April 23, 2003
From the desk of Jane Galt:Accounting Retro-Chic
The Wall Street Journal is reporting (subscription required) that AOL/Time Warner has recovered from its massive loss last quarter to report a profit.
What gives, you may be asking.
Well, it just goes to show you that "big hit" accounting is alive and well.
The basic idea of the "big hit" is that if you're going to lose a little money, you might as well lose a lot, because investors will punish you anyway. So you pack every possible expense you can imagine into a one time charge, which is to say, a non-recurring item related to some unique event in your corporate history. Such as, say, a massive write-down of assets related to the AOL/Time Warner merger.
Some of the bad predictions you have made will not come true: gigantic hungry space aliens do not invade and eat all the AOL subscribers, for example. When it becomes clear that what we thought was the mothership was really only a speck of dirt on our window, we get to reverse the charges. The sudden increase in company value due to improved expectations gets recorded as earnings, and voila! You are back in the black, with a nice little boost. Investors, thinking the crisis has passed and brilliant management has managed a spectacular turnaround, breathe a sigh of relief and buy stock.
Theoretically, this shouldn't work, because professional investors are wise to this sort of thing. But if the dot-com boom proved anything, it's that our theory of how financial markets operate needs a little work.
Posted by Jane Galt at April 23, 2003 11:32 AM | TrackBack | Technorati inbound linksWhen huge "one-time charges" occur once every two or three years or so, it's time to just start calling it something more realistic like "Bad decision-making".
Agreed it's a pileon phenomenon. If you're going to take a hit in a year because of a slump in sales or some such, that's the time to publicly admit what everyone always knew; that venture X is not going to make any money and that ten billion dollars you spent trying to change that is gone and will never be seen again.
Note: I'm an engineer. I'm married to a finance weenie; even so, much of what I know about finance matters is probably wrong in some key way. I don't let it ruin my day, though.
Space Aliens aren't going to plop down on us? Crap, and I just bought all that land in Rozwell, NM.
I don't follow individual stocks, but I read Michael Malone's book an Apple Computer, and they seemed to play that game brilliantly. Take all their losses, say $10 billion, in one quarter, then show a gain of $3 billion in each of the next three quarters. Then float more stock to keep the scheme going.
Wasn't fiddled with the tax reserves the preferred method for this...can't remember the term, but it's the reserve maintained in case you can't fully exploit the tax benefit from carrying losses forward. Arse. Memory is slipping.
With FASB rules shifting from amortization of goodwill to adjustments in goodwill if the acquired assets are impaired, we'll probably see even more room for gaming, e.g.
"Q1. We bought a dog! Time to take a big hit to goodwill."
"Q3. No we didn't! Comprehensive income up! Executive bonuses all round! Hooray for us!"
Big hit accounting? Perhaps you mean big bath?
Psssst... Goodwill dosen't amortize anymore.
Comments are Closed.