Accounting change to knock Japan Tobacco profit

By Elaine Lies

TOKYO (Reuters) - Japan Tobacco Inc (2914.T), the world's third-largest cigarette maker, booked a 9 percent gain in quarterly operating profit on expanding sales outside its shrinking home market, but forecast a 28 percent fall this year due to an accounting change, its first drop in eight years.

Japan Tobacco last year acquired Britain's Gallaher Group for about $15 billion to vastly increase its international sales and offset declining revenues at home, where the population is shrinking and health-consciousness is spreading.

But Japan Tobacco, which makes Mild Seven cigarettes and owns the Camel, Winston and Salem brands outside the United States, said profits would sag this year as it begins to amortise goodwill related to the Gallaher acquisition.

Goodwill is the excess paid for a company above the value of its assets and includes intangible assets such as brand names.

Changes to Japanese accounting standards from this business year have forced companies to amortise goodwill on acquisitions made through overseas subsidiaries that until now have not had to allocate such costs under local laws.

Japan Tobacco said it would book $754 million in goodwill costs this year related to its acquisition of Gallaher and another $154 million for its purchase of RJR Nabisco's international tobacco business in 1999.

The company is also grappling with higher raw materials costs, the yen's surge against the dollar and the fallout from a food scare earlier this year involving pesticide-contaminated dumplings it imported from China.

"These one-off minus factors are overwhelming all the plus factors," Japan Tobacco Chief Executive Hiroshi Kimura told a news conference.