Did Bayer Ax the "Schering" Brand for Tax Reasons?
No doubt you spent part of the day wiping a tear from your eye and holding a cigarette lighter aloft in mourning for the "Schering" part of the Bayer Schering Pharma brand, which Bayer (BAYN.GR)
said it will no longer use.
If there were any tears being shed at Bayer's Leverkusen HQ in Germany, they were tears of joy, as the €405 million asset writedown that accompanied the end of "Schering" appears to have had a fortunate effect on Bayer's cashflow and tax situation.
It would be nice if Bayer presented a consistent, easy-to-read set of financial statements for both the full year and Q4 2010, like the SEC requires American companies to do. But Bayer prefers the European disclosure style which allows the company to spread its information across several different sets of disclosures. The result is that the direct effect of the €405 million writedown is difficult to detect. There are, however, a series of happy coincidences on Bayer's books:
- The €405 million charge led to a net loss in Q4 of €145 million compared with a €153 million profit a year earlier. The loss was unexpected because Bayer's sales increased 14.5 percent in Q4 2010 to €9 billion. Had Bayer not axed the Schering name, the company would have shown a profit.
- Writedowns of "goodwill" due to the loss of a brand name are almost always non-cash charges, meaning they require an "expense" written off against the company's revenues on its income statement -- leading to a loss on paper in Q4 in this case. But the company "adds back" the cash on its cashflow statement. Lo and behold, gross cash flow was up €385 million, Bayer reported.
- Corporate tax expenses, however, are represented on the income statement, not the cashflow statement. Bayer didn't break out both its income and cashflow statements for Q4 2010, but it did produce them for the full year in its annual report. There we find that its 2010 tax expense was €411 in 2010, down from €511 the year before. The reduced tax burden followed the reduced level of profit Bayer showed after writing down the Schering name.
In the U.S., tax day is April 18. Americans who want to follow Bayer's example -- by telling the IRS they're going to give up using their middle names in order to receive a 20 percent tax cut -- should do so at their peril. This type of tax break is only available for corporations.
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