EM.TV & Merchandising AG and its engagement in the German “Neuer Markt” (New Market) has been one of the most interesting and instructive chapters in stock market history. A corporation which rose within three years from a family business to becoming a global leader in media business, EM.TV is inseparably connected to its founder and long-time CEO Thomas Haffa. Establishing a small business in 1989 devoted to buying the rights for, and merchandising TV series such as “Alf” or “Sesame Street”, Haffa took the opportunity of an upcoming stock market hype in Germany and placed a successful IPO in October 1997 (annual report 1997). Soon, the puzzled investor community saw its stock price skyrocketing, reaching a plus of 31521% within two and a half years (Bloomberg Data). Similarly brutally the stock crashed after a series of corrections, announcements, internal inconsistencies and more.
This paper focuses on the accounting practices of EM.TV, which allowed and supported its appraisal in the markets. Specifically, I will analyze the creative accounting techniques underlying the 1998-99 business figures, which inter alia, gave rise to a further boost in its stock price development. The paper is structured in the following way: First, I will outline a number of crucial factors that hinted at anomalies surrounding the EM.TV “miracle”. Those red flags encompass factors such as the business strategy (actually the lack of it), leadership issues, and the special stock market environment at that time. Then the analysis of the business results in 1998 and 1999 will expose the creative accounting tricks employed by EM.TV, with emphasis on goodwill treatment, accounting for amortization, and revenue recognition policies. Thus, it will be shown how the fact of the corporation basing its business on immaterial goods such as media rights and merchandising licenses, is translated into the accounting process. This impact will then serve for an ex-post correction of key figures in the financial statements to lead over to the final section, in which a re-valuation of the company, based on multiples, shall demonstrate the extent and effects of creative accounting to valuing EM.TV.
At a glance
- Grade: 1.0 (1.0 is the best grade)
- Recalculates EM.TV’s 1998 and 1999 income statements for valuation
- Applies Price-to-Tangible Book in the company valuation
- 5 tables
Contents
I. Introduction
II. Red Flags: Behind the Facade of EM.TV’s Astounding Success Story
III. Creative Accounting
a) Film and Merchandising Rights: Amortization Techniques
b) Goodwill Treatment and Inflation of Assets
c) Revenue Recognition
IV. Valuation
V. Conclusion
Objectives and Themes
This work examines how EM.TV’s accounting practices supported its stock market valuation during the 1998–1999 boom. It asks how the treatment of media rights, goodwill and revenue affected reported financial figures and what a valuation based on adjusted figures would imply.
- Corporate governance, acquisitions and stock market warning signs
- Amortization of film and merchandising rights
- Goodwill accounting and the balance sheet
- Revenue recognition for television rights
- Adjusted financial statements and valuation multiples
Excerpt from the Book
c) Revenue Recognition
The final element of accounting tricks employed by EM.TV cannot be classified as “creative”, since it was in parts entirely illegal. When spotted by the auditor, the numbers retrospectively had to be corrected, causing a plummeting stock price due to the massive impact, and the resignation of CFO Florian Haffa (Welt, 2001). Starting with the general principles of EM.TV principles of profit realization, the annual reports of 1998 and 1999 note that “the sales proceeds in the trade in TV rights are realized at the time the exclusive broadcast rights are transferred, provided that our company has substantially fulfilled its obligations, that is, the series or TV programmes are ready for broadcast and must merely be requested by the TV station. […] Distribution and marketing commissions for film rights are recorded when the contracts are concluded, since our company has then rendered its service” (Annual Report 1999, p. 88). Hence, revenues were recognized neither upon payment received, nor upon delivery of the respective series or movies, but already at the point of contract signing, provided that EM.TV’s possessed the licenses. For a young company like EM.TV this proved to be especially powerful since it could leverage rapidly on the acquired rights and licenses, thus presenting impressive sales figures. Table 4 puts this practice into perspective, which reflects the actual poor quality of earnings produced.
Two striking examples illustrate how EM.TV profited in practice from this accounting technique, as many broadcasting companies plan and book their programmes far in advance, which makes upfront revenue so enticing. In 1998, the company sold the TV rights for several Mike Tyson boxfights, and accounted for this sale right away, following their policy. However, the world did not see a Tyson fight happen in 1998, which even brought EM.TV’s accounting entry techniques under pressure. CFO Florian Haffa, thus, gave the order to capitalize the payments made for the licenses, which finally were allocated to the category “other investments” and appeared on the balance sheet instead of being expensed (Focus Money, 2000). Secondly, three days before the closure of the books for the first half-year of 1999, German broadcaster Sat.1 closed a deal with EM.TV. Sat.1 purchased 3000 hours of TV programmes over the next five years, starting in 2000, with an overall value of more than €100 mio. Consequently, even though the contract came into effect only in six months from that point of time, EM.TV accounted already for more than 50% of total revenues (€64 mio.) in their half-year statement ending June 1999 (Spiegel, 1999).
Chapter Summaries
I. Introduction: The author introduces EM.TV’s rapid rise and sets out the planned examination of accounting practices and valuation.
II. Red Flags: Behind the Facade of EM.TV’s Astounding Success Story: This chapter considers management, ownership, acquisitions and the market environment as potential warning signs.
III. Creative Accounting: The author examines amortization of media rights, goodwill treatment and revenue recognition, drawing on annual reports and specific transactions.
IV. Valuation: The author adjusts selected financial figures using stated assumptions and considers their implications for valuation multiples.
V. Conclusion: The final chapter places the analysis in the context of EM.TV’s subsequent decline and the wider stock market boom.
Keywords
creative accounting, EM.TV, stock market hype, financial reporting, revenue recognition, amortization, goodwill, media rights, corporate governance, valuation multiples, income statement, dot-com bubble
Frequently Asked Questions
What is this work about?
It examines accounting practices at EM.TV and their relationship to the company’s stock market valuation.
What are its main themes?
The work covers corporate governance, acquisitions, intangible assets, revenue recognition and valuation during a stock market boom.
What is the central research objective?
The author investigates how accounting choices affected EM.TV’s reported figures and how adjustments to those figures affect valuation.
What method does the author use?
The work uses a case analysis of annual reports and other cited sources, followed by adjustments to financial figures and a valuation using multiples.
What does the main analysis cover?
It examines warning signs around EM.TV, accounting for film and merchandising rights, goodwill, revenue recognition and a subsequent revaluation.
Which keywords characterize the work?
Key terms include creative accounting, revenue recognition, goodwill, amortization, media rights and valuation multiples.
How does the work address the Sat.1 agreement?
It uses the television programming agreement as an example in its discussion of the timing of revenue recognition.
What assumptions are used in the revaluation?
The author makes assumptions about the timing of license consumption and adjusts revenue and amortization expenses before examining valuation ratios.
- Citar trabajo
- Anonym (Autor), 2011, Creative Accounting at EM.TV: Supporting a Stock Hype in 1998/99, Múnich, GRIN Verlag, https://www.grin.com/document/176313
