Financial Accounting Blog

Sunday, February 29, 2004

Wall street Journal, companies complain about cost of Sarbanes Oxley Act. Changes made by Sarbanes Oxley to toughen corporate accountability and restore investor confidence are just now starting to hit the bottom line. The increased cost to bring off balance sheet items on the books and improve audit compliance is costing some large corporations $4.5 million dollars. Much of the money is being spent on consultants,lawyers, auditors and new software.
Audit costs are doubling and final rules on the new controls are still not published. Controllers feel the pendulum has swung to far.

Business Finance Get Ready For New Global Accounting Standards
We are becoming one world with one standard. 7000 companies in the European Union must convert to the (IAS) standard by Jan. 2005. Convergance of U.S. GAAP and IFRS is the primary objective. This will allow cross boarder comparisons of financial statements. Improves access to capital and the cost of raising capital.Nestle SA completed the conversion in 1984 to be listed in London and on the NYSE in 1994. Us companies will be affected minimally.

Robert Bicknell

Saturday, February 28, 2004

Freddie Mac, still shaken from its accounting scandal, is not sure if it will be able to clean up its books in time to post its yearly results by the July deadline. On a side note, the nation's no. 2 mortgage finance company paid its ousted C.E.O about 5 million in salary for 2003 and 14.5 million in other compensation, and continues to pay him $375,000.00 a month for a consulting fee to this day. Makes you sick, dont it? Investors are beginning to question the competency of the company.
Meanwhile, Freddie Mac said significant revisions are necessary for its accounting systems to enact new policies the company adopted after its restatement, causing delays in reporting its 2003 data, the company said.

Analysts expressed some frustration that Freddie Mac may have to push back its 2003 earnings. "I know this is a complicated issue, but at some point you start to wonder about the competence inside the company in terms of the accounting and financial controls," said Mike Vinciquerra of Raymond James.

This article shows how companies that have halted their expenditures since 2001 and have cleaned up their balance sheets are now sitting in a very nice position to borrow working capital at low interest rates.
"The recent slowdown in the commercial paper market stemmed from a decline in capital expenditures in 2001, reducing the need for short-term financing. Corporations paid more attention to repairing their balance sheets from 2001 through 2003, mostly by holding back capital expenditures while internally generated funds climbed. The improved balance sheets helped create a more amenable borrowing environment," added the rating agency."

Friday, February 27, 2004

Increased transparency
Given globalization of the economy, truly international accounting standards are needed to increase transparency and spur cross-border investment.

Thursday, February 26, 2004 talks about a little known and outdated auditing standard for outsourcers that could be the next hurdle for Sarbanes- Oxley Act.
The standard in question is Statement on Auditing Standards No. 70, "Reports on the Processing of Transactions by Service Organizations." Set up by the American Institute of Certified Public Accountants in 1993, SAS 70 spells out how an external auditor should assess the internal controls of an outsourcing service provider and issue an attestation report to outside parties or to a client.

Here is an article (@CNN) on why Microsoft chooses to keep such large amounts of cash on hand. The article suggests various ways of using that cash- dividends being among the options. It also raises the issue of what such decisions mean to investors.
But the debate about what to do with $52.8 billion is not just daydream believing for Microsoft Chairman Bill Gates and CEO Steve Ballmer, Microsoft actually has that much cash on hand. article that details current actions by the SEC to delay implementation of Section 404 which resulted from the Sarbanes-Oxley legislation.The rule "requires that a company's independent auditors attest to and report on management's controls assessments".

Hispanic Business says that companies will soon have to expense the cost of stock options.
The dot-com bust, the recession of 2001, and the corporate crime wave and accounting scandals of 2002 brought the party to an unceremonious end. And any thoughts that the rebounding economy will give options new life should be immediately forgotten. On Oct. 29, the Financial Accounting Standards Board proposed ending in 2005 the special treatment options have enjoyed for decades. Barring an unlikely 11th-hour reprieve from Congress, in a little over 12 months, companies will be forced to account for options as an expense. What's more, unvested options from prior years -- not just new grants -- will have to be expensed, resulting in a much bigger hit to earnings than most imagined.

Recognizing the Unrecognizable provides six key tests of an acquisition target's revenue recognition. Although the article focuses on the acquisition process it provides an overview of some of the mistakes that are made by companies in regards to revenue recognition.
Revenue recognition has perennially been one of the hottest of the SEC's buttons, but perhaps never more so than now. During the past year, the Commission has mounted high-profile investigations of such brand name companies as Xerox, Lucent, and Kmart, as well as several energy and telecommunications companies. SEC staff members have also recently said that the Commission will conduct a sweeping investigation into revenue recognition practices across a range of industries.

