asx 100 companies face losses of $50bn

Bit of a worry for next years results.


Tim Boreham | December 22, 2008
Article from: The Australian

THE 100 biggest listed companies face a $50 billion-plus balance sheet hit next year, as the carrying value of acquired assets erodes in line with economic activity.
ASX

The ASX 100 index continues to tumble with its biggest listed companies set to lose $50 billion.

The most vulnerable are intangible-heavy sectors such as the media and big-hit acquirers such as Wesfarmers, Tattersall's and Rio Tinto, according to a study by brand consultancy Brand Finance.

The ASX 100 companies carried $221 billion of intangibles as of June 30, 2008, $146 billion of which was capitalised goodwill from acquisitions.

Yet while the share market declined by 16 per cent in the 2007-08 year, only 1 per cent of intangibles were written down, notably Foster's Group's $470 million adjustment of its wine assets and insurer IAG's $342 million UK bath. "This is extremely low given the deterioration in current conditions," said Brand Finance managing director Tim Heberden.

Since then the ASX 100 index has tumbled a further 33 per cent.

"Further declines in economic sentiment suggest that significant impairments will be required during the current financial year," Mr Heberden said.

"If current share prices are an accurate reflection of earnings expectations and risk, this would imply goodwill impairments of around $50 billion."

According to the firm, intangibles on average account for only 26 per cent of the reported balance sheet value of the top 100 companies: $221 billion, compared with $644 billion for tangible assets such as property and plant. But the ratio is vastly understated because accounting standards do not allow for the recognition of internally generated goodwill and other intangibles such as brand names.

Brand Finance estimates a further undisclosed value of $816 billion, the difference between the $865 billion of reported assets and the $1.68 billion enterprise value (market cap plus debt) of these companies.

According to Heberden, international accounting rules have failed to meet their objective of enhancing disclosure of separately identifiable intangibles.

For instance, there's little visibility on the nature of intangibles included in the $146 billion goodwill figure, despite a specific requirement that companies explain why an asset cannot be valued separately.

Many companies are reluctant to identify assets, as they then have to be amortised against reported profits over their deemed useful life.

"Rising markets were forgiving of M&A overpayments and anomalies in the reporting of intangibles," the report says. "The tide has turned and declining demand requires robust impairment reviews."

According to Brand Finance, Tattersall's balance sheet rates as the most intangible-heavy, with 98 per cent of value attributable to goodwill and intangibles.

Herbicide company Nufarm ranks second on 93 per cent, followed by Computershare (91 per cent), Fairfax Media (89 per cent) and Tabcorp (87 per cent).

On a dollar value basis, News Corporation (publisher of The Australian) tops the chart with $34.5 billion of intangibles and goodwill, followed by Rio ($26.7 billion), Wesfarmers ($20.8 billion), Commonwealth Bank ($8.3 billion) and Telstra ($7.2 billion).

At the other end of the spectrum, net tangible assets account for 102 per cent of the listed property sector's value.

In other words, the net value of the companies' physical property is worth more than their market cap -- for the time being at least.