Rule change leads to major write-offs by U.S. companies

New accounting directive requires marking down of `goodwill' all at once

April 26, 2002|By William Patalon III | William Patalon III,SUN STAFF

U.S. companies are taking tens of billions of dollars in write-offs this week because of a new accounting rule that experts say might help clear away the lingering largesse of the last bull market.

The new rule, known as FASB 142, requires companies to write off their impaired "goodwill" all at once, instead of amortizing it in annual amounts over 10, 20 or even 40 years. Some of America's best-known companies have announced huge write-offs: $2.97 billion by Aetna Inc., $1.48 billion by Viacom Inc., $856 million by AT&T Corp., $708 million by Ford Motor Co.

A write-off is financial parlance for throwing in the towel on an asset by deeming it worthless; the loss is taken as a charge against any earnings the company might have.

Of the write-offs taken so far, AOL Time Warner Inc. tops the list: The Internet and media giant just announced a first-quarter loss of $54.24 billion, thanks to a $54 billion charge it took against earnings. With AOL, the write-off is evidence of a merger that has yet to bulk up the company's value as shareholders were promised, experts say.

"At the end of the day, this says that $54 billion in value has gone up in smoke," said Charles "Chuck" Carlson, a money manager best known as editor of the DRIP Investor newsletter in Hammond, Ind.

The Aetna and Viacom write-offs were announced yesterday, while AOL shed its goodwill Wednesday.

In the United States, accounting rules are created and interpreted by the Financial Accounting Standards Board, or FASB, an independent entity founded in 1973. U.S. companies - including foreign firms seeking U.S. stock market listings - must conform to these U.S. accounting regulations, known as generally accepted accounting principles, or GAAP.

Accounting rules are occasionally updated, or changed outright, to keep up with changes in the financial markets. FASB 142 is supposed to clean up corporate financial statements by forcing companies to stop amortizing goodwill that has clearly dropped in value.

In a takeover, goodwill is created when the suitor pays more than its target company's book value - a simple measure of assets minus liabilities - said April Klein, associate professor of accounting at New York University's Stern School of Business. For instance, if the suitor pays $20 billion for a company whose book value is $15 billion, the remaining $5 billion is listed as "goodwill" on the balance sheet portion of the new company's financial statements.

Goodwill often has real value, analysts say. A company's brand name can have value, if it assures the firm of customer loyalty. A work force can have value - particularly with a technology firm - because of the skills and know-how of the firm's workers. But because a brand name or a skilled work force is an "intangible" asset, no dollar value is placed on it. It is considered part of its parent company's goodwill.

Before this accounting rule change, corporations would typically amortize their goodwill over, say, 20 years by charging off equal amounts against earnings each year.

While these amortization expenses reduce a company's reported bottom line, they are "paper" charges only - meaning they remove no money from the company's till. The same holds true for the huge charges U.S. companies are taking this quarter: They typically transform a profit into a loss but extract no tangible value from the corporation. Analysts typically look past these paper charges to more reliable and revealing financial metrics, especially because firms are often careful to telegraph the size of the charges so investors will know what to expect, say professional investors.

Freed from the burden of an annual goodwill expense, a company's profits should climb, said Klein, the Stern School accounting professor.

Ultimately, these companies might find themselves being viewed in a more positive light, as removing "impaired" goodwill from a company's books will give analysts a better understanding of a company's financial position, said Bill Stromberg, director of equity research for T. Rowe Price Group Inc.

Some experts say it's unfortunate for many shareholders that such deals as the America Online-Time Warner merger were done in the first place. The AOL Time Warner deal was worth about $165 billion when announced and $124 billion when consummated early last year. In that context, a $54 billion write-off isn't pocket change, one expert said. "$54 billion in value is significant," said Carlson, the money manager.

Big-time writedowns

Under new accounting rules, many companies have written down assets. Here are some of the largest reported in the most recent completed quarter, all posted within the last two weeks.

................................................. Accounting ....................... Profit/

Company .................................... charge ............................. loss

Aetna Inc. ............................. $2.97 billion ................. -$2.8 billion

AOL Time Warner Inc. ............. $54 billion ................ -$54.24 billion

AT&T Corp. .............................. $856 million .............. -$975 million

CSX Corp. ............................... $43 million ................ $25 million

Ford Motor Co. ..................... $708 million .................. -$800 million

Sears, Roebuck and Co. ...... $190 million ................... 110 million

Tribune Co. ......................... $165.6 million ............... -$101.6 million

Viacom Inc. ............................ $1.5 billion ................. $1.1 billion

SOURCE: Company earnings reports

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