Wednesday, February 25, 2004 has an interesting article about Huntington Bank switching it's auditor. The company states that they have had "no disagreements" with their present auditor. The very last line of the article says this:
Last July, Huntington said it voluntarily reduced several years of profit by $30 million in connection with its accounting for automobile leases.
I wonder if there is more to this story...

Rod 2/25/04

"Best Practice Doesn't Equal Best Strategy", analyses the impact of best practice and differenciation on profit margins.
Best-practice benchmarking—the measurement and implementation of the most successful operational standard or strategy available in an industry—can be one of the most effective tools for increasing a corporation's efficiency, productivity, and, ultimately, earnings. To see the benefits such benchmarking can yield, you need look no further than the US automobile industry, which transformed itself during the 1980s by adopting Japanese manufacturing techniques. More recently, Ericsson and Motorola copied the Finnish cell phone maker Nokia's use of the same phone chassis across different technologies to achieve economies of scale in design and production.
A strategic-differentiation index (SDI) can document the herding phenomenon and gauge the ensuing decline in industry margins. An analysis of the impact of such crowding indicates that a 10 percent decline in the wireless industry's SDI resulted in an 11.2 percent decline in margins. The entry of E-Plus into the market in mid-1994 reduced margins by some 19 percent. Between 1992 and 1998, however, the SDI tumbled 83 percent, pulling margins down 50 percent from their peak. In short, it was the low degree of strategic differentiation engineered by the incumbent operators, not the entry of new companies into the market, that was primarily responsible for the lost earnings, which amounted to more than $780 million in 1998 alone.

Tuesday, February 24, 2004

Priceline's Revenue Recognition policy. Priceline recognizes the selling price of
its ticket sales as revenue, not the commission on the sale. Here is an excerpt
from their 2002 annual report (page 6 of the PDF file):

For the year ended December 31, 2002, we had revenues of approximately
$1.0 billion. Revenues for the year ended December 31, 2002 consisted primarily
of: (1) travel revenue and (2) other revenue. Travel revenue, which represented
substantially all of our total revenue in 2002, consisted primarily of:
(1) transaction revenues representing the selling price of airline tickets, hotel
rooms and rental cars;
(2) ancillary fees, including Worldspan, L.P. reservation
booking fees; and (3) customer processing fees charged in connection with the
sale of our travel products. Other revenues consisted primarily of: (1)
transaction revenues and fees from our long distance phone service; (2)
commissions and fees from our home financing and automobile services; (3)
license fees from our international licensees; and (4) marketing revenues.

Monday, February 23, 2004

Reuters reports that JLG is restating earnings due to premature reporting of revenue.
Specifically, the company announced that it has determined that one transaction with $8.7 million in net revenues was recognized prematurely. The transaction, with a single customer, was incorrectly reported as a sale, rather than a consignment sale, which allows recognition of the revenues only upon final sale of the equipment by the consignees. At this time, all of the equipment has been sold, and the restatement has no cash impact. The company's outside auditors have advised management that the improper accounting of this transaction reflects a material weakness in internal controls.

Wall Street Journal Article detailing how NYSE has advantages over electronic markets in regard to stock pricing. "Trade Through" rule requires that investor is given best price even if the order has to be filled through a bigger market (such as NYSE)
"The SEC Tuesday plans to consider proposals that could alter how stocks are quoted, what fees markets can charge for access to quotes and how investors trade securities. The agency is trying mitigate disparities in the way it regulates different markets. Pressure for changes is growing and some lawmakers say Congress could legislate if the SEC's changes don't go far enough."

Sunday, February 22, 2004

Bristol Myers is being investigated for possible violations of the Revenue Recognition principle.
John Skule, senior vice president of corporate affairs at Bristol-Myers, said Wednesday that the subject of the grand jury probe ``probably is the inventory,'' a reference to aggressive sales incentives through which the company created a massive glut of inventory of its prescription drugs.

Bristol-Myers already has revealed that the U.S. Securities and Exchange Commission, the Justice Department and the U.S. Attorney's Office in New Jersey are investigating a program that offered wholesalers huge discounts to buy more prescription medicines than they could sell.

Saturday, February 21, 2004 reports that the International Accounting Standards Board will require issuers of standard stock in the European Union to "treat the costs of providing stock options as an expense on their financial statements." The article predicts that the U.S.-based FASB will do the same and contains an interesting link to an article called "Who Owns Accounting." Indeed a timely article given former Enron CEO Jeffrey Skilling pleading "Not Guilty"only yesterday.

