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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: Joe S Pack who wrote (23510)	2/17/1999 11:54:00 AM
From: Logain Ablar	Respond to of 50167

Hi Nat: Regarding your inquiry on the SEC crackdown. I have to be brief and here goes: 1) Limiting the allocation of purchase price to R&D. This limits a company's ability to take an immediate write off. Forces more goodwill to be set up an amortized (i.e. an expense) in future quarters. Will hurt all companies that grow by acquisition (i.e. future earnings are reduced). I disagree with this "crackdown". While there are abuses (all companies will try to maximize the amount of purchased R&D, it only makes sense) it accelerates the advancement of technology. A trade off between pure accounting and growth (I'd take growth but watch the accounting purist's jump out of the woodwork <gg>). We see an immediate impact with Network Associates, Citrix and will see the LU / ASND deal impacted (or at least LU's share price as future earnings are impacted reducing earnings growth). 2) Fudging earnings. This is an item that should not be done. However, there are some legitimate ways under today's GAAP accounting to “manage” earnings. The legitimate way is to establish and or adjust “contingency” reserves. Under FAS 5 guidance a contingency reserve is based upon “reasonable” estimates (so we always have the discussion of what is reasonable). As the SEC points out they will be looking into restructuring reserves (I'll discuss this further down). If we look at various industries and segments within the industries there are various contingency reserves. The 3 most known (at least to me and I'm sure there are many more), are software companies sales reserve (MSFT”s comes to mind for product they've shipped but may not have been sold through the channel), banks loan loss reserves and insurance companies Incurred But Not Reported Reserves. Insurance companies (my experience) will increase reserves when times are good (i.e. they're exceeding their plan, not the street forecast) and take them down when times are not so good (to try and meet plan). When times are bad times are bad. Many company's incentive plans (bonus and stock options) are based upon a company meeting internal plan numbers not street estimates. However, there are limits on a company's ability to do this. As a recent example look to OXHP. They exceeded the limits by a considerable amount (showing a low IBNR to earned premium in low 70's when their claim experience indicated hi 80's (only one analyst picked up on this but eventually the NY Ins. Dept. forced them to adjust reserves). OXHP was fraud (my opinion). Another case is Cedent. Just posting fictious revenue. 3) On restructuring charges and a subsequent reduction of the reserve. SEC usually inquires about any significant restructuring charge. Normally if the charge (and related reserve) is too high the company takes it back into earnings at a subsequent date (I am pretty sure but not positive) this take down has to be disclosed in 10Q. Of course it may not be in the companies press release (or at least not in opening paragraphs). Hope this helps (and this is the brief version). Tim