Thursday, 5 February 2009

Writedowns Another Name for Mistakes

"Restructuring, that's a word for mistakes" - Warren Buffet

Yesterday BHP reported a -56% decline in half year profits because of approximately $3.5 billion in writedowns. Call them writedowns, abnormals unusual items or whatever other name management manufactures, the fact is, such charges are admissions of prior mistakes. Brian McNiven in his book MARKET WISE put it like this;

Evidence of false profit declarations in previous years becomes apparent when a company announces significant asset revaluations. Write-offs and write-downs that quite obviously cannot be entirely attributed to the current accounting period are due to a lack of adequate provisioning in earlier years. When deferred provisions of this nature are labelled as restructuring, rationalisation, abnormals, non-recurring costs or non-operating costs - so as to give the impression that they are not part of the normal cost or risk of running the business - management is attempting to camouflage accounting oversights or misrepresentation.

You should not give companies a pass because a write-off is claimed to be a one-off. Before investing in such companies you should have a good look at the details of such writedowns, mining companies are notorious for such practices. There will be plenty of opportunity to scrutinize the nature of writedowns as companies will be reporting a slew of them this earnings season.