Friday, February 20, 2004

BMW Switches to International Accounting Standards from German accounting standards.
The company's sales for 2002 will rise by 129 million euros ($161 million) as Munich-based BMW includes revenue from fees for handling credit cards. The cost of sales will rise by 901 million euros. Previously the carmaker's cost of sales had been manufacturing costs. It will now include freight costs and risk provisions.

The higher cost of sales reduces BMW's gross margin to 23.5 percent from 25.4 percent. The company's pretax profit margin remains unchanged at 7.8 percent. The gross margin will remain lower in the coming years as the accounting changes are permanent.

The Atlanta Journal reports that Goodyear Tire & Rubber Co. said it plans to
refinance long-term debt to raise almost $650 million to pay off loans due next year. The announcement came a day after the world's largest tire maker saw its stock plummet on news that the Securities and Exchange Commission was formally investigating accounting problems.

[Spokesperson] Price said "The company disclosed the risks and news of the SEC probe on Wednesday to update investors and lenders so that everybody had current and full disclosure.''

Wednesday, February 18, 2004 Reports that Punishment isn't the sole answer to Corporate America's problems, those in government hope that regulation, rather than incarceration, will provide a lasting deterrent to corporate misconduct.
Post-Enron reforms have made dramatic alterations to the landscape of corporate governance. Boards, their committees, and internal auditors now have greater responsibilities and powers. How will these reforms change the CFO's job?

A CFO magazine poll of more than 300 senior finance executives finds them split on whether the governance reforms enacted in the past 18 months are worth the considerable effort of implementing them. They are also divided about whether CFOs should work merely to satisfy the letter of the law or go further and embrace its spirit.

Tuesday, February 17, 2004

New rules for analysts. This article from Investor's Business Daily talks about how suspected conflicts of interest between securities firms' banking and analytical functions have changed the relationship between analysts and the press:
Less documented has been one of those changes: Many analysts can't talk with the press anymore, or they don't. And those that do often are, by company policy, much more cautious. But some new rules are expected within weeks that could clarify the situation.

Because interplay between these analysts and reporters is a foundation of business news, observers say the result is a loss for investors. They might not be getting all the info they need to make sound investment decisions. Investment banks may not have written policies about how their analysts must deal with the press but in many cases, they must consult with their company's compliance department before an interview is granted.

The Street reports the effects over the shares prices of Micromuse after revealing that the 10-K annual report is delayed
The muse has spoken: Sell. That's the case with shares of Micromuse Tuesday, after the business software company said it is delaying the filing of its 10-K annual report and will incur additional costs because of an internal accounting inquiry. Recently, shares were down 20 cents, or 2.9%, to $6.70, after falling more than 8% in early trading. The San Francisco-based company also said it will restate earnings for the fiscal years 2000 to 2003 and incur about $2 million in "previously unanticipated professional fees and expenses related to the accounting inquiry." The company said the inquiry involves "the accounting for accrued expenses and expense recognition."

Yahoo reports that Cingular buys AT&T Wireless for $41bn, beating out Vodaphone. This makes Cingular the largest wireless company in the US. The part I found most interesting was this:

The $41 billion bid, worth $15 per share, was the largest all-cash offer in history, according to merger and acquisition research firm Dealogic

Earnings as related to Stock Valuation: The Wall Street Journal reported in January 2004 that "Earnings Reports Lift Stocks Despite Valuation Worries".
Among companies wowing Wall Street...Lexmark International climbed 7.2% after its fourth-quarter earnings beat Wall Street estimates...
Energizer Holdings jumped 11% after the company said first-quarter earnings climbed 33% and beat expectations...
And Tyson Foods surged 11% after its fiscal first-quarter earnings surged 46% despite the mad-cow scare late in the period.
The simple fact of beating Wall Street earnings estimates appears to have been enough to allow these stocks to increase in value. (Posted by P. Timmerding.)

BusinessWeek Online reported that on February 16th, Disney's board unanimously rejected the $48 billion offer from Comcast.
In its release, the board said it was refusing the bid because the proposed stock merger valued Disney at $3.60 less than the current price of a Disney share. It is not expected that this will be Comcast's last attempt at on offer. They feel as though Disney lost support from shareholders when Pixar ended it's 12-year relationship with the company in January. Moreover, Disney Chairman Michael D. Eisner faces a compaign aimed at his ouster by former board members Roy Disney and Stanley Gold.

