The Language of Business

This article in Business week is a good example of why accounting is often referred to as “the language of business”. Apparently, the Japanese firm Softbank was able to report a significantly higher profit margin simply by lowering its estimate of how much their newly purchased infrastructure is worth. From the article:

… the company booked a write-down of $4.4 billion worth of infrastructure assets. Vodafone had valued the unit’s servers, transmission towers, and other high-tech equipment at $9 billion. That meant Softbank had cleaved in half the value of the assets, and that the $15 billion it had paid for Vodafone’s business amounted to nearly four times the value of the assets, Spratt wrote.

Which would seem to suggest that at the time of purchase, the Vodafone brand was worth more than Vodafone’s assets. In accounting, the resulting difference is (apparently) referred to as goodwill:

Goodwill is often included on a balance sheet as an asset, but its valuation may be suspected if supporting evidence like an independent survey is missing. Goodwill is forced onto the balance sheet when a company is purchased for more than the sum of the value of the assets of the company. The difference between the purchase price and the sum of the assets is by definition the value of the “goodwill” of the company.

The real trick to this appears to be in how you pay off goodwill, versus how you pay for fixed assets such as the infrastructure Softbank de-valued, as this paragraph in the article suggests:

On its balance sheet, Softbank accounted for part of the total write-down as goodwill. And since companies can amortize goodwill costs over 20 years, vs. the 10 years they can depreciate the cost of fixed assets, the accounting change lowered Softbank’s costs dramatically.

In other words, goodwill is a lower monthly payment than infrastructure. When you go to buy a new car and take out a loan, you may end up paying a certain amount of money each month for 5 years. But if you were able to somehow able to re-negotiate that loan so that you could pay it off over 10 years, then your monthly payments would be cut in half.

This is in essence what Softbank did. The amount of money they aren’t having to spend each month paying back debt they can chalk up as profit. Except that they didn’t have to re-negotiate the loan, they just adjusted their description of how they do business. Language of business indeed.