UPS (NYSE: UPS) agreed on Friday to pay US$45m to settle allegations by the US Securities and Exchange Commission (SEC) that it improperly valued its freight business, leading to misrepresented financial results in 2019 and 2020. The SEC claims the Atlanta-based courier failed to follow generally accepted accounting principles (GAAP), significantly overstating the value of its UPS Freight unit.
SEC findings and settlement
The SEC’s investigation revealed that UPS relied on an external consultant to assess the value of its freight business. However, the company withheld critical internal analyses indicating a much lower valuation. The consultant valued UPS Freight at US$2bn, far exceeding UPS’s internal estimate of US$650m. The SEC asserted that if UPS had used its own calculations, the company would have been required to record a US$500m goodwill impairment, resulting in significantly lower reported earnings.
Goodwill is recorded when a company purchases another business for more than the fair value of its assets. In the case of UPS, its freight unit was significantly underperforming, and the value attributed to goodwill no longer reflected economic reality. SEC Associate Director Melissa Hodgman stressed the importance of accurate valuations, stating, "Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own."
Under US accounting rules, companies must annually test goodwill for impairment. The SEC noted that UPS ignored clear evidence of impairment, further compounding the issue by failing to disclose a non-binding 2020 term sheet for selling the freight unit at US$800m—less than half the consultant’s estimate.
UPS neither admitted nor denied wrongdoing as part of the settlement but agreed to avoid future violations.
Impact on UPS and market reaction
Despite the allegations and settlement, UPS shares rose 1.9% on Friday, and are currently 2.63% higher at US$134.8, reflecting investor confidence in the company’s broader financial stability.
UPS emphasised that the settlement amount had already been accounted for in its financial statements.
