UPS will pay $45 million to settle charges that it improperly valued its freight division, the Securities and Exchange Commission announced Friday.
The regulator agency said that UPS materially misrepresented its earnings because it failed to follow generally accepted accounting principles in valuing its freight unit.
The SEC order said that in 2019 UPS determined that its freight division was likely to sell for no more than about $650 million. UPS’s own analysis indicated that nearly $500 million of goodwill it had associated with the unit was impaired.
But instead of using its own analysis, the SEC said that UPS relied on an outside consultant’s valuation of the freight division, without giving the consultant information necessary to conduct a fair valuation of the business. The commission said that the consultant used assumptions approved by UPS and then estimated that the freight unit was worth about $2 billion – three times as much as UPS had determined.
Goodwill impairment is a term used in accounting to recognize that the face value of an asset on paper exceeds its fair value.
Based on the consultant’s estimate, UPS didn’t record a goodwill impairment in 2019, the SEC said. Had UPS properly valued the division, its earnings and other reported items would have been materially lower.
The SEC’s order also alleges that in 2020 UPS entered into a non-binding term sheet to sell the freight unit for $800 million with adjustments to be made later that were likely to reduce the final price.
Despite its own analysis and its entry into this term sheet, the Atlanta company again relied on a consultant’s valuation of the unit in 2020 to support not impairing the business’s goodwill. UPS also did not inform the consultant of the term sheet, the commission said.
Similar to the previous year, the SEC said that had UPS properly valued the freight division and impaired goodwill, its earnings and other reported items would have been materially lower.
“It is essential for companies to prepare reliable fair value estimates and impair goodwill when required,” Melissa Hodgman, associate director, said in a statement. “UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations.”
Shares of UPS rose more than 2% Friday.
UPS said Friday that the amount of the settlement had been set aside and that it will have no material effect on its business.