Sage under fire over accounting

SOFTWARE group Sage is under mounting pressure to abandon its aggressive accounting policies as concerns over corporate accounts take an increasing toll on share prices. Analysts say Sage's refusal to depreciate the value of goodwill in the conventional way is damaging sentiment surrounding its the stock.

Some say there are also concerns that the sharp drop in the value of technology assets could eventually force Sage to write-down assets, resulting in a heavy charge against profits.

Sage, whose falling share price has left it in danger of being culled from the FTSE 100 index, is thought to be the only listed technology company in Europe that refuses to depreciate the value of the goodwill on its balance sheet at a predetermined annual rate. The company instead conducts an internal assessment of goodwill in a process known as an 'impairment review'. This has not yet resulted in a write-down, despite the sharp falls in valuations being applied to assets across the tech sector.

Sage's goodwill was valued at £836m at 30 September last year. This would have generated a charge of £42m against last year's £121.3m pre-tax profit had the company applied a depreciation rate of 5%, such as that used by many of its peers. 'In an environment in which people are focusing on accounting, they will be looking at Sage,' said Investec Henderson Crosthwaite analyst Gareth Evans. 'In some ways, it may be healthy for them to have a write-down just to clear the air.'

ING analyst Graeme Clark said Sage's relatively strong performance meant many of its institutional shareholders were not overly concerned about the policy. But the practice would be criticised if Sage's results deteriorated in the current half, bringing its valuations into question. 'It is not good having questions about accounting policies at the moment,' Clark said. 'People will continue to look at it and say 'they may have to write-down some of these investments'.'

Interact, the software group acquired by Sage for £189m early last year, is among the investments which some believe may have to be written down if its performance fails to improve. Williams de Broë analyst James Shenton said: 'If things go bad, there is every chance they will have to start writing stuff off.'