Disney was initially valued at $56 billion, but their stock shot up by 14%, while Comcast's fell by 6%. What is the market trying to say about this deal? Comcast's decision to make the offer seemed to be out of fear of competition from other media companies, however, CEO Brian Roberts "said Comcast has given guidance of strong growth and that it saw the ability to help boost performance at Disney's struggling ABC-TV network and its animation unit".

Monday, February 16, 2004 reports that firms are issuing misleading statements about reports by the FDA to bolster stock prices or, in the case of Imclone, sell off shares of stock before a bad report is issued.
Regulators say they are acting to improve detection of potential securities law violations by companies that try to deceive the public about the status of federal scrutiny of their products.

The Food and Drug Administration is announcing steps that it and the Securities and Exchange Commission are taking ``to enhance the public's protection against false and misleading information.''

The New York Times reports that Comcast is attemping a hostile takeover of the Walt Disney Company . The move would allow the nation's largest cable provider to "...control costs and ensure adequate inventory for the most mature and slowest-growing part of its cable business: video programming."One clear example of this shift and proposed merger is seen through cable giant Cox Cable:
The shift in the cable industry's revenue model is already under way, and can perhaps be seen most clearly in the financial data of Cox Communications, the nation's No. 4 cable operator. In the first quarter of 2001, video services represented more than 87 percent of the company's residential revenue of $848 million. In less than three years, in the final quarter of 2003, that figure had fallen to 70 percent, even as total quarterly residential revenue had risen to $1.32 billion. In that quarter, 18 percent of Cox's residential revenue came from its cable-modem operation, and another 10 percent came from telephone service.
Ryan Rebholz In a recently filed 8-K, Goodyear reports that it is now under formal investigation by the SEC regarding its restatement of five plus years of earnings. Previously, the investigation was informal. As a result Goodyear faces numerous lawsuits, credit ramifications, and the inability to post 2003 results by the March 15 deadline.
The probe stems from the company's Oct. 22 announcement on that it would restate its results for the five years ended 2002 and for the first and second quarters of 2003. As a result of the restatement, 36 lawsuits have been filed against the company and some of its current and former directors and officers, Goodyear said in an 8-K filed Wednesday.

Sunday, February 15, 2004 reports that public companies are leaving the big 4 accounting firms in favor of smaller ones.
When it comes to auditors, many companies are apparently deciding that bigger is not necessarily better. That assessment comes courtesy of Auditor-Trak, a database that records more than 12,000 auditor changes. In 2003, PricewaterhouseCoopers, KPMG, Deloitte & Touche, and Ernst & Young each lost more public-company audit clients than it gained, according to a report on

Meanwhile, more than half of those clients migrated to smaller auditing firms — or even local ones — instead of hiring another Big Four auditor. Smaller national firms such as Grant Thornton, BDO Seidman, and McGladrey & Pullen nabbed a total of more than 21 percent of the clients that left the Big Four, according to Auditor-Trak's analysis. Another 34 percent went with a regional or local firm as a replacement.

Forbes reported that U.S. Securities and Exchange Commission Chairman Willam Donaldson is pushing for new governance standards for the New York Stock Exchange. During his testimony to the Senate Banking Committee, he pushed for the NYSE to adopt the governance standards that apply to individual companies.
"As part of his testimony on market structure issues, Donaldson told the committee that self-regulatory organizations are critical to setting sound governance practices. He said the SEC needs to review the governance issues surrounding these organizations, amid the controversy at the NYSE triggered by outrage for former Chairman Richard Grasso's $140 million pay."

Kmart sues Martha Stewart Living over royalties: Kmart Holding Corp. Friday said it had sued Martha Stewart Living Omnimedia Inc. , claiming the home furnishings maker 'double-counted' the royalties it is owed for sales of "

FASB: FASB Issues Accounting Standard to Improve Disclosures about Pension and Other Postretirement Benefit Plans

: "FASB Issues Accounting Standard to Improve Disclosures about Pension and Other Postretirement Benefit Plans
Norwalk, CT, December 23, 2003 The Financial Accounting Standards Board (FASB) has issued FASB Statement No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits, that improves financial statement disclosures for defined benefit plans. The project was initiated by the FASB earlier this year in response to concerns raised by investors and other users of financial statements about the need for greater transparency of pension information. The change replaces existing FASB disclosure requirements for pensions"

Saturday, February 14, 2004

Donald Trump Gives up Control. Interest payments are using up most of the cash generated by the casinos leaving little cash available for upgrading the properties. To remedy this, an investment bank has agreed to invest $400 million of cash into Trump Hotels & Casino Resorts. Part of the change will involve getting some of the debtholders to surrender their bonds in return for shares of stock in the company. Of course, that means more shares of stock outstanding....
DLJ Merchant Banking would own about two-thirds of Trump International with Trump owning slightly more than 20 percent, people familiar with the deal said. Trump now owns 56 percent of the shares, assuming all conversions and options. Trump would not cash out or give up any of his current shares.

