When you do M&A, you often pay what you call “lucky money.” It is a price that is paid more than the fair value of the acquired company’s net assets.

1.
When you do M&A, you often pay what you call “lucky money.” It is a price that is paid more than the fair value of the acquired company’s net assets.

A significant portion of the excess money is reflected as intangible assets (operating rights and other intangible assets) in the consolidated financial statements. Other intangible assets refer to the amount of evaluation of the brand value, customer value, technology value, etc. of the acquired company.

2.
In principle, intangible assets must be amortized in a fixed amount every year, and if the asset value is damaged, the cost of damage must also be dealt with.

However, when Korea introduced IFRS, IFRS accounting was supposed to only impair goodwill and not amortize it. Other intangible assets are amortized in a flat amount, and if there is damage, the cost of damage is also reflected.

For example, the acquisition target entity’s customer value was valued and recognized at 10 billion won, and a 10-year amortization would result in 1 billion won being processed for amortization costs while increasing the book value by 1 billion won each year.

3.
Last week, Hankyung published an article titled <Merger Boomerang… ‘Damage of Business Rights’ one after another. This article reminded me of an MTN article at the end of March. It is said that the International Accounting Standards Commission has decided not to reintroduce goodwill amortization.

4.
If amortization is reintroduced, let’s say firms should amortize goodwill on the current books.

E-Mart’s goodwill has increased to 5 trillion won in recent years when it acquired G Market, Starbucks, and W Concept. If this is amortized for 10 years, 500 billion won will be added to operating expenses per year. Even if it is 20 years, it is 250 billion won per year.

As E-Mart conducted M&As, other intangible assets also increased to 2 trillion. For this reason, it is currently amortizing around 200 billion won per year. In other words, if goodwill amortization is added to this, the amortization cost of general affairs assets will be 450 billion to 700 billion won per year.

Amortization costs are operating costs. Will E-Mart be able to make operating profit? It is fortunate that the International Accounting Standards Commission has decided.

5.
Kakao has conducted a number of M&As so far, but over 2.1 trillion won has been dealt with due to impairment of goodwill and other intangible assets during the company’s fiscal year-end settlement. The damage is attributable to lower operating profit. The company also suffered a net loss of 1.8 trillion won (1.46 billion dollars) despite operating profit of 460 billion dollars.

After the CFO changed, Kakao still has 4 trillion won in goodwill and 1.6 trillion won in intangible assets, although it had a big bath in 23 years and dealt with a lot of damage. It seems that there will be no large-scale damage reflection in the future. Then it’s a relief..