“Few companies are likely to be able to top the big charge — as much as $60 billion — that AOL Time Warner Inc. plans to take this year to write down “goodwill” assets gone bad. But it is a sure bet the maneuver will be imitated,” writes Jonathan Weil in today’s Wall Street Journal.

“Heading the list of companies that could be candidates for very large goodwill write-offs this year: telecommunications companies Qwest Communications International Inc. and WorldCom Inc. Others to watch include consumer-finance company Conseco Inc., container-manufacturer Crown Cork & Seal Co., and Aetna Inc., the health-care company.”

“All this because of a series of rule changes for valuing goodwill assets by the Financial Accounting Standards Board that take effect for most companies this year. Goodwill is the intangible asset created when one company pays a premium price to acquire another. Put simply, goodwill represents the amount by which the purchase price for a deal exceeds the fair value of the acquired company’s net assets.”

“Under the old rules, companies generally wrote down such goodwill gradually, over periods as long as 40 years. Also, thanks to loopholes in those rules, they often could leave overvalued goodwill assets on their balance sheets for years.”

“But routine quarterly amortization is now gone; as long as the goodwill remains valuable, companies may leave it on their balance sheets indefinitely. But once deemed overvalued, it must be written down immediately. In the most dramatic cases, that means big charges like the kind announced in recent months by AOL, JDS Uniphase Corp. and Nortel Networks Corp., each with goodwill charges stretching well into the tens of billions.”

“Companies taking goodwill-impairment charges typically play them down as ‘one-time’ items that don’t require cash outlays and don’t affect their operations. That isn’t the whole story, however. Companies taking such charges, in essence, are acknowledging that their assets — and thus the company itself — won’t generate as much cash as previously projected, notes Southern Methodist University accounting professor Wayne Shaw. ‘The problem is the cash flows of the combined company,’ he says.”

“Moreover, such charges can speak volumes about the quality of a management team and whether it exercised good judgment in paying so much for an acquisition that turned out to cost too much, some accounting professors say.”

“Most companies will have until the end of the second quarter to decide whether to write off any goodwill, and they will have a full year to determine the final size of any charges. For now, most companies with huge slugs of goodwill on their books remain tight-lipped about how the new accounting rule will affect them. Of the 30 companies with stocks that are components of the Dow Jones Industrial Average, all but six say in their most recent public financial filings that they haven’t determined whether they will have to take goodwill-impairment charges to comply with the new rules. The six that have made disclosures, including International Business Machines Corp., Microsoft Corp. and Procter & Gamble Co., say they won’t have to take any material charges.”

“The lack of information from most goodwill-laden companies has sent many analysts sifting for clues. In some cases, the need for an impairment charge seems obvious. One trick analysts use to identify candidates is to look for companies with stock prices that have declined sharply since big acquisitions, or which now trade for less than book value. To be sure, this isn’t the actual test that companies will use themselves; companies will use such things as independent appraisals or internal cash-flow projections for various business units. But a faltering stock price often is a telling indicator, signaling that the market value of a company’s assets is less than its purported value on paper.”