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Technology Stocks : Network Associates (NET)
NET 234.89-2.3%3:59 PM EST
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To: Just_Observing who wrote (4530)3/27/1999 12:48:00 PM
From: Chuzzlewit  Read Replies (2) of 6021
 
Just Observing, you are making the error of confusing accounting with truth <VBG>.

First, let me clear up an error in your post. There is no write off under pooling (in spite of what many analysts seem to say). It is really an estimate of the cost of bringing current projects which are currently incomplete to economic fruition. It is in essence taking a charge now for future costs. It's like saying that you are buying something that is incomplete, and so I will include the cost of completion in my calculations to give a better picture. So what happens is that the cash expended to complete the project in the future does not impact future earnings because the expense has been recognized in advance. I hope this distinction is clear.

Second, the concept of "economic profit" is not synonymous with "earnings". What the SEC is doing is simply mandating the timing of the recognition of the cost, which is reflected in earnings. But the economic profit has not changed. That's why financial analysts prfer to use operating cash flow and free cash flow as a measures of economic profit. Regardless of what the SEC mandates, those numbers will remain the exactly the same because those numbers are only influenced by cash expenditures.

So what has really happened is that the representation of profit has changed, but the underlying profit is really no different.

I hope this explanation is clear.

TTFN,
CTC
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