Friday, February 13, 2004

The New York Times reports on Comcast's unsolicited bid to purchase Disney for $54 billion. The deal may hinge on a determination of the true worth of Disney and its value as a cultural institution.
"Disney's bankers - Goldman, Sachs and Bear, Stearns - have begun working up valuation models that are expected to show that Comcast's $54 billion bid fails to appreciate Disney's value as a business and a cultural institution, an executive close to Disney said. It is unclear how quickly Disney's board will be presented with this material and how long it will take the directors to evaluate it. Some independent board members, meanwhile, have talked about retaining an outside lawyer to advise them as they navigate the repercussions of the Comcast bid."
"Many analysts and investors say Disney's priority will be to use price to deflect Comcast's overture. It is not unexpected that Disney's bankers would find the bid undervalued, and investors and analysts say the company could be worth $35 to $38 a share. On Wednesday, Comcast's stock offer was valued at $26.47 a share."

Accountingweb reports EU's dispute with International Accounting Standards Board despite its goal o fmaking it easier for European companies to list stocks in the U.S.
"The dispute has made it on to the radar of the U.S. Securities and Exchange Commission, which says it won’t take financial filings from European companies unless the EU requires them to follow the IASB’s derivative rules, which closely mirror U.S. rules, Dow Jones reported.

John Hitchins, a partner at PricewaterhouseCoopers, told Dow Jones that the current situation is "pretty serious." "If the European Union doesn't adopt international accounting standards with IAS 32 and IAS 39 [the standards that deal with derivatives], it will leave a big hole in the IAS framework. The EU itself would have to consider drafting alternative rules," he says. But, he adds, these may not be acceptable across Europe because of national differences. For instance, Germany has adopted IASB standards, but the French oppose the new derivative rules."

Thursday, February 12, 2004 published an article detailing an auditor's assessment that the National Hockey League lost $272.6 million last season. The amount is disputed by the NHL Players Association as both sides prepare to enter negotiations after this season.
The NHL Players Association immediately challenged the results. Ted Saskin, the union's senior director of business affairs, said that its examination of four teams' finances -- Boston, Buffalo, Los Angeles and Montreal -- found revenue and benefits to the clubs had been underreported by $52 million.

"The Levitt report is simply another league public relations initiative," NHLPA head Bob Goodenow said in a statement. He called it "fundamentally flawed" because it defined NHL revenue in the same manner used by the NFL and NBA in their salary-cap systems.

Expensing. Business Week article analyzes Tyco Corp.'s acquisition that raised suspicion among the investment community that uncommon growth may be due to manipulative accounting.
"This is one of the most startling examples of financial engineering you can hope to find," says Albert J. Meyer, an analyst at David W. Tice & Associates and longtime critic of Tyco's accounting. CIT made downward "adjustments" to income totaling $221.6 million last May, just before the deal closed. The result, is that CIT swung into the red in April and May, losing $78.8 million. Then, in June, CIT earned $71.2 million.

Even if you accept Tyco's explanations, the bottom-line impact is indisputable: The huge surge in charges taken by CIT just before the deal closed--combined with the drop in,"other revenue",--helped produce a noticeable jump in CIT earnings just after the deal closed. Indeed, CIT was the major reason Tyco reported a 34% increase in per-share earnings for the quarter ending Sept. 30, just as profits were tanking throughout Corporate America.

Wednesday, February 11, 2004 reports that Merrill Lynch has authorized a $2 billion stock buyback.
Cheif financial officer, Ahmass Fakahany, stated that company has generated substantial level of capital in the past two years and that that its balance sheet and liquidity are strong. Merrill Lynch currently has $1.5 trillion in client assets and has 1.01 billion common shares outstanding (1.7 percent of total shares).

Tuesday, February 10, 2004

Wall Street Journal, Feb, 2004 Phillips post profit after two years of losses
Phillips cost cutting allowed them to turn a profit in 2003 after two years of losses. Over the last three years they trimmed their workforce from 219,000 to 166,000.
While this allowed them to turn a profit, the predictability of future earnings are in question. Poor brand equity in the USA continues to limit their selling price and hurts their gross margins. The USA division has until 2004 to become profitable or risk being shut down. This division with over 400 hundred million in sales lost over 85 million euros in 2003. A marked improvement but a long way to go in a short period.

