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Aruba, May 14, 2013 - GOODWILL write-offs are confusing. When they happen, the managers of firms insist they do not matter. Goodwill is the excess paid for an asset over its book value. Writing it down is a mere accounting adjustment, bosses tend to say. Yet those same bosses go to inordinate lengths to delay recognizing such supposedly irrelevant, non-cash losses. On May 13th Tata Steel, an Indian firm, announced a $1.6 billion impairment, mainly of its $13 billion takeover of Corus, a British steelmaker. The deal happened six years ago. It has been clear for at least four years that it has been a financial disaster. Why recognize that now?

The simple, cynical—and largely true—view is that managers are vain and hate to admit mistakes. Investors usually decide an acquisition has gone bad within a year or two. The buyers’ shares drop. It takes longer for the accounts to catch up. Auditors should subject balance sheets to a yearly impairment test, but valuations are subjective and executives can twist their arms. When the auditors do, finally, assert themselves, companies are often blas√©. An example is ArcelorMittal, another steel firm, which disclosed a $4.3 billion write-down in December. There has been no post-mortem of the long and value-destructive acquisition spree that helped generate it.

The typical lag between error and admission seems to be about five years. Take the top 3,000 firms listed worldwide. In the boom of 2004-2007, takeovers were at a peak, and write-offs were minimal at about $30 billion a year. Impairments surged to $150 billion in 2012 according to Bloomberg data. If one ignores 2008, when banks were forced to clean up their books as they were bailed out, the previous impairment peak was in 2003, when the victims of the dotcom bubble, such as Time Warner, at last admitted reality.

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