Louis - Not your FASB option disclosure rule-in-development, but the new FASB asset impairment rule will be getting some attention here by the looks of it.
Speaking as a former CFO of a public company, IMO this is pure BS on the part of the reporting issuers -
marketwatch.com
Year over year, without a benchmark
Companies' goodwill omissions stymie Wall Street
By Barbara C. Costanza, CBS.MarketWatch.com
Last Update: 2:12 AM ET May 5, 2002
LOS ANGELES (CBS.MW) -- Thanks to a new accounting rule, a controversial element of this year's earnings reporting has emerged as scores of U.S. companies disclose write-offs that in some cases are worth hundreds of millions of dollars.
The whole point of the new rule was to make sure that investors were getting a fuller picture of corporate profitability, and the factors that contribute to or detract from it.
Instead, say Wall Street's guardians of fair bookkeeping, many corporations are leaving out a key part of the picture needed for making all-important year-over-year comparisons.
"I sure hope the SEC puts out a warning to companies, because what is going on right now is certainly misleading. Now, whether it is, is in the legal sense, is debatable," said Chuck Hill, research director at earnings tracker Thomson Financial/First Call.
For First Call, one of the biggest problems is the simple fact that many companies aren't providing apple-to-apple comparisons for year-over-year results.
The Financial Accounting Standards Board's new rule, No. 142, requires a company to review all of its acquired assets on an annual basis to determine if any of those assets have dropped in value.
Charge against earnings
If the acquired assets have lost value, the company is supposed to take a charge against earnings. And many companies are recording those charges in the first quarter of 2002. However, many of those same companies aren't providing comparable year-ago numbers.
Prior to the new rule, a company could amortize goodwill over a period of up to 40 years, in turn, not taking a direct hit to earnings.
Earnings watchers say the only way to gauge how a company performs from year to year is to look at restated numbers for the year-ago quarter, excluding the amortization of goodwill. "Very few of the already reported companies have done so in their press releases," Hill said.
But the new rule only requires companies to provide restated comparable numbers in their quarterly filings with the SEC, not their press releases, said Sheryl Thompson, a spokeswoman for FASB.
Hill takes exception to that. "I think it is misleading in many cases where the numbers are significantly different," he said.
As a result, he said, First Call has been working overtime to assemble apple-to-apple comparisons, but that doesn't always work so well in today's real-time news-driven market environment. "We knew it would be confusing, but not to the extent that it really is," Hill said.
Companies currently are allowed 45 days to submit their 10-Q filings, but the SEC is considering cutting that time to 30 days. Officials at the SEC did not return phone calls seeking comment.
Some companies have clearly stated what their year-ago results would have been excluding amortization of goodwill. Smith International (SII: news, chart, profile) did so in the very first paragraph of its press release, but Smith is in the minority, according to First Call.
By contrast, companies like Bausch & Lomb (BOL: news, chart, profile) have taken a shotgun approach of providing a wide variety of numbers -- such as pro forma income, net income, net income including and excluding the accounting change and the restated year-ago numbers.
Albeit confusing, Bausch & Lomb issued three sets of numbers and provided the pathway to get to a fourth set of numbers, which included one-time items and excluded goodwill for the year-ago period.
And then there are companies that provide the comparable numbers by way of their conference calls or Web sites. In a press release, General Electric (GE: news, chart, profile) said its earnings rose 9 percent in the first quarter, excluding goodwill. The company didn't provide a per share figure in the release. However, anybody who listened to GE's conference call found out the per-share figures and a discussion of those numbers.
Hill says "there is no excuse for not having comparable numbers for the press release."
It's not magic
How investors interpret the goodwill write-off, sometimes called an impairment charge, is also a concern for some observers.
When AOL Time Warner (AOL: news, chart, profile) reported its results, the company cited a $54.2 billion write-off for goodwill, the largest quarterly loss in corporate history. Excluding that charge, the earnings would be $118 million, or 18 cents a share, 4 cents better than the Wall Street consensus estimate.
Krishna G. Palepu, senior associate dean at Harvard Business School and author of "Business Analysis and Valuation," worries that investors may completely dismiss such a large number as a meaningless one-time charge.
"Its not accounting magic," Palepu said. "In a sense, the company is fessing up that the original value [of the acquired assets] is no longer true."
Palepu says investors should pause and consider the message when a company takes a write-off related to its acquired assets. "Last year, you told me the acquisition was so valuable and that is why you paid a premium," said Palepu. "Now you write off the asset, in essence telling us you can not create more value."
In addition, Palepu has a theory for the first quarter's torrent of write-offs: Companies may be taking advantage of the economic environment this quarter, recording write-offs that could be "somewhat excessive." While FASB guidelines call on companies to review acquired assets once a year, they don't have to be in the first quarter, Palepu noted.
Taking a big write-offs now would in essence make it easier to paint a prettier picture in the future when year-over-year comparisons are made. Under this scenario, companies with huge write-offs would have a smaller asset base, in turn creating the appearance of stronger profitability, assuming the economy picks up. "In some sense, they have cleaned up their financials in one shot," Palepu said.
Greg Soukup, co-director of mergers and acquisitions for Ernst & Young's western regional office, warns that goodwill charges will continue to be "unexpected surprises" to investors and analysts alike throughout this year. |