Wall Street Journal,Feb. 10 2004 Companies complain about the cost of Sarbanes- Oxley.
Changes made by Sarbanes-Oxley to toughen corporate accountability and restore investor confidence are just now starting to hit the bottom line. The increased cost to bring off balance sheet items on the books and improve audit compliance is costing large corporations up to 4.5 million dollars. Much of the money is being spent on consultants, lawyers, auditors and new software.
Audit costs are doubling and final rules on how to asses the new controls is still not published. Many controllers feel the pendulum has swung to far and this is overkill.

WebCPA reports that Computer Associates said that an internal re-audit is currently underway and that it is continuing to cooperate with regulators investigating accounting irregularities at the technology conglomerate.
"However, CA chief executive Sanjay Kumar told a gathering of analysts in New York that the company could not comment on the re-audit until it was complete."

Monday, February 09, 2004

FAIRMONT HOTELS & RESORTS: reports that Fairmont Hotels & Resorts have a good base of assets, considering their EBITDA and capitalization.

Fairmont's top moneymaking properties, known as the "Big Eleven Assets," contribute approximately 65%-70% of the company's overall EBITDA (earnings before interest, taxes, depreciation and amortization). Its top-earning properties are Banff Springs, the Fairmont Scottsdale Princess and the Fairmont Kea Lani Maui. Three key Canadian properties--Banff Springs, Chateau Lake Louise and Whistler--contributed about 20% of total EBITDA in 2003, while the two Hawaiian properties, the Kea Lani Maui and the Orchid, were expected to contribute 16%-17% of 2003 EBITDA.
Legacy's market capitalization is $485 million, and it has been a weak performer. The new proposal, which Fairmont announced during its recent fourth-quarter conference call, may force it to consolidate Legacy onto Fairmont's balance sheet. Largely based on that announcement, Goldman Sachs analyst Steven Kent downgraded Fairmont stock from "outperform" to "in-line/neutral" on Feb. 2, but industry consensus seems to be that it's too soon to see how (and if) the ruling would apply to hotels.

Forbes reports British Airways' (BA) the biggest third-quarter profit in 12 years because of its stabilisation in the revenue environment and fairly concerted cost cutting.
Shares of BA, which has slashed more than 12,600 jobs in the past two years, rose as much as 4.2 percent in early trading after the company posted a pretax profit of 125 million pounds ($232 million) for the three months to December 31. Sales rose by 1.8 percent to 1.891 billion pounds on the back of the gradual recovery in demand for air travel, a better economic outlook and cheap ticket offers to encourage travel.

Net debt stood at 4.511 billion pounds at December 31, its lowest level since December 1997. The company said last year it would be comfortable with debt levels of three billion pounds. reports that FASB Chairman Details Reporting Objectives, Challenges...
A major benefit of Sarbanes-Oxley is that the act has elevated the national focus on sound financial reporting, the chairman of the Financial Accounting Standards Board told roughly 200 business leaders here.

As part of its efforts to develop a sound, uniform financial reporting system, chairman Robert Herz said that the Norwalk, Conn.-based accounting standards setter has designated three strategic objectives: to revamp the overall financial reporting system by improving and simplifying U.S. GAAP; to move toward a more principles-based approach to accounting; and to accomplish international convergence.

Expensing versus Capitalization. This website discusses a case of FedEx versus the IRS with regards to expensing maintenance costs versus capitalizing them. The IRS had claimed that these costs
were capital expenditures... which must be amortized. FedEx claimed that the amounts paid... were ordinary and necessary business expenses... which were currently deductible.

The article explains the court's decision for finding in FedEx's favor and allowing the items to be expensed, versus capitalized:
(Since the items) did not materially increase the value of FedEx's aircraft, did not appreciably prolong the life of FedEx's aircraft, and did not adapt the property to another use. The (items in question) merely maintained the (aircraft) in an ordinary efficient operational condition. As such, the expenditures... were incurred as ordinary and necessary business expenses incidental to the maintenance of FedEx's aircraft.
(Submitted by P. Timmerding)

CFO.COM reports that Congress is questioning the effectiveness of GAAP standards in relation to Freddie Mac accounting problems.
"It is possible Freddie could have hidden billions of dollars on income in a way that complied with GAAP," said Stearns, chairman of the House Subcommittee on Commerce, Trade, and Consumer Protection. "I suggest this is not the result we want from U.S. accounting standards."

