Accounting Strategies Buoyed S&P 100 EPS By 10% - Study
25 Feb 17:36
By Lynn Cowan
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--If investors controlled what was included in pro
forma results during the bull market, the Standard & Poor's 100 index would
have taken a 10% cut on consolidated earnings.
That's according to calculations by corporate accounting expert Jack
Ciesielski, a Baltimore, Md., portfolio manager. Ciesielski, who publishes the
Analyst's Accounting Observer, a monthly newsletter, developed his own version
of pro forma accounting for the S&P 100 and compared it with the Generally
Accepted Accounting Principles numbers reported by companies on the index from
1996 through 2000.
His definition of pro forma results probably wouldn't sit well with
corporate America, which has gotten a bad rap in recent years for gussying up
its GAAP results into more profitable pro forma versions.
Ciesielski's take on pro forma, published last month, would exclude pension
plan credits and include the cost of stock options.
Although GAAP accounting allows companies to include pension plan credits in
their earnings and exclude stock options from compensation costs, both have
been criticized by accounting purists as items that distort results. Gains
recorded from overfunded employee pension plans don't flow down to investor
dividends, and stock options allow employees to purchase shares from the
company at prices below market value.
A June 2001 study by Credit Suisse First Boston Corp. noted that in 2000, 30%
of the companies in the S&P 500 index reported pension income that added, on
average, 12% to their pretax earnings.
The top sectors that benefited from their employees' overfunded pension plans
and stock options during those years were predictable: Older industrial and
manufacturing companies that have large pension plans, and technology upstarts
that are generous with options.
In some cases, the two worlds overlapped: telecommunications equipment maker
Lucent Technologies Inc. (LU), with a holdover pension plan from its AT&T days,
was also generous with options. Cumulatively, Lucent gained $3.02 billion from
its pension plan and kept $1.88 billion in stock options out of its expenses
from 1996 to 2000 - amounts that would have pulled its GAAP earnings during
that period to $1.27 billion under Ciesielski's version of pro forma from the
$6.17 billion that the company reported under GAAP. Lucent refused to comment.
Another company that would suffer under Ciesielski plan would be Viacom Inc.
(VIA), whose GAAP earnings during 1996 to 2000 were a cumulative $330.6
million. They would have been $56.3 million by Ciesielski's reckoning.
AOL Time Warner Inc.'s (AOL) $1.49 billion would have dropped to $384
million; International Paper Co.'s (IP) $1.04 billion would have dropped to
$408.5 million; and Black & Decker Corp.'s (BDK) $214 million would have been
$95.8 million. In the case of AOL Time Warner and Verizon, which resulted from
mergers, Ciesielski only used data from predecessor firms AOL and Bell
Atlantic, respectively.
Verizon countered that it would have been fairer to calculate its results
using all its predecessor companies - Bell Atlantic, Nynex and GTE - and to
factor out $3.1 billion in post-retirement benefit costs. That would leave it
with cumulative GAAP earnings of $36.3 billion, and Ciesielski-style pro forma
of $32 billion.
A spokesman said the company felt that its retiree benefits spending is much
larger than most other companies, and should be reflected in any comparison. He
added that the company's 2001 operating earnings rose to $3 a diluted share in
2001 from $2.91 a share, even though its pension gain was the same in both
years. (On a GAAP basis, earnings to 14 cents a diluted share from $4.31.)
"It (pension gains) wasn't a contributor to (operating) earningsgrowth,"
said spokesman Robert Varettoni.
He added that the company uses conservative accounting assumptions to
calculate pension income.
AOL Time Warner declined to comment. Neither International Paper nor Black &
Decker immediately commented.
Ciesielski's ideas may have some merit: The International Accounting
Standards Board is considering requiring stock option costs as a compensation
expense, and a bipartisan Senate bill would force companies to expense options
if they also count them as deductions in determining their taxes.
But Ciesielski said he doesn't think his idealized pro forma will become a
reality any time soon, primarily because it will take decades for the
accounting profession to agree on whether pension gains belong in earnings. He
added that he doesn't see his analysis as a good stock-picking method: The
information he used to calculate results is available in Securities and
Exchange Commission filings just once a year.
What he would like to see, though, is the information reported on a quarterly
basis.
"It wouldn't be difficult to require more frequent reporting ... companies
have to know what their pension costs are to disclose their earnings
quarterly," he said. "But politically it could be difficult. The problem is
that companies would get more questions about it, so they don't want to do it."
-By Lynn Cowan, Dow Jones Newswires; 202-628-9783; Lynn.Cowan@dowjones.com
(END) DOW JONES NEWS 02-25-02
05:36 PM |
