Yesterday we reported that Kmart Holding Corp., which is preparing to merge with Sears, Roebuck & Co., is restating the accounting for a $60 million convertible note that was issued when Kmart emerged from bankruptcy.
Now it’s Sears’s turn to clean up the books. The retailer announced that it during an internal review and consultation with its independent auditors, it has identified an error in its accounting practices associated with construction allowances.
As a result, Sears will reduce its fourth-quarter 2004 results by between 5 cents and 10 cents per share.
Historically these allowances were classified on the balance sheet as a reduction of property and equipment, Sears explained, and were amortized as a reduction of depreciation expense over the estimated useful life of the related property and equipment. To correct this error, the company added that it will now record construction allowances as deferred credits, which will be amortized as a reduction of rent expense over the lease term.
The reduction in earnings per share for last year’s fourth quarter, Sears elaborated, is the result of amortizing construction allowances over a longer period than had been the practice. The company added that results for prior years would not be restated “due to the immateriality of this adjustment to the results of operations, cash flows and financial position for the current year or any individual prior period.”
The company also said it is reviewing its accounting practices relating to leasing transactions, an issue we have chronicled several times in recent weeks.