When Should a Company Write Down Assets
September 16 2016 - 6:51PM
Dow Jones News
By Michael Rapoport, Bradley Olson and Chester Dawson
Exxon Mobil Corp. is under scrutiny for a question that's
fraught for any business: When should a company decide its assets
literally aren't worth it?
New York Attorney General Eric Schneiderman is investigating why
the oil giant hasn't written down the value of its assets even as
others have done so due to plummeting crude prices. It is an issue
that is particularly knotty in the energy industry, where the rules
about valuing and writing down assets are complex. And a lot
depends on what a company expects for the future: Will oil prices
rebound, or stay mired below $50 a barrel?
The answer can make a big difference for investors -- if a
company decides its assets have lost value and should be written
down, it hurts earnings and book value, or a company's net worth.
And the leeway allowed in making that decision means there is
always a motivation for a company to be overly optimistic about the
future to avoid an earnings hit today.
"There's definitely a temptation all the time," said Dan Amiram,
an associate professor of business accounting at Columbia
University's business school. Companies "will use discretion in
accounting to push the envelope" away from taking write-downs.
But some in the oil industry said Exxon has a good reputation
for avoiding aggressive accounting practices. And they think it may
be justified in not writing down its assets. "They love stability,
they are one of the most compliant companies in the business," said
John Hofmeister, a former president of Royal Dutch Shell PLC's U.S.
business.
In a statement Friday, Exxon said its results were in accordance
with accounting and reporting rules. It declined to comment on The
Wall Street Journal's report of Mr. Schneiderman's investigation. A
spokesman for Mr. Schneiderman declined to comment.
And debate about write-downs isn't limited to the energy
industry. In the aftermath of the financial crisis, banks faced
scrutiny over decisions to avoid write-downs of some risky,
hard-to-trade securities. In other industries, some companies won't
write down the value of "goodwill," the intangible asset typically
generated when one company buys another, even as peers have done
so.
Adding complexity to the question of when a write-down should
occur in the energy industry: the way oil and gas reserves are
recorded as assets to begin with depends in part on whether they
can be extracted, and whether it is cost-effective to do so.
The oil-price crash has led some companies to take big
write-downs.
Chevron Corp., for instance, recorded write-downs and other
noncash charges totaling $2.6 billion in the second quarter,
reflecting "lower oil prices and our ongoing adjustment to a lower
oil price world," the company said. Shell took $3.7 billion in
write-downs in 2015 to reflect a weaker long-term outlook for
energy prices, plus another $4.6 billion for scrapping Alaska
drilling and Canada oil-sands projects.
Exxon maintains the value of reserves tied to decades-long
projects shouldn't be affected by price fluctuations it views as
temporary. The company did acknowledge in its latest annual report
that future write-downs are possible if long-term price increases
don't materialize.
And Exxon is careful, testing a potential investment under every
price scenario before committing to it, so that even a prolonged
price slump won't derail the project, said Derek Ryder, a retired
reservoir engineer specializing in reserves accounting who spent
most of his career as an executive at Exxon subsidiary Imperial
Oil.
The company is particularly reluctant to write down an asset
because that removes its value permanently, he noted. "Impairment
is a one-way trap door. Once they're gone, they're gone," said Mr.
Ryder, who says he wrote a manual in the 1990s that standardized
Exxon's reserves-booking policy. That was at the behest of Rex
Tillerson, then head of corporate planning and now Exxon's chief
executive.
Sometimes companies differ on how to value assets even on the
same project. At a Nigerian oil-drilling project in which both
Exxon and French oil giant Total SA are partners, Total took a
write-down in February, while Exxon didn't. Oil and gas accounting
specialists said the two companies may not have valued the assets
the same way, and noted U.S. accounting rules Exxon follows differ
in some respects from international standards followed by
Total.
The leeway companies have around write downs may also make it
hard for regulators to prove any wrongdoing on Exxon's part, Mr.
Amiram said. "It will be very difficult in this case unless there's
a smoking gun," he added.
Write to Michael Rapoport at Michael.Rapoport@wsj.com, Bradley
Olson at Bradley.Olson@wsj.com and Chester Dawson at
chester.dawson@wsj.com
(END) Dow Jones Newswires
September 16, 2016 18:36 ET (22:36 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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