Regulators call time on inaccurate goodwill writedowns
EUROPEAN companies are having to reassess the cost of a rush of takeovers in more buoyant times as regulators call time on outdated asset values.
Companies are obliged to ensure the goodwill sums in their accounts accurately reflect the future economic benefits of a target.
As recession bites, some are increasingly reluctant to trim a figure that reflects the premium they paid.
The European regulator, ESMA, estimated this month that just 5pc of the goodwill on European companies it sampled had been written off to reflect current trading conditions, making it tough to analyse their true worth and management skills.
It highlighted financial services and telecoms but other research has thrown up the auto sector and metals as well and highlighted Italy and Spain as areas of particular concern.
The ESMA (European Securities and Markets Authority) says if goodwill writedowns do not become more accurate this year, it will start naming and shaming the worst offenders.
Writing off chunks of acquisitions can reflect hasty dealmaking or merely the economic slowdown, Simon Jones, director at valuation firm American Appraisal, told Reuters.
"If the market is going in one direction, it's beyond the control of management," he said.
But if it is not done, or not done enough, investors will take their own view.
At the end of 2011, almost a quarter of the 600 companies in the Stoxx Europe index traded well below book value compared to less than 10pc four years earlier, a study by investment bank Houlihan Lokey showed.
Cars, metals, banks and insurance sectors were amongst those with the highest share of companies with a market capitalisation below 90pc of the book value of equity.
Marc Hayn of Houlihan Lokey told Reuters public relations may be partly to blame. "Either they overpaid in former times or companies are not able to communicate to the market the value of their business."
In terms of regions, Italy and Spain showed the worst ratios of market capitalisation versus book value of equity with just 43pc and 58pc respectively.
Italian carmaker Fiat has €10.4bn of goodwill recorded in its annual report to end-2011, almost double its €5.7bn market capitalisation.
PSA Peugeot Citroen meanwhile had €1.5bn of goodwill versus a €2.1bn market cap. (Reuters)