To understand the answer we first have to understand what Goodwill is.
Goodwill in a companies balance sheet is an intangible asset that represents the extra value because of a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.
An article from The Economist explains this very well and actually talks about Time Warner directly - The goodwill, the bad and the ugly
When one firm buys another, the target’s goodwill—essentially the
premium paid over its book value—is added to the combined entity’s
balance-sheet. Goodwill and other intangibles on the books of
companies in the S&P 500 are valued at $2.6 trillion, or 10% of their
total assets, according to analysts at Goldman Sachs.
As the economy deteriorates and more firms trade down towards (or even
below) their book value, empire-builders are having to mark down the
value of assets they splashed out on in rosier times. A recently
announced $25 billion goodwill charge is expected to push Time Warner
into an operating loss for 2008, for instance. Michael Moran of
Goldman Sachs thinks such hits could amount to $200 billion or more
over the cycle. Investors have so far paid little attention to
intangibles, but as write-downs proliferate they are likely to become
increasingly wary of industries with a high ratio of goodwill to
assets, such as health care, consumer goods and telecoms.
How bad things get will depend on the beancounters. American firms
used to be allowed to amortise goodwill over many years. Since 2002,
when an accounting-rule change ended that practice, goodwill has had
to be tested every year for impairment. In this stormy environment,
with auditors keener than ever to avoid being seen to go easy on
clients, companies are being told to mark down assets if there is any
doubt about their value.
The sanguine point out that this has no effect on cashflow, since such
charges are non-cash items. Moreover, some investors take goodwill
write-offs with a pinch of salt, preferring to look past such
non-recurring costs and accept the higher “normalised” earnings
numbers to which managers understandably cling. The largest companies
are thus able to survive thumping blows that might otherwise floor
them, such as the $99 billion loss that the newly formed but
ill-conceived AOL Time Warner, as it then was, reported for 2002. But
the impact can be all too real, as write-downs reduce overall book
value and increase leverage ratios, a particular concern in these
debt-averse times.
