Analysis Of The Problem Of Goodwill Impairment In Dongfang Precision’s Merger And Acquisition Of Pride Power

With the increasing scale of capital market mergers and acquisitions,the scale of M&A goodwill has also increased rapidly.Goodwill,as a special asset,will be affected by certain subjective factors in its initial recognition and subsequent measurement.In the process of mergers and acquisitions,it is easy for the acquirer to pay a high premium for the merger cost to recognize high goodwill,and there are also provisions for subsequent measurement.The risk of a huge impairment of goodwill has a huge impact on the business performance of the company.The provision for impairment of goodwill may be due to the decline in the operating performance of the acquired party,and its ability to obtain economic income in the future has declined;or the management may make a large amount of impairment of goodwill at a certain moment for the needs of earnings management So as to complete the thorough cleaning of business performance.Since the provision of goodwill impairment has certain subjective operability and will affect the business performance of enterprises,how to reduce the negative impact of goodwill impairment on the enterprise has become a practical research question.In order to further expand its business segment,Dongfang Precision Corporation acquired the entire equity of Beijing Pride Power Company at a high premium to form a huge amount of goodwill.However,in the second year after the merger,Pride Power Company did not meet the expected performance of the acquisition.The devaluation of goodwill was accrued,which resulted in a huge loss of operating profit of Dongfang Precision Corporation that year,which had a great negative impact on the company.The case of impairment of goodwill in mergers and acquisitions involves the payment of high premiums for the merger consideration,excessively high performance promised profits,and the management’s earnings management behavior.This paper is divided into five parts.The first part mainly introduces the research background of this paper and the significance of the topic,sorts out the literature review of the related theoretical research on goodwill impairment,sorts out the research ideas of this paper and propose the research methods used in this paper.The second part is an overview of the related theories of goodwill impairment.It specifically introduces the concept of goodwill,the factors affecting the impairment of goodwill,economic consequences and theoretical basis.The third part is an introduction to the case of Dongfang Precision Corporation’s acquisition of Pride Power Company.Introduce the basic status of the companies on both sides of the merger,the merger process,the motivations of the merger,and the merger goodwill and impairment of goodwill.The fourth part is the analysis of the reasons for the impairment of goodwill and the economic consequences.This paper analyzes the reasons for the impairment of goodwill from the four aspects of industry and operating risks,asset valuation,performance commitment,and earnings management,and analyzes the economy consequences of goodwill impairment from the three aspects of financial performance,capital markets,corporate business and shareholders.The fifth part is the conclusion and enlightenment.First of all,this paper believes that high valuations and high premium payments during mergers and acquisitions will cause the initial recognition of goodwill to be too high,which will subsequently bring the company the risk of accruing a huge amount of goodwill impairment;secondly,too high performance commitments are also the important reason for the provision of goodwill impairment,and the provision of goodwill impairment is likely to be a tool for the management to manipulate earnings management;finally,the provision of goodwill impairment will cause a decline in the financial performance of the company in the year and release bad signals to investors in turn lead to a series of negative economic consequences such as the company’s share price decline.Based on the above research conclusions,this article puts forward the following recommendations: First,the company should conduct a comprehensive and rational assessment of the possible future risks of the acquired party before the merger,and use reasonable valuation methods to value the acquired party during the merger.To avoid the risk of the company’s subsequent increase in the amount of goodwill impairment due to the overly high initial entry of goodwill;secondly,the merger and acquisition parties should sign appropriate performance commitments to prevent subsequent business performance from failing to meet performance commitments.Requirements are forced to withdraw goodwill impairment;finally,we can consider reintroducing the amortization method and use it in conjunction with the impairment test method to improve the follow-up measurement method of goodwill.At the same time,government regulators should urge enterprises to increase the disclosure of information on impairment of goodwill and strengthen the market supervision responsibilities of third-party institutions to prevent the risk of goodwill impairment to the enterprise.