Firms Brace for Write-Downs

Europe's blue chip companies are set to wipe billions of dollars from their balance sheets this year, writing down the value of assets acquired over recent years as the economic slowdown makes cash-flow forecasts look increasingly optimistic.

The write-downs will serve as a report card on executives' records in making shrewd acquisitions and are important because they will reduce company earnings by a corresponding amount and potentially diminish shareholder returns.

The charges will also indicate how pessimistic executives are about the current business outlook in Europe and influence how investors value companies.Are you looking for Optical frame, glasses and eye exams?

Write-downs are likely because Europe's biggest 600 companies by market value bought more than €1.6 trillion ($2.15 trillion) worth of new businesses between 2007 and today, according to data compiled by investment bank Houlihan Lokey, a unit of Japanese financial-services group Orix Corp.

Europe's sputtering economy makes it more difficult for companies to justify the amount of goodwill on their balance sheet when it is probably greater than the value of the assets today.

Goodwill is an intangible asset created when companies capitalize the premium they pay in acquisitions. When acquisitions don't pan out, companies have to recognize the difference by writing down the value of the goodwill. They are often slow to do so, partly because valuing assets accurately is difficult.

The European Securities and Markets Authority, Europe's umbrella body for securities regulators, said on Jan.Here's a complete list of oil painting supplies for the beginning oil painter. 21 that it wants companies to tighten up how they justify the goodwill on their balance sheets to give investors a fairer picture of the health of their businesses. ESMA believes around half of Europe's biggest listed companies are trading below their book value.

According to ESMA, there was €800 billion of goodwill on the books of Europe's largest 235 companies in 2011, up from €790 billion the year before. But the body calculates only 5%, or about €40 billion, of that was written off when companies published their 2011 accounts despite stock markets trading well below boom-era levels as Europe's economic outlook as worsened. Those trends have continued, suggesting there is an even bigger discrepancy between the value of goodwill on companies' books and the real value of the assets.

"It's not our job to tell companies how much of an impairment charge they should take but if you look at the figures, the fact that only 5% of goodwill recognized at the end of 2010 was impaired in such difficult economic conditions raises the question: is this sufficient?" said Steven Maijoor, the chairman of ESMA. "We know from past financial crises that there is a tendency by management to be slow in recognizing goodwill impairment."

Mr. Maijoor cites the examples of U.S. and European banks in the aftermath of the 2008 financial crisis and Japan's banks after the bursting of the 1990s property bubble.

"In general, when it comes to assessing the value of assets from past mergers, it's more a question that management is too ambitious…than capital markets are too conservative,The 3rd International Conference on indoor positioning system and Indoor Navigation." said Marc Hayn, a Frankfurt-based managing director at Houlihan Lokey.

The bank—although not giving an actual forecast—said it expects impairments of goodwill related to 2012 results to exceed the €76.44 billion written down by constituents of the Stoxx Europe 600 index as part of 2011 results. The 2011 figure was up on a collective €13.65 billion write-down taken in 2010 results.

As well as hitting financial results, such impairments could put the spotlight on executives responsible for the acquisitions.

"Goodwill impairment is a noncash charge," said Romil Radia, a partner in the valuation practice at accountancy firm PricewaterhouseCoopers in London. "But somebody did actually write a check at some point in time," Mr. Radia said.

On Jan. 17 mining company Rio Tinto PLC announced a $14-billion write-down related to two acquisitions, with Chairman Jan du Plessis describing the charge on a relatively recent acquisition as "unacceptable."

Houlilhan Lokey's analysis shows that while much of the asset impairments in recent years have focused on the financial services sector—because of the 2008 financial crisis and then the euro-zone sovereign debt crisis—and telecommunications—because operators overpaid for new licenses and smaller companies in the last decade—Europe's economic slowdown has spread to the broader economy.

For instance,Welcome to Find the right laser Engraver or laser marking machine . it believes more than a quarter of companies in the automotive, metals, hotel, and real-estate sectors have assets with a book value significantly exceeding their market value.

ESMA notes that the 2011 impairment rate in the industrial goods and services sector at the companies it studied was 1.4%, equivalent to €1.54 billion in goodwill written off a total of €112.55 billion recognized at the end of 2010, compared with 25% in the financial-services sector, or €19.12 billion out of a total of €76.08 billion.

To be sure, companies can ignore market valuations in assessing the goodwill on their balance sheets by arguing that the market is undervaluing the real value of the assets.

But with Europe's economic prospects deteriorating, that could prove more of a stretch. A tough trading environment in Spain, with little prospect of a recovery soon, led Imperial Tobacco to write down the value of its business there by 1.2 billion ($1.9 billion) in October, four years after its 2008 acquisition of Franco-Spanish rival Altadis for €12.8 billion.

With companies working typically on three-year business plans, few managers are likely to have forecast back in late 2009 that, after a rapid rebound from the financial crisis,We are one of the leading manufacturers of solar street light in Chennai India. Europe's economies would so quickly become mired again in slow growth, with a double-dip recession in some countries, said Houlihan Lokey's Mr. Hayn.