[Hayvok]

If you're like me, and you had no idea what "goodwill impairment" meant, and wondering 'what does this billion dollar expense get Etsy?'

Investopedia: "Goodwill impairment occurs when a company decides to pay more than book value for the acquisition of an asset, and then the value of that asset declines. The difference between the amount that the company paid for the asset and the book value of the asset is known as goodwill."

> Goodwill impairment: Goodwill impairment expense consists of non-cash charges related to the impairment of the goodwill of Depop and Elo7.

This is a level of circular definition that makes the head spin. Depop and Elo7 were Etsy acquisitions. I haven't read the SEC filing in depth, but I assume this means that Etsy is acknowledging they overpaid on both these acquisitions, and that their value is in reality far less than they thought at the time.

I'm not sure what the accounting advantages are here for Etsy, maybe someone else with more knowledge could weigh in?

[brvsft]

It's not really a circular definition because "impairment" and "goodwill" are two words with their own meanings in accounting/finance, so "goodwill impairment" including those two words separately in the definition isn't circular.

Goodwill is basically the extra value paid one company pays when buying another company. So if Etsy buys Depop for 1.6B, and of that 1.6B, let's say 600M were actual 'assets' (cash, inventory, whatever (not that Depop had those things when purchased)), then Etsy paid $1B (1.6B - 600M) in "goodwill" for Depop. That "goodwill" is basically the Depop brand, the desire for existing and potential customers to use Depop, etc.

Suppose Etsy wakes up one day and realizes that the $1B worth of Depop brand must be worth less. I don't know how they determine this, as the most realistic way would be if they were somehow shopping around to sell Depop off to another buyer, and all the offers are markedly lower than the $1.6B they paid for the same assets + intangibles. That difference is the impairment, to the goodwill.

Not sure if that made it sound less circular. I'm also not an accountant, but I've tried learning quite a bit about the subject.

[drbacon]

Thank you for that very well-stated explanation! TIL!

[codexb]

It's a way to effectively re-allocate losses into the current quarter/year before they are actually realized. For example, if I bought something for a high price and won't sell it until a year later, those losses won't show up until I sell them. I can use impairment to re-value those assets and "realize" those losses right now.

The way this is generally used in practice is that when a company is having a bad year or quarter and knows they are going to report losses, they will tack on a bunch of impairment so that future quarters and years don't look so bad. Having a bad quarter followed by mediocre quarters is much worse than having a very bad quarter followed by good or okay quarters.

It's not entirely nefarious, though. If a company is operating with good fundamentals and finances, you don't want that constantly being hidden by a bad decision or massive loss that really happened years earlier.

[CPLX]

To get picky, it doesn't necessarily mean they "overpaid" it means the asset is now worth less.

You could make an argument that the two concepts are the same thing, but that's not really how business works.

For example you could have paid exactly what the market value was for something, maybe even gotten a "good deal" as of the date the deal closed, and the market could subsequently shift.

Like if they invent a cheap way to convert water to unleaded gasoline tomorrow it doesn't mean you "overpaid" for Exxon three years ago, per se.