Goodwill and its Amortization: The Rules and The Realities
This appendix deals only with economic and accounting Goodwill – not the goodwill of everyday usage. For example, a business may be well liked, even loved, by most of its customers but possess no economic goodwill. (AT&T, before the breakup, was generally well thought of, but possessed not a dime of economic Goodwill.) And, regrettably, a business may be disliked by its customers but possess substantial, and growing, economic Goodwill. So, just for the moment, forget emotions and focus only on economics and accounting.
When a business is purchased, accounting principles require that the purchase price first be assigned to the fair value of the identifiable assets that are acquired. Frequently the sum of the fair values put on the assets (after the deduction of liabilities) is less than the total purchase price of the business. In that case, the difference is assigned to an asset account entitled "excess of cost over equity in net assets acquired". To avoid constant repetition of this mouthful, we will substitute "Goodwill".
当一个公司被并购时，会计准则要求并购价格首先分配给所并购的可确认资产的公 允价值。资产的公允价值总和（经过扣除负债后）经常是少于公司的并购总价格。在这种情况，这两者的差异就被分配到一个资产帐户，称为“超出并购的净资产权 益的额外成本”。为了避免不断的重复这一很长的说法，我们将用“商誉”来替代之。
Accounting Goodwill arising from businesses purchased before November 1970 has a special standing. Except under rare circumstances, it can remain an asset on the balance sheet as long as the business bought is retained. That means no amortization charges to gradually extinguish that asset need be made against earnings.
The case is different, however, with purchases made from November 1970 on. When these create Goodwill, it must be amortized over not more than 40 years through charges – of equal amount in every year –to the earnings account. Since 40 years is the maximum period allowed, 40 years is what managements (including us) usually elect. This annual charge to earnings is not allowed as a tax deduction and, thus, has an effect on after-tax income that is roughly double that of most other expenses.
That’show accounting Goodwill works. To see how it differs from economic reality, let’s look at an example close at hand. We’ll round some figures, and greatly oversimplify, to make the example easier to follow. We’ll also mention some implications for investors and managers.
Blue Chip Stamps bought See’s early in 1972 for $25 million, at which time See’s had about $8 million of net tangible assets. (Throughout this discussion, accounts receivable will be classified as tangible assets, a definition proper for business analysis.) This level of tangible assets was adequate to conduct the business without use of debt, except for short periods seasonally. See’s was earning about$2 million after tax at the time, and such earnings seemed conservatively representative of future earning power in constant 1972 dollars.
Blue Chip Stamps于1972年初以2500万美元购买了喜诗糖果。当时，喜诗有大约8百万的净有形资产。（在整个讨论中，应收帐款将被归于有形资产，这个定义对商业分析是适合的。）这个水平的有形资产，除了季节性的短时期，当时足够不用债务而运营业务。喜诗当时的税后盈利是2百万美元，这似乎保守的代表了以1972年美元计的未来盈利能力。
Thus our first lesson: businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.
In 1972 (and now) relatively few businesses could be expected to consistently earn the 25% after tax on net tangible assets that was earned by See’s – doing it, furthermore, with conservative accounting and no financial leverage. It was not the fair market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.
在1972年（和现在）相对来说只有很少的公司能像喜诗那样稳定的获得25%的 税后净有形资产回报率。而且这种回报率还是建立在保守的会计方式和没有财务杠杆的情况下。并不是公允市场价值的库存，应收款，或者固定资产，产生了这种非 凡的回报率。正好相反，是无形资产的组合，尤其是在消费者中良好的声誉产生了这一切。这种良好的声誉是建立在消费者对其产品以及公司员工无数愉快的体验之 上。
Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price. Consumer franchises are a prime source of economic Goodwill. Other sources include governmental franchises not subject to profit regulation, such as television stations, and an enduring position as the low cost producer in anindustry.
Let’s return to the accounting in the See’s example. Blue Chip’s purchase of See’s at $17 million over net tangible assets required that a Goodwill account of this amount be established as an asset on Blue Chip’s books and that $425,000 be charged to income annually for 40 years to amortize that asset. By 1983, after 11 years of such charges, the $17 million had been reduced to about $12.5 million. Berkshire, meanwhile, owned 60% of Blue Chip and, therefore, also 60% of See’s. This ownership meant that Berkshire’s balance sheet reflected 60% of See’s Goodwill, or about $7.5 million.
In 1983 Berkshire acquired the rest of Blue Chip in a merger that required purchase accounting as contrasted to the “pooling” treatment allowed for some mergers. Under purchase accounting, the“fair value” of the shares we gave to (or “paid”) Blue Chip holders had to be spread over the net assets acquired from Blue Chip. This “fair value” was measured, as it almost always is when public companies use their shares to make acquisitions, by the market value of the shares given up.
