EM.TV & Merchandising AG and its engagement in the German “Neuer Markt” (New Market) has been one of the most interesting and instructive chapters in stock market history. A corporation which rose within three years from a family business to becoming a global leader in media business, EM.TV is inseparably connected to its founder and long-time CEO Thomas Haffa. Establishing a small business in 1989 devoted to buying the rights for, and merchandising TV series such as “Alf” or “Sesame Street”, Haffa took the opportunity of an upcoming stock market hype in Germany and placed a successful IPO in October 1997 (annual report 1997). Soon, the puzzled investor community saw its stock price skyrocketing, reaching a plus of 31521% within two and a half years (Bloomberg Data). Similarly brutally the stock crashed after a series of corrections, announcements, internal inconsistencies and more.
This paper focuses on the accounting practices of EM.TV, which allowed and supported its appraisal in the markets. Specifically, I will analyze the creative accounting techniques underlying the 1998-99 business figures, which inter alia, gave rise to a further boost in its stock price development. The paper is structured in the following way: First, I will outline a number of crucial factors that hinted at anomalies surrounding the EM.TV “miracle”. Those red flags encompass factors such as the business strategy (actually the lack of it), leadership issues, and the special stock market environment at that time. Then the analysis of the business results in 1998 and 1999 will expose the creative accounting tricks employed by EM.TV, with emphasis on goodwill treatment, accounting for amortization, and revenue recognition policies. Thus, it will be shown how the fact of the corporation basing its business on immaterial goods such as media rights and merchandising licenses, is translated into the accounting process. This impact will then serve for an ex-post correction of key figures in the financial statements to lead over to the final section, in which a re-valuation of the company, based on multiples, shall demonstrate the extent and effects of creative accounting to valuing EM.TV.
Table of Contents
I. Introduction
II. Red Flags: Behind the Facade of EM.TV’s Astounding Success Story
III. Creative Accounting
a) Film and Merchandising Rights: Amortization Techniques
b) Goodwill Treatment and Inflation of Assets
c) Revenue Recognition
IV. Valuation
V. Conclusion
VI. Bibliography
Objectives and Topics
This paper examines the accounting practices of EM.TV during the 1998-1999 period to understand how these methods facilitated an unprecedented stock market hype. The central research objective is to analyze specific "creative accounting" techniques—namely amortization policies, goodwill treatment, and revenue recognition—and to demonstrate, through an ex-post correction of financial statements, the extent to which these practices inflated the company's perceived value and subsequent stock price.
- Corporate governance issues and the influence of the Haffa brothers.
- Mechanisms of "creative accounting" in media and merchandising firms.
- Impact of aggressive revenue recognition and asset inflation on financial reporting.
- Re-valuation of EM.TV using adjusted financial multiples.
- Market psychology and the role of speculative bubbles in stock market history.
Excerpt from the Book
c) Revenue Recognition
The final element of accounting tricks employed by EM.TV cannot be classified as “creative”, since it was in parts entirely illegal. When spotted by the auditor, the numbers retrospectively had to be corrected, causing a plummeting stock price due to the massive impact, and the resignation of CFO Florian Haffa (Welt, 2001). Starting with the general principles of EM.TV principles of profit realization, the annual reports of 1998 and 1999 note that “the sales proceeds in the trade in TV rights are realized at the time the exclusive broadcast rights are transferred, provided that our company has substantially fulfilled its obligations, that is, the series or TV programmes are ready for broadcast and must merely be requested by the TV station. [...] Distribution and marketing commissions for film rights are recorded when the contracts are concluded, since our company has then rendered its service (Annual Report 1999, p. 88). Hence, revenues were recognized neither upon payment received, nor upon delivery of the respective series or movies, but already at the point of contract signing, provided that EM.TV’s possessed the licenses. For a young company like EM.TV this proved to be especially powerful since it could leverage rapidly on the acquired rights and licenses, thus presenting impressive sales figures. Table 4 puts this practice into perspective, which reflects the actual poor quality of earnings produced.
Chapter Summary
I. Introduction: This chapter introduces EM.TV’s rise as a media powerhouse and outlines the paper's focus on analyzing the accounting techniques that supported its rapid stock market ascent.
II. Red Flags: Behind the Facade of EM.TV’s Astounding Success Story: This section explores the leadership style of Thomas Haffa and identifies structural governance weaknesses and the speculative environment that characterized the company's growth.
III. Creative Accounting: This chapter provides a detailed analysis of the company's specific accounting methods, including amortization techniques, goodwill treatment, and revenue recognition policies that artificially boosted earnings.
IV. Valuation: This section presents an ex-post adjustment of EM.TV’s financial statements and uses valuation multiples to demonstrate the company's actual degree of overvaluation during the 1998-1999 period.
V. Conclusion: The final chapter summarizes the inevitable collapse of the company following the exposure of its accounting inconsistencies and reflects on the lessons learned regarding investor ignorance and financial reporting.
VI. Bibliography: This section lists the sources and literature used to analyze the company's history and financial data.
Keywords
EM.TV, Creative Accounting, Stock Hype, Thomas Haffa, Revenue Recognition, Goodwill, Amortization, Neuer Markt, Corporate Governance, Valuation, Financial Statements, Dot.com Bubble, Media Rights, Investor Sentiment, Market Overvaluation.
Frequently Asked Questions
What is the primary subject of this analysis?
The paper analyzes the accounting practices of the German media company EM.TV during the years 1998 and 1999, specifically focusing on how these practices facilitated a massive stock price inflation.
What are the central thematic areas?
The central themes include corporate governance, aggressive financial reporting, the role of external auditors, market psychology during the "Neuer Markt" era, and the techniques used to mask poor earnings quality.
What is the core research goal?
The goal is to expose how specific "creative accounting" tricks, such as premature revenue recognition and manipulation of amortization, were used to create a self-fulfilling stock hype, and to quantify the effect of these practices through adjusted financial modeling.
Which scientific methods are applied?
The author performs an ex-post financial analysis, adjusting key performance figures (EBITDA, EBIT, and EPS) to rectify distortions caused by creative accounting and applying multiple-based valuation techniques to assess the firm's true worth.
What is covered in the main body of the text?
The body covers the background of the company's leadership, detailed explanations of amortization and goodwill treatment, the mechanics of revenue recognition, and a comparative valuation study of the company's performance.
Which keywords characterize the work?
Key terms include EM.TV, creative accounting, stock hype, revenue recognition, corporate governance, financial statement adjustment, and overvaluation.
How did the company's revenue recognition policy specifically contribute to the hype?
EM.TV recognized revenue at the point of contract signing rather than upon delivery or payment, which allowed the firm to leverage future rights and present inflated sales figures to investors.
What was the role of the company's goodwill treatment?
EM.TV utilized amortization periods for goodwill—later extended from five to twenty years—to artificially inflate its balance sheet and avoid reporting significant write-down losses.
Why did the author conclude that a re-valuation was necessary?
The reported financial results were heavily distorted by accounting techniques that did not reflect the company's actual cash flow or operational success, necessitating a correction to determine its true economic position.
- Arbeit zitieren
- Anonym (Autor:in), 2011, Creative Accounting at EM.TV: Supporting a Stock Hype in 1998/99, München, GRIN Verlag, https://www.hausarbeiten.de/document/176313
