Rule change. (Wall Street West).Public companies are taking charges to reported earnings in the first quarter due to a change in accounting regulations -- specifically, how to account for changes in the value of "goodwill" and other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. associated with acquired companies. New accounting rules require goodwill and other merger-related losses to be counted against net income immediately. "In past years, a company could take up to 40 years to amortize amortize To write off gradually and systematically a given amount of money within a specific number of time periods. For example, an accountant amortizes the cost of a long-term asset by deducting a portion of that cost against income in each period. lost goodwill associated with a merger," said Greg Soukup, co-director of Ernst & Young's National Office West, an M&A advisory arm. The new rules took effect in the first quarter, and some big names have reported net earnings that fell below analyst expectations. That led to price drops in stocks such as Yahoo! Inc. and General Electric Co., Soukup asserts. Operating earnings Operating Earnings Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. Notes: Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before were unaffected, and did meet targets. So why didn't GE, Yahoo or other companies bring Wall Street analysts up-to-date on the rule change's effect on reported profits? Both GE and Yahoo said they did. "We published in our annual report, on March 8, an estimate of the (goodwill impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. ) charge we would have in our first quarter (2002)," said GE spokesman David Frail. "Wall Street was very aware of this rule change.... We discussed this issue in our fourth quarter earnings conference call on Jan. 16," said Joanna Stevens, a Yahoo spokeswoman. Indeed, sub-par revenue played a role in subsequent stock slides at both companies. But Soukup said he believes that even at Fortune 500 companies, the investor relations Investor relations The process by which the corporation communicates with its investors. departments have been caught off guard. Accounting firms are uncovering lost goodwill and telling clients what they must report, but it's a scramble To encode (encrypt) data in order to make it indecipherable without having a secret key to "unlock" it. The term came from the early days of cryptography which camouflaged analog transmissions with secret frequency patterns. to meet deadlines. In short, the IR folks are learning late in the quarter that net earnings are taking a hit. "It's coming out late in the game," he said. Also, under SEC Regulation FD (put into effect last year), news from public companies must be disseminated disseminated /dis·sem·i·nat·ed/ (-sem´i-nat?ed) scattered; distributed over a considerable area. dis·sem·i·nat·ed adj. Spread over a large area of a body, a tissue, or an organ. to all relevant market players at once, not selectively. That said, Soukup wonders if Wall Street is over-reacting to downsized earnings due to goodwill write-downs, which are paper losses. Ernst & Young has concluded that three out of every eight public companies is going to take a goodwill hit in the first quarter. Contributing columnist Benjamin Mark Cole Mark Cole is a multi-instrumentalist blues and roots musician based in Gloucester, UK Music Mark primarily writes and performs blues music but also writes and performs music influenced by other American roots music genres such as americana, cajun, zydeco, bluegrass and writes about the local investment community. He can be reached at sevencontinents@mindspring.com. |
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