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Do you need to worry about the rash of asset-value restatements?

BIScom Subsection: 
Editorial Staff

For the goldfish amongst us and those who are too young to know and, especially, those who simply don't think history has anything to tell us, here is something to note: crises hit us every few years. The superficial causes are viewed as significant but in truth, most crises result from one thing: overstated balance sheets and the fact that those who have naively accepted them suddenly discover that not one, not two but many companies are not worth the paper they are written on. Literally.

Pay attention

We are back in the times of asset value restatement with several examples in the past month alone.

Last week, Australia breathed a sigh of relief: it had avoided official recession because January's figures just, by a hairsbreadth, showed growth. The previous month had given the country, which avoided official recession during the global financial crisis, a significant shock.

So, the country has the jitters, and it is right that it should have: its non-mining industrials (vehicles, aircraft maintenance) have been destroyed in the past two years. Cities such as Melbourne are living on borrowed time as their economy, with its high-discretionary spending population, finds itself in the grip of substantial and rising unemployment amongst the age group that spend their money on eating out and other entertainments. Property prices have not fallen, as they should have. Repossession figures have not yet begun to rise significantly as those workers made redundant in the districts near Melbourne find themselves unable to meet their monthly outgoings.

It is into this that there is some surprising news: three public companies have, in recent weeks, informed the companies regulator that they have restated their asset value, applying major markdowns.

On 22 February, Seven West announced that it was to write down the value of its 50% investment in Yahoo7. The remaining 50% is owned by Yahoo! which, despite persistent media reporting is not "troubled" but is simply not performing as well as some of its rivals. But Yahoo7 is nothing special: it's a branded version of Yahoo News with a few small localisation tweaks.

The big question that the write-down poses is whether it is an indicator that internet/media values are inflated and, if so, if that is a worldwide problem or local to Australia?

Part of the answer might be found less than a week later when Nine Network wrote down its own goodwill valuation by AUD260 million.

On 28th March, Pacific Star Networks announced that it was writing down the value of mastheads and goodwill on assets bought when it took over Morrison Media: the "impairment charge" was AUD4.5 million.

On 6th March, Spotless wrote down its goodwill figures value by AUD99.2 million.

Those all seem, broadly, related to the primary problem of companies being valued on the brands and supposed repeat business which, the dot com collapse, demonstrated was a flawed valuation model but it is one that accountants persist in basing balance sheet values on.

The second problem in tech and media companies balance sheets is that the technology they buy may be written down over a period of, say, five years under accounting conventions but the true position is that, once installed, hardware, in particular, loses anything up to 90% of its value immediately.

Today, MMA OFFSHORE wrote down the value of property, plant and equipment relating to its vessels business by AUD254 million.

Cynics, and those who make it their business to close their eyes to information that may tend to indicate what might become a trend, might say that this series, and others that will follow, is simply a reaction to a formal notice issued by ASIC on 8th December, telling companies to accurately value their assets. But while that might be a contributory factor in restating, it is not the reason assets are overstated.

The reasons for that is simple: there are no accurate measuring tools for goodwill: it used to be said that, when buying a business as a going concern, goodwill was five to nine times turnover. In the tech era, that guideline has been ignored and insanely inflated values are, even today, being placed in tech companies.

The Australian information is not going to cause collapse today but it should un-nerve investors in the tech sector.

We have seen it all before: to prevent a problem turning into a crisis, we need to make certain that history's lessons are learned to avoid a sudden shock.