What a CEO Firing Teaches Us About Accounting Charges
Wait- the CEO of GE got fired?
It’s true.
And, for GE, firing a CEO is unusual, because the prior two CEOs, Jack Welch and Jeffrey Immelt, had long tenures as head of this global company. John Flannery was fired by the board after less than two years.
What I was particularly interested in was this quote, which was one of the reasons given for the firing:
“GE also will take a $23 billion noncash charge for its struggling power business.”
I thought this was a great example to explain the purpose of an accounting charge.
What Happened
The accounting charge relates to GE’s power business, which was struggling for a variety of reasons. Trends in power production were moving against GE, and sales of turbines to gas and coal-fired power plants were stagnant. Lower sales meant higher inventory levels (GE produced too much inventory), and the firm couldn’t make as much money servicing new equipment that was sold.
Fewer sales, fewer turbines to service.
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Goodwill
Accounting defines goodwill as the dollar amount paid for an acquired company that is greater than the fair market value of the assets purchased. GE stated that its current (Oct 2018) goodwill balance on the GE Power division’s books is $23 billion and that the “goodwill impairment charge is likely to constitute substantially all of the balance.”
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Adjusting Entry
If goodwill, or the value of some other asset, is impaired, the value of the asset is permanently reduced. The accounting principle of conservatism requires assets to be stated at their true value- and if an asset is impaired, the amount of the impairment should be reclassified to an expense account.
Debit (increase) expenses, credit (decrease) the asset.
Keep this in mind, the next time you come across an accounting charge.
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Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
Co-Founder: accountinged.com
(email) ken@stltest.net
(website and blog) https://www.accountingaccidentally.com/
(you tube channel) kenboydstl