Apple's profits

Here's the impact of an accounting change for Apple: a new FASB standard allows them to be more aggressive in the recognition of revenue than was previously the case.

As reported in The Australian. Discussion at Gadgetophilia.com

Apple discusses the matter on the website here.

Explaining your accounts

I have mentioned in class that companies can use voluntary disclosure to explain how the accounting rules impact on their results, and also that we have seen examples of this with the adoption of A-IFRS accounting standards in Australia.

Here's one example - Westpac provided this presentation in April 2007 (note - link to pdf file).

How banks can manage earnings

No surprises, it's the loan-loss reserve. Businessweek with more details.

Stock options

From a few years back, how companies were trying to 'ignore' the requirement to expense stock options. This one was about the stressing of "pro forma" results, i.e. excluding the impact of expensing options. From the New York Times in 2005.

And a bit of background from the year before in Forbes focusing on Silicon Valley. Why hi-tech? Well that's where a large number of companies were paying large proportions of salaries as options.

Xerox and lease accounting

Here's an old one from the New York Times (by old, I mean from 2002) about Xerox's battles with the SEC over lease accounting.

And an even older one (from 2000) in Forbes about nonrecurring items that turn out to be, well, recurring.

Steven Mayne on the recent earnings results

In the Herald.

ASIC takes action against

After a long time during which ASIC has been accused of being too lenient on enforcement issues, action is taken against auditors involved in a corporate collapse.

THREE partners of accountancy giant KPMG have been banned from acting as auditors for periods of up to two years over their involvement in the $390 million collapse of the Westpoint property empire.

Leases and valuation

We were speaking this week in class about adjusting for accounting distortions. Here's a link to a recent article about capitalising operating leases by Aswath Damodaran from New York University. It's in the Journal of Applied Research in Accounting and Finance (JARAF), Vol. 4, No. 1, pp. 3-29, 2009

Here's the abstract:

When analyzing or the value of a firm, there are three basic questions that we need to address: How much is the firm generating as earnings? How much capital has been invested in its existing investments? How much has the firm borrowed? In answering these questions, we depend upon accounting assessments of earnings, book capital and debt. We assume that the reported operating income is prior to any financing expenses and that all debt utilized by the firm is treated as such on the balance sheet. While this assumption, for the most part, is well founded, there is a significant exception. When a firm leases an asset, the accounting treatment of the expense depends upon whether it is categorized as an operating or a capital lease. Operating lease payments are treated as part of operating expenses, but we will argue that they are really financing expenses. Consequently, the stated operating income, capital, profitability and cash flow measures for firms with operating leases have to be adjusted when operating lease expenses get categorized as financing expenses. This can have far reaching implications for profitability, financial leverage and assessed value at firms.

Some old accounting analysis / earnings qaulity articles

Here's one by Gretchen Morgenson in the New York Times about how to spot and undo questionable accounting.

Also an old Businessweek cover story back from 2004 - Fuzzy Numbers.

News Corp - underlying economics or big bath?

News Corporation recently announced its full year 2008-09 earnings, and they included large write-downs. By large, we mean just under $US9 billion. Now we'd expect large write-downs given the impact of the "Global Financial Crisis"; but now would be a good time to take an aggressive approach to write-downs. Here's how The Australian (owned by News Corporation) reported the results. Here's the New York Times take on it. Here's the conference call transcript News held with analysts and investors.

* Photo by Flickr user oh_simone. Original photo here.

Fair value accounting

Well we're into the reporting season. One of the things I have previously suggested we look out for is the impact of "mark-to-market" accounting; especially for businesses that have a relatively large amount of investments in listed assets.

Last night Lateline Business ABC television interviewed the Managing Director of Australian Foundation Investment Company (AFIC), who announced a 75 percent fall in full year profit. The Australian Foundation Investment Company (AFIC) says the slump, to $103 million, reflects a big fall in realised gains and a more than $100 million impairment charge. Transcript and video here.

UPDATE: Not suprisingly, AFIC is calling for an overhaul in the accounting rules for 'impaired' assets. From The Australian:

"The (accounting) standard doesn't make a lot of sense for us," AFIC managing director Ross Barker said. "We have $1 billion in our revaluation reserve, but we can't offset any of that against the assets that we are holding below-cost."

AFIC, he said, was making its views known to international and domestic bodies that review and create accounting standards.

An exposure draft where mark-to-market gains and losses would all be taken through the profit and loss statement, or the balance sheet, would not help, according to the AFIC chief.

The first option would create volatile earnings streams, while the second would mean the dividends that AFIC earns from its investments would also have to be taken through the balance-sheet as an adjustment to reserves.

UPDATE: Here's Argo, another listed investment company, with a similar tale.

