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Three-Year Mission? FASB to Redefine Revenues

One more county heard from, faintly; board will take two to three years to come up with new definition. Plus: CA confirms SEC probe, and triggers could trigger cash crisis for some.
Stephen Taub, | US
May 16, 2002

One day after ratings agency Standard & Poor's came out with a new definition of corporate earnings, members of the Financial Accounting Standards Board (FASB) also decided to take on the top end of the income statement.

In a meeting Wednesday, the accounting standards setter reportedly voted to embark on a project to develop a standard way of defining revenues. FASB's timetable for the project? Two to three years.

Revenue recognition and other top-line issues have attracted a lot of attention of late from the Securities and Exchange Commission, Capitol Hill, and Wall Street. Much of that attention has been fueled by recent controversies involving Enron Corp.'s special-purpose entities, as well as some energy companies' use of "round-trip" trades to inflate sales.

FASB's goal is to come up with one standard for reporting revenues—for all sectors. "We need to pull together the different industries' accounting," Todd Johnson, FASB's revenue-recognition project leader, told Bloomberg. "We need to find gaps and inconsistencies."

Achieving that goal won't be easy. Some CFOs argue that different industries require different methods for gauging corporate performance.

Indeed, in an exclusive survey of 196 finance managers conducted in November, 82 percent of the respondents said their companies report some kind of non-GAAP (that is, pro forma) earnings in press releases. The poll also showed the lion's share of corporate filers (88 percent) believe it is appropriate to include nonfinancial measurements in growth trends.

When asked why they issue pro forma results, around 45 percent said non-GAAP results help convey their companies' true financial performance.

This is not to say that finance executives don't think some work needs to be done on how pro forma results are presented. Most of the respondents in the poll (93 percent) believe a company should be required to reconcile non-GAAP financial measures and GAAP operating results in an earnings press release.

What's interesting, however, is that finance managers apparently would rather have the SEC providing guidance on pro forma numbers—rather than FASB. Fully 65 percent of the respondents indicated the commission should take a more formal role in the earnings release process.

But when asked if FASB should address pro forma earnings computation and reporting issues in a previous project on performance reporting, well over half the respondents said no.

Nevertheless, the widespread use of pro forma numbers, along with aggressive bookkeeping, has created confusion for investors. It's also led to charges that CFOs and other finance executives are engaging in accounting shenanigans.

Even many finance executives admit to tarting up their financial statements. In another poll, more than 40 percent of respondents said they've engaged in aggressive bookkeeping practices to boost their companies' numbers. (To see the result of that survey, plus other user polls on Auditgate, accounting, and financial reporting, go to CFO Community.)

FASB has come under criticism for reacting slowly to the recent spate of financial scandals and restatements. Of course, the standards setter's three-year timetable for the revenue project may garner the board more of the same.

To head off critics who want to see FASB take action in less than 36 months, Johnson says the board's Emerging Issues Task Force (EITF) will address the most urgent revenue-recognition concerns. The EITF plans to meet next month.

CA Confirms SEC Probe
After months of media speculation, management at Computer Associates confirmed that the company is being investigated by the SEC.

In a regulatory filing yesterday, the software giant noted that the U.S. Attorney's Office and the SEC have been probing the company's accounting practices. According to the company's filing, the investigations began in February.

"The investigation appears generally to be focusing on issues relating to the company's historical revenue-recognition policies and practices," Computer Associates management conceded, adding that it is cooperating with the investigations.

The company also reported that it has voluntarily turned over relevant documents and information. In addition, third parties have received subpoenas from the SEC for documents related to the investigations.

CA management conceded that the investigations could result in the institution of administrative, civil injunctive, or criminal proceedings; the imposition of fines and penalties; or other bad things. "The company also cannot predict what impact, if any, the inquiry may have on the company's results of operations or financial condition," it added.

Unhappy Trails: Triggers Could Spark Cash Crisis
At least 23 companies in the United States and Europe could experience a liquidity crisis because of triggers in their borrowing agreements. This, according to a survey of 1,000 companies by Standard & Poor's.

The rating agency said about half of those companies have clauses in their borrowing agreements that could require them to put up collateral or pay back debt if the companies are downgraded or miss financial targets. Not surprisingly, S&P says more than half of the companies at risk are energy companies.

"When you go below investment grade, that triggers a heavy need for collateral," said S&P managing director Ronald Barone, according to published accounts. No company is in immediate danger of being downgraded because of one of these triggers, however.

Even so, S&P said it is encouraging companies to disclose triggers in their government filings.

