UPS has reached a settlement to pay $45 million over allegations from the Securities and Exchange Commission (SEC) regarding the improper valuation of its freight division. This announcement was made by the SEC on Friday.
According to the regulatory body, UPS significantly misrepresented its earnings by not adhering to generally accepted accounting principles (GAAP) when assessing the value of its freight unit. The SEC stated that during 2019, UPS concluded that the division was unlikely to fetch more than approximately $650 million. UPS’s internal evaluations suggested that there was nearly $500 million of goodwill associated with this unit that should have been considered impaired.
Instead of applying its own evaluation, UPS opted to rely on a third-party consultant’s assessment without providing the consultant with all the necessary information to conduct an accurate valuation. The SEC reported that the consultant, using assumptions sanctioned by UPS, estimated the worth of the freight division to be about $2 billion—threefold higher than UPS’s own estimation.
In accounting terminology, goodwill impairment refers to a situation where the recorded value of an asset exceeds its actual fair value. The SEC noted that based on this inflated estimate from the consultant, UPS did not record any goodwill impairment for the year 2019. If UPS had accurately evaluated its freight division, the reported earnings and figures would have shown a significant decrease.
The SEC’s findings also indicate that in 2020, UPS had entered into a preliminary, non-binding agreement to sell the freight division for $800 million, with further adjustments likely to lower the final sale price. Despite this and its prior analysis, UPS again relied on a consultant’s valuation, neglecting to mention the existing agreement to the consultant, as per the SEC.
Similar to the previous year, the SEC emphasized that had UPS accurately valued the freight division and accounted for the goodwill impairment, it would have led to materially lower reported earnings and figures. Melissa Hodgman, associate director of the SEC, remarked that companies must produce reliable fair value estimates and recognize goodwill impairment when necessary. She pointed out that UPS repeatedly preferred unreliable third-party evaluations over its validated pricing estimates for the freight division, which led to significant compliance issues.
Following the SEC’s announcement, UPS’s stock price saw an increase of over 2%. The company also stated that it had already set aside the settlement amount and affirmed that it would not have any significant impact on its operations.