Chinese Firms Try to Dodge Forced Delisting by Booking Huge Goodwill Losses in 2018
Zhang Lihua
/SOURCE : yicai
Chinese Firms Try to Dodge Forced Delisting by Booking Huge Goodwill Losses in 2018

(Yicai Global) Feb. 1 -- Many listed Chinese firms have posted huge 2018 loss forecasts this week, with a large number logging massive goodwill impairments under hope that possible changes to goodwill accounting standards will help them avoid a forced delisting.

Some 230 companies forecast combined net losses of between CNY190 billion (USD28.3 billion) and CNY223 billion on Jan. 30, more than one and a half times the total losses made by all listed Chinese firms in 2017. Dalian Zeus Entertainment fancied itself as the biggest loser, predicting a deficit of as much as CNY7.8 billion (USD1.2 billion) despite its CNY4.4 billion value.

The firm posted a goodwill impairment of CNY6.5 billion for the third quarter, barely a dent in the CNY1.4 trillion (USD209 billion) that companies listed in Shanghai and Shenzhen recorded for the period. Goodwill is an intangible asset stemming from a firm acquiring another at a premium.

The vast amount of goodwill impairment being recorded is likely a result of the China Accounting Standards Committee planning to revise the way in which goodwill is calculated, an insider said. Chinese firms have large amounts of goodwill after going on a spending spree in 2015 and 2016. Many listed companies bought other firms at a price-to-earnings ratio of as much as 30 times, and in 2016, more than 100 listed enterprises paid premiums of over 1,000 percent.

Listed Chinese firms currently calculate their goodwill impairment once a year, but the CASC is looking at bringing in goodwill amortization to change that, it said on Jan. 4. That means apportioning the purchase cost of the goodwill to future expenses in order to avoid major fluctuations in a firm's profit caused by one-off purchases.

Companies are forcibly delisted from mainland stock exchanges if they fail to make a profit for three straight years. Under the new rules, firms would be able to spread out goodwill over multiple years, making it easier for them to turn a profit as the annual goodwill costs would be lower. By writing off large amounts of goodwill before the change, they will have lower goodwill totals to cover in the coming years.

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Keywords: Profit and Loss , Stock Markets , Forced Delisting , Goodwill Amortization , Goodwill Impairment