Accounting & Tax

Blockbuster to Restate Results

Accounting for rental library is at issue, but company says adjustment won't affect net income, total cash flows, or debt covenants.
Stephen TaubMarch 9, 2006

Officials at Blockbuster Inc. said the company will restate its financial results for 2003 and 2004, and for each of the first three quarters of 2004 and 2005. The restatements stem from discussions company executives have had with the Securities and Exchange Commission regarding accounting practices related to its rental library and rental library activities.

In a regulatory filing, the company elaborated that the historically, accountants classified rental library purchases as an investing cash outflow on its cash flow statements, and rental library assets as a non-current asset on its balance sheets. As a result of the discussions, however, Blockbuster determined that rental library purchases should be classified as an operating cash outflow, and that rental library assets should be classified as a current asset on the balance sheet.

The adjustments do not affect the company’s reported revenues, net income, total assets, shareholders’ equity, total cash flows, current cash, or liquidity position, the company assured. The adjustments also do not affect the company’s compliance with the financial covenants under its debt facilities.

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Blockbuster’s stock price surged in pre-market trading after investors seemingly liked the fact that the company reported a large increase in fourth-quarter earnings. However, investors were less enthusiastic, when they discovered revenues came in below expectations, selling off shares by more than 7 percent—and by 8.5 percent at one point.

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