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Mix-Ansicht- Accounting change: A Herculean task? - Cosa, 25.05.2002, 17:59
- A Herculean task? - Nein, braucht nur ein paar Jährchen Zeit - Diogenes, 26.05.2002, 12:53
Accounting change: A Herculean task?
Und weil es so"nett" ist, noch was zur Buchhaltung....
<font size="4">Accounting change: A Herculean task?</font>
By Scott Brown from Raymond James & Associates Inc 05-24-2002
Of the 12 labors of Hercules, the one most often remembered is the cleaning of the Augean stables? the proper metaphor, perhaps, for accounting reform. On this issue, which is central to the current crisis in investor confidence, the Federal government has been missing in action.
However, the private-sector response appears to be moving forward to some degree. Standard & Poor's has proposed a new definition of core earnings.
Rotten To The Core.
What do we mean when we talk about earnings? For economists, it's simply revenue minus costs. But accountants live in some parallel universe. Let?s review the various definition of earnings, including S&P's.
As Reported Earnings: the broadest and most traditional measure, reported earnings include all charges except those related to discontinued operations, the impact of cumulative accounting changes, and extraordinary items, as defined by Generally Accepted Accounting Principles (GAAP).
Operating Earnings: earnings from a company's principal operations. Widely followed, operating earnings are reported earnings excluding corporate or one-time expenses. However, not precisely defined and different interpretations have added confusion in recent quarters.
Pro Forma Earnings: excludes major changes, such as mergers. Perfectly valid in specific cases, but seriously abused to the point where pro forma earnings often exclude a wide variety of costs (simply to make earnings look better than they really are).
Standard & Poor's Core Earnings: focuses on the company's principal, or core, business. Excludes gains or losses from factors not related to the company's main and ongoing business. Excludes litigation settlements, expenses related to mergers and acquisitions, unrealized losses or gains from hedging activities and financing costs. There is adjustment for some restructuring (new or discontinued operations), but not changes related to current business lines.
S&P core earnings are really nothing more than a formal definition of operating earnings and the application of that definition may not be entirely smooth.
Issues And Difficulties.
S&P notes that the cost of stock options was nearly 10% of profits in 2000. Core earnings include stock options as part of employee compensation. However, companies do not have to report stock options expenses on a quarterly basis. Accounting regulations give companies the choice of reporting these expenses annually in the income statement or as a footnote in the annual report. S&P will push for quarterly reporting of stock option expenses, but there's no regulatory requirement for them to do so. Hence, S&P?s core earnings measure may not take off in its true form.
Restructuring costs (from layoffs, etc.) for ongoing operations will be included in core earnings. However, it's often difficult to determine whether restructuring will prove to be cyclical (temporarily shutting down a factor for a few months) or structural (a permanent change).
Asset write-downs (when the market value of an asset drops below the net book value) should be included in core earnings, even if they are one-time events.
Pension costs are a part of employee compensation and will be included in core earnings, but pension income (gains in the pension portfolio) is excluded.
Goodwill impairment charges (the difference between the price paid for an acquisition and the market value of those assets) fall under FASB 142. Companies cannot amortize goodwill. S&P has indicated that goodwill impairment will not be included in core earnings. Gains or losses from asset sales (equipment, real estate, or intangibles) will be excluded from core earnings, except where such sales are part of the normal course of business (banks, real estate companies, leasing companies, and so on).
Similarly, gains or losses from hedging are excluded from core earnings, except for financial firms where hedging is a part of regular business (risk management).
Where To Now?
Accounting issues are a major concern for investors and a hot topic on Capitol Hill. However, it's an election year and no specific reforms are likely to occur (we note that both major political parties have shown a lack of serious effort on accounting reform).
Standard & Poor's core earnings is not a great leap forward. It's really a fine-tuning of operating earnings and there will be many problems implementing the definition. However, at least somebody is doing something.
The unsettling aspect in S&P's new definition is that a significant portion of prior earnings from the last few years will evaporate. Will stock prices too? The market is pricing in a healthy rebound in earnings. Profit margins are improving, but the bar may be get raised.
Hercules, it is told, cleaned out the Augean stables by diverting the course of a river. If accounting reform efforts are to be similarly successful, it may take equally drastic action (that is, they shouldn't be watered down - unless you mean in this Herculean sense). Hopefully, investors won't be washed away with the refuse.
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