24 julho 2007

IAS encoraja os ganhos de curto prazo

Leia, a seguir, um artigo sobre o IAS do Valor Justo e os efeitos sobre o comportamento das empresas:

Standards that encourage short-term gain.
Financial Times - 23/07/2007, p. 6

The 2005 IAS 36 fair value accounting standards encourage listed companies to pursue takeovers for short-term gain - a tendency exacerbated by low financing costs - regardless of possible longer term consequences.

A listed company has three basic ways to pursue a growth or value-creation strategy.

First, a company may simply buy back its own stock to increase earnings per share. This can be done either with cash, borrowings or a combination of the two. Although earnings per share may increase (as long as the company's return on equity is higher than its financing costs), this approach creates no real economic value. Its only purpose is to protect the company from takeover.

In the second, "traditional" method, a company expands through capital investment, which typically has a three to five-year pay-off. For the investor-entrepreneur, this presents uncertainty: it is difficult to assess the future value creation in advance, especially in new business fields, while the investment has to be amortised, which in the short term depresses profits and valuation multiples. Such organic growth is the classic long-term strategy of unlisted companies free from the pressures of quarterly earnings results.

The third, more straightforward, growth strategy is to acquire another company for cash or borrowings. The acquirer can achieve its objectives much more quickly and assess the return on its purchase more accurately.

The purchase price is generally higher than the shareholders' equity on the balance sheet of the acquired company. This difference, called goodwill, is an intangible asset that reflects the company's reputation, brand and client base. For the acquiring company, goodwill represents the additional cost of buying a business that is already productive.

Until the advent of IAS 36, the accounting and tax treatment was the same whether companies grew organically or expanded through acquisition. Companies growing organically had gradually to amortise their investments, while acquisitive companies had to amortise the recently purchased external goodwill. This approach considered goodwill as a wasting asset.

Writing off goodwill is not only transparent, but has the added virtue of limiting the acquisition price, because the amortisation requirement reduces the net profits of the acquiring company.

The new international accounting standards, known ironically as "fair value" accounting, have turned this notion on its head. Rightly, they recognise that goodwill should not necessarily be written off; a company's reputation, brand value and client base may well have an enduring value. Thus, under the new rules, a company that takes over another no longer has to amortise the goodwill of the business it acquires.

But the acquirer can also include the goodwill on its balance sheet immediately. If the company it buys is already efficient and productive, the acquiring company will therefore increase its profits instantly, boosting the share price and benefiting the management and board of directors of the acquiring company, even if the goodwill ultimately has to be written down.

What is the "fair" value of goodwill? For market purists, the price paid is by definition fair value. But in the event of a hostile takeover, for example, the price paid for goodwill is often far too high. This is especially true if the predator is sitting on a lot of cash or if it can borrow at low interest rates (as today), which naturally leads to overpaying.

The result is that in today's conditions of easy money, the recent change in international accounting standards has fuelled the mergers and acquisition boom, and given an acquiring company wide discretion in the statement of its profits, which in turn affects valuation multiples. The lure of short-term gain may be difficult to resist.

To be sure, since goodwill is held as an asset on the balance sheet, its value is subject to an annual "impairment" test under the new rules. Such impairment normally arises from a lower projected return on investment, either because the assets are deemed to have become less productive, or simply because of higher interest rates, which depress the internal rate of return. This is potentially very damaging, because such write-downs invariably come at the low point of the cycle.

Either way, IAS 36 allows companies that pay too much for acquisitions in a period of low interest rates the freedom to boost profits now and take the hit later, probably when they can least afford it. And, as the ancient wisdom has it: "If you don't pay at the beginning, you pay at the end." Investors would be well advised to heed this traditional advice.

Charles Pictet is a former managing partner of Pictet & Cie and a member of the Swiss Banking Commission

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