Companies Divesting From Russia Are Facing Big Write-Downs

Commodities firm Glencore PLC said it was reviewing its business in Russia, including stakes in EN+ Group PLC and Rosneft. Companies outside the oil-and-gas industry, such as Apple and Dell Technologies Inc., said they would retreat from Russia by halting product sales.

But doing so comes at a cost. Divesting Russian investments and joint ventures will make a dent in companies’ income statements likely due to their reduced value, according to accountants and valuation advisers. Companies under U.S. and international reporting standards have to take impairment charges, or write-downs, when the sum of estimated future cash flows from an asset is less than its book value.

Such impairments cover tangible assets, like factories and land, and intangible assets, like brands and goodwill, which is created when one company buys another for a price higher than the fair market value of its assets.

In Russia, foreign companies’ assets could range from joint ventures to equipment, oil fields and refineries. Write-downs usually mean that an asset has lost some of its value, while write-offs indicate a complete loss of value.

Impairments from these divestitures, some of them multibillion-dollar holdings, will likely constitute some of the biggest write-downs of the year, said David Trainer, chief executive at New Constructs LLC, an investment-research firm.

“They’re looking at significant losses,” he said.

BP, for instance, plans to take significant noncash charges to reflect foreign-exchange losses it has accumulated since 2013—the year it acquired the 20% Rosneft stake—and the revaluation of its stake as a financial asset instead of as an equity interest on the books, a spokesman said. Under International Financial Reporting Standards, BP can no longer use equity accounting for its stake as it doesn’t meet the criteria for having “significant influence” over Rosneft; two BP directors resigned from Rosneft’s board on Sunday.

BP will assess the fair value of the stake at the end of the first quarter and write down the difference between that amount and the roughly $14 billion value on its books as of Dec. 31, 2021.

“Depending what that fair value is judged to be, it will be part of $14 billion that is written off,” the spokesman said. The company plans to report the charges in May as part of its first-quarter earnings.

Shell said its move to exit its Russian joint ventures is expected to diminish the book value of its Russian assets and lead to impairments. The company said it held about $3 billion in noncurrent assets in these joint ventures at the end of 2021. Shell plans to conduct a thorough impairment analysis, a spokesman said. It is also looking at all available ways to exit, such as an equity sale or transfer.

The companies haven’t detailed how they plan to go about divesting. For instance, it is not clear how they would negotiate a sale with a buyer, or whether they would just abandon assets if they failed to find one. Sanctions imposed by the U.S. and Europe will also limit the range of possible buyers. In some cases, companies may not be allowed to sell to anyone but a joint-venture partner, likely reducing the value of a stake.

Determining the current value of the assets will be difficult given the economic drag of sanctions and geopolitical uncertainty, said Shishir Khetan, a managing director in the valuation advisory group at Stout Risius Ross LLC, an investment bank.

If the crisis and sanctions continue in the coming weeks, companies could decide to write down their once-valuable assets to zero—meaning they have no value, Mr. Khetan said. “Companies could simply walk away and that would be a full impairment,” he said.

The exact size of the impairments will become clear in the coming quarters as companies disclose them in financial statements. Arriving at those figures will require greater perspicacity than usual, said Philip Keejae Hong, an associate professor of accounting at Central Michigan University.

“It’s always hard to measure the market value at any given point of time, and the political climate doesn’t really help,” Mr. Hong said.

Some companies try to defer testing for impairments as long as they can in order to account for them as part of discontinued operations instead of continuing operations, said Paul Chaney, accounting professor at Vanderbilt University. This allows them to avoid reporting lower income from continuing operations, he said.

“They might look at what would be the best reporting strategies for us to make us look as good as we can,” Mr. Chaney said.

Last year, companies recorded smaller asset impairments as the economy continued to bounce back from the Covid-19 pandemic. Businesses in the S&P 500 reported $12.59 billion in asset impairments for last year, down from $109.21 billion in 2020, data provider Calcbench Inc. found. The bump in 2020 was largely driven by oil-and-gas businesses booking charges as energy prices fell and pressure to reduce carbon emissions rose.

About 94% of S&P 500 companies had reported full-year earnings for 2021 as of Wednesday, Calcbench said.

—Nina Trentmann contributed to this article.

Write to Mark Maurer at [email protected]