This reduces reported earnings every year along the way. In some cases, they have made the entire purchase price of companies vanish from the books on the day of acquisition. IBM says it simply followed accounting rules. Lotus Development itself already knew about such write-offs. SEC staff members are now querying companies about how they calculate and disclose the write-offs valuation.
Critics say the write-off inevitably distorts financial results.
If the acquired company produces earnings, its return on equity will be overstated because so much equity has been written off, critics charge. The practice tends to understate assets and make return on equity seem more robust than it really is, say experts. Companies taking the write-off say they are simply following their accountants' lead. Two years ago, Cisco Systems, Inc., the large San Jose, CA, manufacturer of networking systems, decided to buy Lightstream Corp., a Billerica, MA maker of computer network switches. At the time, Lightstream was developing a multimedia device, which Cisco believed it could improve.