Aurora Cannabis (NYSE: ACB) is a Canadian-based cannabis producer valued at $390 million by market cap.
At the end of fiscal 2019 (ended in June), Aurora Cannabis reported goodwill of CA$3.17 billion on its balance sheet. In fiscal 2020, its goodwill reduced to CA$928.4 million, while at the end of fiscal 2021, it stood at CA$887.73 million.
In fiscal 2019, Aurora Cannabis' goodwill accounted for 58% of total assets. At the end of fiscal 2021, goodwill accounted for 34% of total assets for Aurora Cannabis.
The decline in the company's goodwill can be attributed to the impairment of these intangible assets. So, what is goodwill impairment, and when does a company write off the asset?
Goodwill is an intangible asset recorded on a company's balance sheet and is generally associated with an acquisition undertaken by an organization. Intangible assets do not exist physically and, in addition to goodwill, may also include trademarks, patents or copyrights. Comparatively, tangible assets such as land, buildings, inventory or machinery have an intrinsic value.
So, the goodwill is reported on the financial statements if the acquisition price of a company is higher than its book value. Also known as the net asset value, the book value is the total assets owned by the company after excluding intangibles and liabilities. Book value is the total value of assets that shareholders may receive in case of a company's liquidation.
For example, if a company's book value is $1 billion and its acquisition price is fixed at $1.2 billion, the goodwill will amount to $200 million.
The premium paid for the acquisition can be a function of the company's wide economic moat, brand value, patents, or even its customer base.
According to accounting guidelines, goodwill needs to be checked for impairments annually. If the value of the acquired company deteriorates, it will result in an impairment charge, lowering the goodwill amount on the balance sheet. A goodwill impairment charge indicates acquisitions were overvalued, and the premium paid is not justified.
The goodwill impairment may be recorded due to challenging economic conditions, lower-than-expected revenue, increased competition, and regulatory issues, among others.
A significant goodwill impairment charge generally results in a depreciation of a company's stock price.
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