According to most of the press Vodafone made a £15bn loss in the 2005/6 financial year. The largest loss ever made by a British company. In fact, it would be more accurate to say that the company made a real profit but an accounting loss.

First, what actually happened? Vodafone had a lot of goodwill sitting on its balance sheet. This came about when it bought other companies for more than their assets were worth (quite usual when one buys a successful business). The difference between the value of the assets and what it paid for the businesses went into its accounts as a notional asset called goodwill.

An EU directive forced Vodafone (and other companies) to move from British accounting standards (which allowed goodwill to be written off a little every year) to international standards which required the value of goodwill to be reviewed every year and reduced when necessary.

So, Vodafone looked at the businesses it had purchased, and came to the conclusion that they were worth a lot less than it had paid for them. In fact it had £23.5bn too much of goodwill in its accounts. So Vodafone reduced the amount of goodwill on its balance sheet. This also meant it had to subtract this amount from its profits.

Doing this did not cost Vodafone a penny of actual cash. All that changed were some numbers in its accounts. It still has exactly the same businesses, it is just being more realistic in how much it is saying their worth. If was following the old British accounting standards the write-off may not have been required at all.

In fact, professional investors, would ignore the write-off, and look at the profit before the impairment of goodwill. This was a reasonable £8.6bn.
How did the press report this?

The Sun, not surprisingly, was the worst I could find. It simply said that Vodafone made a £14.85bn loss. The four digit precision is rather ironic given it is a completely misleading number.

IT news website, The Inquirier, was much the same.

The BBC, The Register (another IT news website) and the New York Times all gave some indication that the loss was a one-off or due to impairments. All three explanations were incomplete or unclear. All three also had headlines that mentioned only the size of the loss. The BBC article was probably the best of these, with an indication of the cause of the loss in the introductory paragraph.

None of the last three gave any indication that Vodafone had made an underlying profit, once the effect of the impairment was stripped out.

CNN and The Independent did mention the underlying profit number. Both buried the fact deep in the article. Neither made it clear that this was what mattered: the headlines and the introductory paragraphs gave quite the opposite impression.

At least this time not everyone got it completely wrong, but a good many did. All the articles were misleading to some extent. Certainly, very few people relying on any of the articles would have a good idea of what Vodafone’s results were like.