The Newcastle-based company was warned profit figures would be hit ‘by a significant amount’ if it moved away from its ‘contentious’ accounting mechanism towards a standard type.
As a result its shares plummeted over 6%, 13.5p to 208.5p last Wednesday alone. Latest trading show Sage shares have fallen further, to 208.25p – compared to a year high of 283p and an average for the year of 237p.
Sage is in agreement with the City in not believing the accounting strategy of the company is a serious issue.
But its share price has been hit after criticism in two separate downbeat analysts’ reports.
After a number of deals in recent years, Sage has £836m of goodwill sitting on its balance sheet. If it was to amortise it over 20 years, it would have to wipe off more than £40m a year off its paper value, though it would not affect cashflow.
According to its latest annual report Sage’s, profits were up £10m from £74m to £84m.The company is understood to be the only IT company in Europe not to amortise goodwill, instead, it completes an annual impairment review, examining the performance of each business to see if the value has fallen.
Merrill Lynch analyst Ariel Bauer added: ‘If Sage had to write down its goodwill after an impairment test, it would wipe out accounting profits as the goodwill on the balance sheet is much larger than the annual profit.’
Sage, said: ‘Our accounting principles comply with UK and US GAAP. Sage has a track record of significantly enhancing the value of goodwill. Our approach involves subjecting goodwill to rigorous annual impairment review rather than arbitrary goodwill amortisation.’
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