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28.09.2012: EU companies write off £60bn of goodwill

European companies have reported their biggest goodwill impairments since the financial crisis, writing off €76bn (£60bn) in asset values last year of former acquisitions.

The analysis of the largest companies on the STOXX Europe 600 Index, by US investment bank Houlihan Lokey, showed that more than a third of the companies recorded market values for their companies at, or below, book values in 2011 – twice as high as levels reported in 2007.

Goodwill impairments are of particular concern for companies as the depressed capital markets have seen asset values on a downward trend since the financial crisis. When goodwill – created when the price of an acquisition exceeds a stated value – is impaired because managers have to revisit initial assumptions used in acquisitions, values are written down, causing a knock-on effect on profits.

According to the study, although profitability at the companies reviewed remained robust, even rising slightly in 2011, a question mark remains over whether they are addressing their balance sheet issues as aggressively as they should, given the prevailing uncertain economic climate in Europe. Further, the study showed that companies’ balance sheets appear to be more compromised in 2011 than in the past four years (following the start of the financial crisis). Despite goodwill impairments reaching their highest level since 2007, companies’ market capitalisation to book value of equity (market-to-book) ratios have deteriorated almost across the board.

The downward trend for companies in the automotive, banking, insurance, real estate, leisure and financial institutions industries were joined by new industries which included metals, engineering, construction and transportation.

More than 70% of the total goodwill impairments were booked by the banking and telecommunications industries. Sandy Purcell, senior managing director at the firm and co-author of the study said that the financial services industry in particular continued to encounter a number of challenges.

‘Although the banks sector booked more goodwill write-downs in 2011 than in the previous year, banks are still trading below book value, which signals further headwinds for banks as investors are likely to scrutinise asset valuations in upcoming capital raises,’ said Purcell.

 

Source: Accountancy Live

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