Triggers in Enron's financial agreements forced that company to pay out almost $4 billion after its debt rating was cut to junk status.

Bonds, Big Bonds
It was a big day for jumbo bond deals, as two companies combined to borrow $5 billion on Wednesday.

Household Finance Corp. (HFC), a unit of Household International Inc., issued $2.5 billion in a two-part global debt deal, led by Credit Suisse First Boston, Deutsche Bank Securities Inc., and Merrill Lynch & Co. HFC issued $1.75 billion in 10-year notes, priced to yield 7.101 percent, or 183 basis points over comparable Treasuries. The financial-services company also issued $750 million of 30-year bonds priced to yield 7.723 percent, or 195 points over Treasuries. Both offerings were rated A2/A.

Kraft Food Inc. also issued $2.5 billion in two-part global notes, led by Deutsche Bank Securities Inc. and Salomon Smith Barney. It issued $1 billion of 5-year notes priced to yield 5.37 percent, or 73 basis points over comparable Treasuries, and $1.5 billion of 10-year notes, priced to yield 6.255 percent, or 96 points over Treasuries. The Kraft paper was rated A2/A-minus.

Meanwhile, Aquila Inc. filed a shelf registration to offer $1 billion of senior notes, common stock, stock purchase contracts, and other securities. Aquila, formerly Utilicorp United, is an energy and risk-management company.

In other financing news: S&P cut its long-term corporate credit and senior unsecured debt ratings on Sequa Corp. to double-'B'-minus from double-'B', citing a sharp reduction in the aerospace service and product supplier's profitability.

The ratings are removed from CreditWatch, where they were placed on September 21, 2001. The outlook for Sequa is still negative, however.

"The downgrade reflects sharply reduced profitability, stemming partly from the consequences of the September 11 events on the firm's commercial aerospace unit, Chromalloy Gas Turbine, which accounted for a majority of earnings in recent years," explained credit analyst Roman Szuper.

Deloitte Hits the Jackpot
Deloitte & Touche picked up a couple of casino clients from Andersen.

MGM Mirage hired D&T as independent auditor after dropping Arthur Andersen. The move came after the New Jersey Casino Control Commission ordered New Jersey casino license holders to stop conducting business with Andersen (according to MGM's SEC filing). MGM Mirage and several subsidiaries are in the process of applying for licenses in New Jersey and are subject to these requirements, according to the filing.

Mandalay Resort Group also replaced Andersen LLP with D&T. Mandalay is a Las Vegas—based owner and operator of casino hotels in Nevada, including Mandalay Bay, Circus Circus, Excalibur, and Luxor.

Meanwhile, three companies dropped Andersen as their auditor without naming replacements: Paul Mueller Co., which makes dairy and processing equipment; TiVo Inc., which provides digital recording and subscription-based television services; and Startec Global Communications Corp.

KPMG International Names New Chairman
Mike Rake was elected chairman of KPMG International, succeeding Stephen G. Butler.

In addition, Robert W. Alspaugh was elected CEO of KPMG International. Alspaugh was deputy chairman and COO at KPMG's U.S. operation.

Rake, 54, will retain his position as chairman of the firm's U.K. unit, and will head KPMG's international network of firms. That network includes more than 100,000 partners and staff in more than 150 countries and 750 locations worldwide.

Rake is the only European leader of a major accounting organization. "I am delighted to have been asked to take on this role at what is an important time for KPMG and the accounting profession as a whole," he said. "We will do everything possible to lead the industry in restoring credibility to our profession."

Back in April, KPMG announced that Eugene O'Kelly would succeed Butler as chairman and CEO of the firm's U.S. operations. As you know, O'Kelly has been in the news of late because of a discussion he had—or did not have—with SEC chairman Harvey Pitt.

O'Kelly reportedly E-mailed KPMG employees telling them that he spoke briefly to Pitt about a possible enforcement action against KPMG for the firm's audits of Xerox Corp. Pitt has denied he talked to O'Kelly about the Xerox audit. Earlier this week, O'Kelly reportedly insisted the discussion did take place—but said he didn't specifically use the word "Xerox" when speaking to Pitt.

Rake has worked in the accountancy profession for 36 years. He spent much of his early career with KPMG in Continental Europe, before becoming chairman of KPMG in the Middle East. He was appointed U.K. chairman in 1998, and chairman of European operations in 1999.

Alspaugh has spent 33 years with the U.S. firm. He has served as COO for the Americas region, where he was closely involved with KPMG's regionalization initiative.