Sunday, February 08, 2004 reports that a new accounting rule cost Cisco $567 million in earnings.
Cisco Systems Inc., the world's largest maker of switching and linking equipment for computers, reported a 15 percent rise in second-fiscal-quarter sales, to $5.4 billion, the highest in three years. The company's earnings were penalized by $567 million, however, because the company complied with a new accounting rule that applies to off-balance-sheet assets.

After a one-quarter delay, Financial Accounting Standards Board Interpretation No. 46 (FIN 46) went into effect for companies' first financial reporting period ending after December 15, 2003. FASB issued FIN 46 in January 2003 to prevent companies from using off-balance-sheet partnerships and other special-purpose entities, or SPEs (which the board now calls variable interest entities, or VIEs) to hide debt and inflate profits, as Enron is alleged to have done in particularly aggressive fashion. discusses how the acquisition of another company can negatively affect the bottom line. Business Objects did not provide net income figures excluding the acquired firm, Crystal Decisions.
On the surface, Business Objects first-quarter earnings fell well below Wall Street estimates. But it wasn't clear if analysts had correctly accounted for the effect of the acquisition. Revenue in the firm's December quarter was a record $184.2 million, compared to $126.2 million a year ago. But net income dropped to a loss of $8.6 million from a profit of $12.8 million, or 20 cents a share, in 2002. The quarter's results include 20 days of revenue and expenses contributed by Crystal Decisions, as well as acquisition costs totaling $43.5 million.

Saturday, February 07, 2004

Mind the Gap. A new study of operating cash flow and earnings for the 87 nonfinancial companies in the Standard and Poor's 100 suggests that the recent upturn in corporate profits may not be sustainable.
Is the recent upturn in U.S. corporate profits likely to last? Unfortunately, a new study comparing trends in cash flow with those in earnings for the largest blue-chip companies provides ample reason for doubt.

The study, by the Financial Analysis Lab at the Georgia Institute of Technology's DuPree College of Management, found a troubling gap between cash flow from operations and operating income last year for the 87 nonfinancial members of the S&P 100. DuPree found that the difference between operating cash flow and income last year for the median company in the group was almost 12 percent greater than average for the three years that ended in 2002.
Posted by: Ron S.

investopedia has a great article titled: Technical Analysis 101:Is P/E Ratio a Good Market-Timing Indicator?
Analysts have argued for years about the merits of price/earnings (P/E) ratios. When P/Es are high, as they were in the late 1920s and 1990s, raging bulls would proclaim that the ratios are irrelevant. When P/Es are low, as they were in the 1930s and 1980s, marauding bears would argue that the worst is still ahead. Each time, both were wrong. Here we test a newly designed indicator to determine if P/Es can be effectively used to generate buy and sell signals. To get a complete picture of its effectiveness, we’ll look at whether this indicator would have helped the trader beat the returns rendered by a buy-and-hold strategy over the period from 1920 through to 2003.
posted by Rod B. 2/7/04

Thursday, February 05, 2004 is reporting that FASB is considering a stricter definition of "current liability", to bring the US more in-line with international standards.
The proposal, expected to be released within a few months, would require companies to use the balance-sheet date — not the date they issue their financial statements — as the only cutoff date for determining whether a liability is current or long-term....

FASB and IASB have been working together since October 2002 to bring the U.S. and international standards in line with each other, with the idea that investors could more easily compare companies in different countries.

Wednesday, February 04, 2004

CISCO's RESULTS ADD EVIDENCE OF A RECOVERY FOR TECHNOLOGY. The NYTimes reports how Cisco's announcements of its sales, net income and strategy influenced the market's reaction and therefore the value of its stock.
Net income at Cisco fell in the quarter, to $724 million, or 10 cents a share, from $991 million, or 14 cents a share, a year earlier. But excluding an accounting change related to its acquisition of Andiamo Systems, the company said net income was $1.3 billion, or 18 cents a share, surpassing analysts' forecasts by a penny a share.
The market's reaction, however, was not enthusiastic. In regular-session trading before the earnings announcement, Cisco's shares gained 21 cents, to $26.41. But after hours, the shares fell $1.13, or 4.3 percent, to $25.28, suggesting that some investors were disappointed Cisco executives did not express greater optimism about the recovery in technology sales. "There was no upside to expectations," said Eric Suppiger, an analyst with Pacific Growth Equities. "The stock has shown some pretty sharp increases lately that reflect expectations beyond what the numbers show."

