Think BR: When cash is not cash - accounting obfuscation
One of the most common phrases used by chief executives of public companies to play down bad news is to describe certain types of cost as 'non cash' items, when quite the opposite is almost certainly true, writes Bob Willott.
Bob Willott: editor of Marketing Services Financial Intelligence
This week Cello Group alluded to the non cash nature of various items when announcing its loss for 2011. And in doing so, Cello was just one among many.
The impression given was that the items were - to all intents and purposes - notional and not to be worried about because no cash had left the company (or, if you look at the footnotes, at least not in the latest financial period).
One such item arose from the decision to close its above-the-line agency in London which resulted in an exceptional goodwill write-off of £2.5m, but 'no exceptional cash charges'.
In reality cash had almost certainly left the company. It may have been paid out some time ago in the belief that it was being exchanged for another asset (namely the acquired subsidiary) of equal, and potentially greater, realisable value.
But cash had left the company. What’s more, a statement that a loss is a non cash item generally means not only that cash has left the company albeit some time ago, but also that it won’t be coming back.
It’s been lost, because the asset bought in exchange is no longer worth anything like the value that was paid for it.
So why should shareholders be encouraged to believe that money spent and wasted is 'non cash' and of no serious consequence when precisely the opposite is the case?
Why should Cello imply that a £2.5m write down in the value of the Farm agency is non cash when it has handed over the entire business and its staff to another agency Inferno and will never get the cash back again?
The non cash mirage has a long and eminent pedigree. Back in the spring of 2001 Interpublic announced a $160m write-down of its investments in various internet businesses that included MarchFIRST and IconMedialab (now part of LBi International).
At a press briefing the company’s chief financial officer calmly explained that this was a "non-cash accounting adjustment to mark (reduce) the recorded values of these investments to their estimated recoverable values".
Questioned at the time by Marketing Services Financial Intelligence, the reply came back: "The write-downs were non-cash in that the cash was invested more than a year ago (years ago in some instances) and the current write-down would not be a cash-using event in the current quarter".
But as noted at the time, lost cash is lost cash irrespective of when it happens.
Accounting obfuscation still rules, OK?
Bob Willott is editor of Marketing Services Financial Intelligence
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