Managing director Rob Patterson said the $64.4m loss after tax was not the best measure of the company's performance over the financial year, as it did not reflect the income received from the investment portfolio and was inconsistent with the company's long-term investment philosophy.

A more accurate indicator, he said, was the operating profit of $163.4m, which was down 10.4 per cent from the previous financial year.

The return on the company's investment portfolio over the financial year was a loss of 16.8 per cent, outperforming the benchmark All Ordinaries Index, which declined by 22.1 per cent.

How accounting rules can affect business strategy

The change to 'mark to market' accounting for certain asset classes continues to impact on the business environment. Today, Adele Ferguson shows us the impact on some of the Macquarie Group listed vehicles.

The demise of Babcock & Brown, Allco Finance Group and the unravelling of the complex structures behind the Macquarie satellites are a stark reminder that investors have had a gutful of backing a model that was good for the head stock/external manager and bad for investors.
...
A statement from ASIC late last month on "fair values", no doubt speeded up the model's demise. ASIC said "careful consideration should be given to whether assets are traded in active markets. Most ASX-listed securities are actively traded, in which case, quoted prices should be used".

This would have given the Macquarie boys some major heartburn. In its latest results, released in May, profit was down 52 per cent, as chief executive Nicholas Moore made a $2.5 billion writedown on assets such as MIG, MAP, BrisConnections, real estate equity investments, loan impairment provisions and CDO exposures.

Keep an eye out in the upcoming reporting season for the impact of mark-to-market driving write-downs and hits to earnings.

The ongoing debt problem

According to Adele Ferguson in The Australian,

CORPORATE Australia is sitting on a $200 billion debt bomb that needs to be refinanced over the next three years, with analysts warning some infrastructure and small companies will collapse under the mountain of debt.

QAN financial and non-financial news

Another article showing the importance of knowing what you need to look for. Qantas' recent earnings announcement - Michael Pascoe goes behind the Income Statement.

Here's the start:

The passenger figures Qantas released to the stock exchange yesterday weren't flash - but the unannounced financial reality was much, much worse.
While Qantas told the ASX its May Qantas International and Jetstar International revenue seat factors were up 4 and 4.8 percentage points respectively, it didn't say that its yield on the combined international business had collapsed by 25 per cent.

Understanding how QAN makes its money is the starting point.

Westpac cuts dividend

Westpac joins the ranks of the dividend cutters this week. Some accounting analysis helps explain why.

More bad debts for the banks

Some of the banks are set to report this week, and more doom and gloom is expected, particularly with respect to bad debts. Bad debt provisioning is always one area where managers have some discretion. In the current climate, asset writedowns are also going to be of interest, and have been the focus of discussion of Macquarie's recent results announcement.

Banks and mark to market

Here we (finally) have a defense of mark-to-market accounting - in The Economist.

Key graphs:

Standard-setters should defuse the argument by making clear that their job is not to regulate banks but to force them to reveal information. The banks, their capital-adequacy regulators and politicians seem to dream of a single, grown-up version of the truth, which enhances financial stability. Investors and accountants, however, think all valuations are subjective, doubt managers’ motives and judge that market prices are the least-bad option. They are right. A bank’s solvency is a matter of judgment for its regulators and for investors, not whatever a piece of paper signed by its auditors says it is. Accounts can inform that decision, but not make it.

What they used to teach you at Stanford

Seven lessons learned by someone who received an MBA back in 1972.

Buffet on mark to market accounting

Warren Buffet offers his thoughts on accounting and the GFC. WSJ link here

Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.

We add the italics for the benefit of a House hearing tomorrow on this very issue. Mark-to-market accounting is fine for disclosure purposes, because investors are not required to take actions based on it. It's not so fine for regulatory purposes. It doesn't just inform but can dictate actions that make no sense in the circumstances. Banks can be forced to raise capital when capital is unavailable or unduly expensive; regulators can be forced to treat banks as insolvent though their assets continue to perform.

Bank provisioning

One way that banks respond to changes in economic circumstances is via the level of provisioning. It's been interesting to see how the Australian banks have adjusted their level of provisioning in response to the Global Financial Crisis (TM). Here's an article by Richard Gluyas in The Oz focusing on the Commonwealth Bank.

Key graf:

But not only that, Mr Williams said CBA's provisioning coverage was "lacking" compared to its peers. Total provisions as a proportion of risk-weighted assets was only 0.77 per cent, compared to 1.27 per cent for ANZ, 1.11 per cent for Westpac and 0.86 per cent for NAB. "Should, as we anticipate, the environment continues to deteriorate, this will likely result in higher provisioning charges in the near term," Mr Williams said. The bar had been lifted on capital adequacy, Citi said, and CBA was at risk of "not measuring up".