The assets “purchased” consisted of 40% of everything owned by Blue Chip (as noted, Berkshire already owned the other 60%). What Berkshire “paid” was more than the net identifiable assets we received by $51.7 million, and was assigned to two pieces of Goodwill: $28.4 million to See’s and $23.3 million to Buffalo Evening News.
“并购”的资产包括了Blue Chip所拥有的所有东西的40%（如上所示，伯克希尔一直拥有余下的60%）。当伯克希尔“支付”的超过了我们收到的5170万美元可确认净资产，这一超出的部分被分配到两部分商誉：2840万美元在喜诗，以及2330万美元在Buffalo Evening News。
After the merger, therefore, Berkshire was left with a Goodwill asset for See’s that had two components: the $7.5 million remaining from the 1971 purchase, and $28.4 million newly created by the 40% “purchased” in 1983. Our amortization charge now will be about $1.0 million for the next 28 years, and $.7 million for the following 12 years, 2002 through 2013.
In other words, different purchase dates and prices have given us vastly different asset values and amortization charges for two pieces of the same asset. (We repeat our usual disclaimer: we have no better accounting system to suggest. The problems to be dealt with are mind boggling and require arbitrary rules.)
But what are the economic realities? One reality is that the amortization charges that have been deducted as costs in the earnings statement each year since acquisition of See’s were not true economic costs. We know that because See’s last year earned $13 million after taxes on about $20 million of net tangible assets – a performance indicating the existence of economic Goodwill far larger than the total original cost of our accounting Goodwill. In other words, whilea ccounting Goodwill regularly decreased from the moment of purchase, economic Goodwill increased in irregular but very substantial fashion.
Another reality is that annual amortization charges in the future will not correspond to economic costs. It is possible, of course, that See’s economic Goodwill will disappear. But it won’t shrink in even decrements or anything remotely resembling them. What is more likely is that the Goodwill will increase– in current, if not in constant, dollars – because of inflation.
That probability exists because true economic Goodwill tends to rise in nominal value proportionally with inflation. To illustrate how this works, let’s contrast a See’s kind of business with a more mundane business. When we purchased See’s in 1972, it will be recalled, it was earning about $2 million on $8 million of net tangible assets. Let us assume that our hypothetical mundane business then had $2 million of earnings also, but needed $18 million in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic Goodwill.
A business like that, therefore, might well have sold for the value of its net tangible assets, or for $18 million. In contrast, we paid $25 million for See’s, even though it had no more in earnings and less than half as much in “honest-to-God” assets. Could less really have been more, as our purchase price implied? The answer is “yes”– even if both businesses were expected to have flat unit volume – as long as you anticipated, as we did in 1972, a world of continuous inflation.
To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double.
But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales meansc orrespondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner.
但是关键的是，为了达到这一点，两者恐怕都必须把正常的净有形资产投资翻倍。 因为这就是通胀常常强加于商业的经济要求，有好处也有坏处。以美元计的销售额翻倍意味着更多的钱必须马上被用在应收款和库存。固定资产所用的钱对通胀会有 较慢的反应，但肯定会有反应。而且，所有这些通胀要求的投资将无法改善回报率。这种投资的原因在于维持业务的生存，而不是拥有者利益的增长。
Remember, however, that See’s had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large – a need for $18 million of additional capital.
After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its tangible assets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)
See’s, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 million in additional capital – over $3 of nominal value gained for each $1 invested.
Remember, even so, that the owners of the See’s kind of business were forced by inflation to ante up $8 million in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least.
And that fact, of course, has been hard for many people to grasp. For years the traditional wisdom – long on tradition, short on wisdom –held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets (“In Goods We Trust”). It doesn’t work that way. Asset-heavy businesses generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.
然而这个事实，当然一直很难被许多人领悟。多年以来，传统智慧，（长于传统， 短于智慧）认为充满天然资源，工厂，机器和其他有形资产（“我们信赖的商品”）的业务能够提供最好的通胀保护。其实根本不是这样。重资产的业务通常获得低 回报率，低到仅能提供足够的资本来满足现存业务的通胀下需求，而根本无法剩下任何东西来支持真正的增长，分配股息给所有者，或者并购新的业务。
In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional businesses. This phenomenon has been particularly evident in the communications business. That business has required little in the way of tangible investment – yet its franchises have endured. During inflation, Goodwill is the gift that keeps giving.
