Goodwill Write-offs: Paper Losses or Squandered Money?

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First quarter earnings announcements of many companies bring news of huge one-time write-offs under the Financial Accounting Standards Board's Statement No. 142, Goodwill and Other Intangible Assets. This is leading to controversy and changing performance measures.

Huge write-offs and controversy

For media giant AOL-Time Warner Inc., the projected write-down for first quarter 2002 amounts to a breath-taking $40 to $60 billion. Analysts estimate the total write-downs for all companies will exceed $1 trillion
in 2002. "You can come up with $1 trillion just looking at the tech acquisitions of the last three or four years," explains Robert Willens, an accounting analyst with Lehman Brothers Holdings Inc.

Although the write-offs have only just started, they are already stirring controversy, especially among companies and investors associated with the dot-com bubble. Company managers tend to dismiss the write-offs as paper losses. But some investors see the adjustments as evidence that companies have squandered shareholders' money by overpaying for acquisitions. “These companies are claiming retroactive virginity,” charges Donald Coxe, chairman of Harris Investment Management. “They're saying we didn't make a mistake when we bought these assets, but the world has changed.”

Changing performance measures

No matter how the controversy is resolved, the bottom line may well be a change in the performance metrics most important to the investment community. According to press accounts, prominent industry experts agree the goodwill write-offs will help restore comparability among companies and focus more attention on earnings and price-earnings multiples.

Wayne Pace, AOL-Time Warner's CFO, says prior accounting rules caused his company to encourage investors to focus on cash flow rather than net income “because it is the most common form of comparison among companies in our industry.” Richard Bilotti a media-industry analyst at Morgan Stanley, predicts that in the next two years “the accounting changes will mean that earnings per share and return on invested capital will matter for media companies. That presents complicated issues for all of them.”

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