LEX Christmas is the season of goodwill. The new year will be the season to write it off. The recession has pricked auditors’ interest and among their top priorities for upcoming annual audits is to probe that intangible asset sitting on company balance sheets, goodwill.
Companies generally use projected future profits to justify goodwill on their balance sheets, which is essentially no more than the difference between the price paid for a business and its book value. Indeed, as most forecasters last October were still predicting economic growth across the developed world, many auditors took Lehman’s collapse as an anomaly and believed normal earnings would resume. As a result, only €71bn of goodwill was written off by Europe’s 600 biggest listed companies, according to investment bank Houlihan Lokey, and almost half of that was due to a single company: Royal Bank of Scotland. This year, given the depth of the recession, the idea that accountants will be as lenient again looks daft.
RBS, for one, may be worried. Its shares already trade at less than half its book value of equity; the roughly £16bn of goodwill it still carries may be ripe for the chop. Vodafone, the world’s largest mobile phone operator, meanwhile has £54bn of goodwill on its books, a third of its total assets. Then there is Anheuser-Busch Inbev, the world’s largest beverage company. Goodwill amounts to two-fifths of its $118bn of assets, yet its revenues are struggling in the recession. Although goodwill writedowns are a non-cash cost, they still pass through the income statement and can destroy earnings – and analysts’ forecasts with them.
Companies’ reluctance to write-off goodwill is understandable; it is a tacit admittance of having over-paid in the past. But as the majority of the €1,400bn in goodwill sitting on the balance sheets of Europe’s 600 biggest companies derives from the €1,800bn of deals made between 2005 and 2009, auditors may have the whip hand. If you want sign-off, you need to write-off.
E-mail the Lex team confidentially
OR
