- US COMPANIES could be forced
to write off a total of $1 trillion (£690 billion) in the first three
months of this year to cover the cost of acquisitions made at the peak
of the Internet boom, analysts said yesterday.
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- Under new accounting rules that have already forced AOL
Time Warner to write off up to $60 billion, US companies will have to give
details of the amount they overpaid for acquisitions during the boom of
the late 1990s and early 2000.
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- The write-offs will be unprecedented in stock market
history and will result in US businesses reporting losses of a magnitude
never seen before. Although the write-offs are book-keeping exercises that
do not involve any cash, they will prove to be embarrassing for many chief
executives.
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- In AOL's case, the write-off suggests that Gerald Levin,
the former head of Time Warner, did not get a good deal when he merged
the media group with AOL. Mr Levin is to stand down as chief executive
of AOL in May.
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- The new accounting rules, introduced by the Financial
Accounting Standards Board (FASB) on January 1, force US companies to declare
any fall in the value of "goodwill" they paid for acquisitions.
Goodwill is the premium paid for an acquisition over and above what accountants
call the "fair value" of its assets.
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- The fall in the stock market value of high-tech companies
since early 2000 has resulted in hundreds of billions of dollars of this
goodwill being wiped out. But before the new accounting rules were introduced
US companies could spread goodwill charges over a period of up to 40 years,
effectively making it irrelevant. Now companies have to report changes
to goodwill annually.
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- According to Alfred King, vice-chairman of Valuation
Research, who has advised the Senate on accounting standards, AOL's write-off
will "open the floodgates". He and other analysts believe the
total could reach $1 trillion.
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- Other companies expected to make big write-offs include
Viacom, the media group, and the telecoms companies AT&T and Qwest
Communications. According to recent filings with the Securities and Exchange
Commission, Viacom has about $72 billion of goodwill on its books, while
AT&T has $25 billion and Qwest $34 billion. Analysts argue that the
value of this goodwill has been severely reduced over the past year.
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- Bob Willens, an accounting analyst with Lehman Brothers,
said: "If you add it all up it's pretty easy to get to $1 trillion.
I think there will be a certain amount of embarrassment about it. When
you write off goodwill you acknowledge that the acquisition is not going
to be as successful as you thought. But I don't think it will have much
of an effect on stocks because it is already priced into the market."
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- Mr Willens added that he expected most companies to get
their write-offs out of the way in the first quarter. "Companies have
until the end of the year to do it," he said. "But most will
do it in the first quarter because otherwise they will have to go back
and restate their results."
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