What is the Rule?
Under Singapore FRSs, SingTel has ceased amortisation of goodwill on acquisition since April 2004.
The carrying value of goodwill continues to be reviewed annually or whenever there is an indication of impairment.
What are the possible indications of impairment?
- introduction of a superior product by competitor
- significant change in the business environment
How much monies are we talking about ie. size of goodwill in Singtel's books?
- Singtel paid $13bi0 for Optus in Oct 2001. $11.4bi0 (about 87%) of which is for goodwill.
- By FY2005, Singtel had reduced goodwill by $1.78bio. ie. the Group's profit had been reduced by that value.
- The auditors had just signed off the accounts for year ended March 31, 2006 with no request to adjust the goodwill figure.
A Mr Patrick Russel, a Merrill Lynch analyst attempted to value that intangible assets from different approaches. The current book asset value of Optus is $18.2 bio.
In his first approach, he used the current Singtel's share price of $2.50, multiplied by the no. of shares outstanding and then less all liabilities. It churned out a figure of $10.6 bio.
He calculated the present value of Optus' future cash flows in his second approach to give $9.4 bio.
Both Mr Russel's approaches highlighted the difference of about $5 - 8 bio from book value. I would love to know how Singtel does its valuation. While it may be true that goodwill amortisation and impairment charges are non-cash accounting adjustments in post-acquisition years, Singtel did pay good monies of about $13 bio back in 2001.
Merrill Lynch has reaffirmed its SELL recommendation on Singtel. So if you were one of those Singaporeans who are holding Singtel shares, should you panic and sell? Mr Heng, Singtel spokesman, correctly highlighted the need for investors to read widely from other analysts for a balanced view.
Till my next post, good night...
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