与之相反，不成比例的大量商业财富在通胀时期积累起来。这些财富是通过拥有一 些业务运营而实现的，这些运营结合了具有持久价值的无形资产与相对很少的有形资产需求。在这些例子里，名义盈利大幅增加，这些资金可以用来并购其他的业 务。这种现象在通讯行业尤为明显。这一行业仅需要很少的有形资产投资，但是却能保持特许经营权。在通胀时期，商誉是不断奉献的礼物。
But that statement applies, naturally, only to true economic Goodwill. Spurious accounting Goodwill – and there is plenty of it around –is another matter. When an overexcited management purchases a business at a silly price, the same accounting niceties described earlier are observed. Because it can’t go anywhere else, the silliness ends up in the Goodwill account. Considering the lack of managerial discipline that created the account, under such circumstances it might better be labeled “No-Will”. Whatever the term, the 40-year ritual typically is observed and the adrenalin so capitalized remains on the books as an “asset” just as if the acquisition had been a sensible one.
但是这一论断自然只适用于真正的经济商誉。欺骗性的会计商誉（有很多这样的例 子）是另外一码事。当一个过度兴奋的管理层用愚蠢的高价购买一个业务时，前面描述的同样的会计细节也能被观察到。因为它无处可去，愚蠢的买价最终留在商誉 帐户。考虑到由于缺乏管理纪律而创造的这样一个帐户，在这种情况下，应该称之为“无誉”。无论期限，通常可以观察到40年的仪式性摊销。管理层追求刺激的肾上腺素被资本化保留在帐面上作为一项“资产”，就好像这个并购是一个明智的举动。
If you cling to any belief that accounting treatment of Goodwill is the best measure of economic reality, I suggest one final item to ponder.
Assume a company with $20 per share of net worth, all tangible assets. Further assume the company has internally developed some magnificent consumer franchise, or that it was fortunate enough to obtain some important television stations by original FCC grant. Therefore, it earns a great deal on tangible assets, say $5 per share, or 25%.
With such economics, it might sell for $100 per share or more, and it might well also bring that price in a negotiated sale of the entire business.
Assume an investor buys the stock at $100 per share, paying in effect $80 per share for Goodwill (just as would a corporate purchaser buying the whole company). Should the investor impute a $2 per share amortization charge annually ($80 divided by 40 years) to calculate“true” earnings per share? And, if so, should the new “true” earnings of $3 per share cause him to rethink his purchase price?
We believe managers and investors alike should view intangible assets from two perspectives:
我们相信经理人和投资者应该从两个视角看待无形资产： 1. In analysis of operating results – that is, in evaluating the underlying economics of a business unit – amortization charges should be ignored. What a business can be expected to earn on unleveraged net tangible assets, excluding any charges against earnings for amortization of Goodwill, is the best guide to the economic attractiveness of the operation. It is also the best guide to the current value of the operation’s economic Goodwill.
In evaluating the wisdom of business acquisitions, amortization charges should be ignored also. They should be deducted neither from earnings nor from the cost of the business. This means forever viewing purchased Goodwill at its full cost, before any amortization. Furthermore, cost should be defined as including the full intrinsic business value – not just the recorded accounting value – of all consideration given, irrespective of market prices of the securities involved at the time of merger and irrespective of whether pooling treatment was allowed. For example, what we truly paid in the Blue Chip merger for 40% of the Goodwill of See’s and the News was considerably more than the $51.7 million entered on our books. This disparity exists because the market value of the Berkshire shares given up in the merger was less than their intrinsic business value, which is the value that defines the true cost to us.
在 评估商业并购是否明智时，摊销费用也应被忽略。摊销费用既不应该从业务的盈利中减去，也不应该从业务的成本中扣除。这意味着永远视所购买的商誉为在任何摊 销之前的全部成本。更重要的是，并购成本应该被定义为，包含所支付代价的全部内在商业价值，而不仅是其记录的会计价值，不论合并当时所涉及的证券的市场价 格，也不管是否允许用合并会计处理。比如，我们在合并Blue Chip 40%的喜诗和Buffalo Evening News的商誉时，真正支付的代价远超过我们记录在账面上的5170万美元。这种不一致的存在是由于在合并时，伯克希尔股票的市场价值低于其内在商业价值，对我们来说这才是决定真实成本的价值。
Operations that appear to be winners based upon perspective (1) may pale when viewed from perspective (2). A good business is not always a good purchase – although it’s a good place to look for one.
We will try to acquire businesses that have excellent operating economics measured by (1) and that provide reasonable returns measured by (2). Accounting consequences will be totally ignored.
At yearend 1983, net Goodwill on our accounting books totaled $62 million, consisting of the $79 million you see stated on the asset side of our balance sheet, and $17 million of negative Goodwill that is offset against the carrying value of our interest in Mutual Savings and Loan.
在1983年底，在我们会计帐面上的净商誉是6200万美元，包括7900万美元标明在资产负债表的资产一侧，以及1700万美元负的商誉以冲销我们持有的Mutual Savings and Loan的权益价值。
We believe net economic Goodwill far exceeds the $62 million accounting number.