions).


In this case, it's therefore quite likely that we could see a "faux-drop" in the total company equity in the "financial statements" section of the results. If this happens, it's worth remembering a few things:


1. The Quindell we have now is the important focus for longer term holders.

2. The sale of the Professional Services Division (the historic big earner) means that the re-publishing of the results are in my opinion of little relevance going forwards.

3. Accountancy regulations dictate that Goodwill can only be recognised if you pay for the asset - a home-grown brand can't have a Goodwill figure, making the situation potentially very confusing when looking at the company's "true" value.

4. Goodwill is horrifically subjective (who's to say if you payed too much for a company or not?), meaning that you can make a pretty good argument for ignoring any revisions within five percent of the figure.


Have a nice day,

The Masked Stock trader