Tuesday, February 03, 2004

Reuters reports that...
The European Commission wants firms to rotate auditors to boost their independence and avoid Parmalat-style scandals but has yet to decide if companies should switch accounting firms or only partners, officials said on Tuesday. Recently, the SEC has sought to put more pressure on U.S. businesses in regards to revenue recognition. The guidelines of accrual basis accounting state that revenue is to be recognized when the transaction that causes it occurs. Apparently, in today's world things are not quite as cut and dry. Therefore, the SEC is urging businesses and their auditors to thoroughly review their revenue recognition policies, and the SEC will likely continue to investigate more cases of potential fraud and tighten policies on revenue recognition that prevent missappropriations such as "premature revenues" from being recorded.
"If you have a revenue-recognition policy, then we want to know what are the things that made you decide" the policy. "We are asking for additional disclosures," Taub added. SEC executives, including Taub, said lack of clarity on recognizing what is revenue and what is not still remained a "major deficiency" among several Fortune 500 companies.

Carol Stacey, chief accountant in the SEC's corporate finance division, said the regulators will scrutinize carefully companies' accounting policy descriptions. "We would like to know whether the company has described explicit or implicit conditions, contingencies, or circumstances that would impact the timing and amount of revenue recognized," Stacey said. "Are the sources you've identified consistent with those you talk about in your business section discussion?"

The SEC also urged auditors to be more thorough while going through companies' internal control systems. Rather than just certifying whether a company's internal control system is right or wrong, the SEC wants accounting firms to evaluate and analyze them.

MSNBC reports investors scrambled to cover their mistaken bets that Taser International Inc. shares were headed lower as the company reports higher earnings.
The Scottsdale, Arizona-based maker of less-lethal weapons said earnings rose to $2.8 million, or 56 cents per share, compared with $67,498, or 2 cents per share a year ago.

The earnings-per-share calculations include $449,000 of deferred revenue generated in the second and third quarters of 2003 as part of a trade-up program for the company’s Taser X26 weapon system, the company said.

Monday, February 02, 2004

Investopedia reports that more financial decision makers are looking forward at the PEG ratio instead of looking back at the P/E ratio.
The relationship between the price/earnings ratio and earnings growth tells a much more complete story than the P/E on its own. This is called the PEG Ratio and is formulated as:

PEG Ratio = Price/Earnings Ratio

Annual EPS Growth*
* The number used for annual growth rate can vary. It can be forward (predicted growth) or trailing, and either a 1 to 5 year time span. Check with the source providing the PEG ratio to see what kind of number they use.

Wharton School accounting professor compares recent history of accounting improprieties by U.S. companies to international ones.
"But just as support for accounting reforms gains momentum, Wharton accounting professor Christian Leuz points out that efforts to strengthen accounting rules and oversight may be useful, but in themselves they cannot prevent another Enron. More importantly, he says, the recent incidents of financial chicanery should not be taken as representative of Corporate America in general. Individual investors in U.S. companies, by and large, benefit from strong laws and enforcement that protects their rights. However, no system, even one with effective legal protection for outside shareholders, can prevent some of the most egregious actions from occurring.

Says Leuz: “Much of the public and academic debate tends to focus exclusively on the accounting standards.” Leuz notes that this emphasis misses the important point that managers will still have incentives to misstate financial results if there is poor corporate governance coupled with poor performance. Misleading and fraudulent accounting reports are a symptom of more fundamental governance problems. The emphasis should therefore remain on corporate governance efforts and legal protection of outsiders if the goal is to improve the quality of accounting reports."

Whistle-Blower Wins Protection Under Sarbanes-Oxley. AccountingWeb reports that for the first time in history under Sarbanes-Oxley a CFO and whistle-blower, David Welch, was fired and then reinstated with back pay after announcing internal controls failures and other accounting problems.
The whistle-blower, David Welch, was fired as chief financial officer of Cardinal Bankshares Corp. in October 2002 after he expressed concerns about its financial reporting, alleged insider trading and internal controls. He then filed a complaint with the U.S. Department of Labor. The department's Administrative Law Judge Stephen Purcell on Thursday ordered the Bank of Floyd and holding company Cardinal Bankshares Corp. to rehire Welch with back pay.
(Ben Piening)

Onetime Investment Gains Here's a website that has an interesting take on onetime investment gains.
Is your company struggling with a shortfall in revenue? If so, you may want to consider Corporate-Owned Life Insurance (COLI)...Essentially COLI is a life insurance policy held by a corporation on its employees.
Companies are taking out life insurance policies on their employees, and if that employee dies, the company benefits, posting an investment gain. And, it's tax-free to boot. Its tax-free status is currently under review however, so get your investment gains in now! (See the following article in the Wall Street Journal from 1/29/04 discussing its tax-free status.) (Posted by P. Timmerding)