Accounting changes stagger big companies
By Alan Clendenning
Associated Press
NEW YORK — Still smarting from the recession and the Sept. 11 attacks, many of America's large corporations are taking another financial hit, thanks to new accounting rules forcing them to write billions off their books for money lost on past merger and acquisition deals.
Associated Press
Companies used to acknowledge the erosion in small increments over periods lasting up to 40 years under a technique known as amortization of goodwill. But regulators required companies to stop amortizing goodwill this year, and the change is resulting in hefty losses for many companies reporting the writedowns for the first time in their first-quarter earnings statements.
Most people who walk past the AOL Time Warner building in New York are oblivious to new accounting procedures that are causing huge writedowns on quarterly profits. AOL Time Warner took a $54 billion hit to its latest balance sheet.
Yesterday, AOL Time Warner announced the biggest writedown so far under the accounting changes — a one-time balance sheet charge of $54.24 billion — the biggest in U.S. history — reflecting the company's market value decline since it was announced in January 2000 that America Online and Time Warner would merge in a $106 billion deal.
The writedown widened the first-quarter loss at the world's biggest media company to $12.25 a share from $1.37 billion, or 31 cents, a year earlier, the company said in a statement. The writedown comes after the company's stock fell 74 percent since the purchase was announced in January 2000.
The loss "is a recognition that AOL paid too much for Time Warner," said George Gilbert, who helps manage the Northern Technology Fund, before the results were released. "If they paid for it in cash, it would be a real disaster, but they paid for it in AOL funny money." Gilbert's fund owns AOL Time Warner stock.
The massive charge, however, didn't shock experts who follow the company because it already had been announced. And for AOL Time Warner and other companies affected by the accounting rule changes, the writedowns amount to paper losses generally anticipated by analysts.
The rule changes were made by the Financial Accounting Standards Board, which develops private sector accounting rules recognized by the Securities and Exchange Commission.
Critics said the old rules governing accounting for mergers and acquisitions allowed companies to understate the value of their purchases and inflate earnings, said Itzhak Sharav, an accounting professor at Columbia University's business school.
But the changes are hitting many companies hard now because of the timing under which they are taking effect. That's because the value of many acquisitions U.S. corporations made in the late 1990s and in 2000 plunged last year as the economy slid into a recession.
Underlying the changes is the accounting concept of goodwill.
When one company buys another, there's always a book value to the acquisition — the firm's assets minus its debts.
But goodwill comes into play because there are a host of intangible assets that make the value of the acquisition worth more than the whole of its identifiable parts, said Kim Petrone, FASB's director of planning, development and support activities.
It could be that the company being bought has valuable locations and employees or strong customer loyalty. Also, acquiring companies usually pay more than the value of what they are buying to ensure that the deal goes through.
"Goodwill is the difference between what you paid and the fair value of the underlying liabilities and assets of what you bought," Petrone said.
Under the old rules, goodwill was considered a "wasting asset" that declined in value over time and had to be depreciated, which cuts into companies' earnings a little bit each quarter.
But under the new rules, goodwill isn't necessarily a wasting asset.
"Those may be more valuable assets now. It's better accounting in the sense that it more accurately reflects the value of each acquisition," said April Klein, an accounting professor at New York University's Stern School of Business.
The new rules let companies leave the value of their goodwill as is on their books unless it falls — under another accounting term called "impairment."
"If you bought the company and paid a fair price there's no reason to write it down," Klein said. The AOL-Time Warner merger "created all this goodwill, but there's an impairment because they paid more than its worth. Who knew the Internet bubble would burst, but they have to write it down."
The problem is magnified for companies now because of the mergers and acquisitions craze of the 1990s that saw huge acquisition deals for ever increasing prices.
Many were in the technology sector, which crashed hard in 2000 and 2001, erasing much of the goodwill.
But companies in other sectors aren't immune to the accounting rule changes.
