Tax Rules Cause Static for Radio Company

"Arcane" tax rules trip up Emmis Communications, which flubbed the accounting for tax assets created by the write-down of intangibles.
David McCannOctober 9, 2009

Radio-station operator Emmis Communications will restate its financials for its most recent fiscal year and first quarter to correct an error in its provision for income taxes, the company said Friday in a regulatory filing.

Last year the company, which has stations in New York, Chicago, Los Angeles, and other large cities, wrote down the value of an intangible asset, its Federal Communications Commission licenses. Since Emmis was in a loss position, the write-down created deferred tax assets for which the company determined a valuation allowance.

But in doing so, it netted the deferred tax assets against deferred financial-statement liabilities that arose from the difference between its income for tax-payment and financial-accounting purposes. That ran contrary to generally accepted accounting principles relating to intangible assets with indefinite life spans such as the licenses (which, for example, the FCC could cancel). Emmis should have shown the deferred assets and liabilities on a gross basis.

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As a result, the company overstated the benefit for income taxes and understated deferred tax liabilities by $25.3 million for its fiscal year ended February 28, 2009. It also will increase the deferred tax liability for intangible assets by $6.1 million, with a corresponding reduction to the beginning balance of retained earnings for the current fiscal year.

Emmis CFO Patrick Walsh told that the error was inadvertent. “The tax provisions for intangible assets are pretty arcane,” he said. “Accounting for most tangible assets on a net basis is perfectly appropriate. It’s something we missed internally.”

In a memo to employees that was posted on Emmis’s Website, CEO Jeff Smulyan said, “Certainly, ‘restating our earnings’ sounds ominous, but our restatement solely relates to a noncash technical tax issue that has no impact on our operations. While there might be big numbers involved and a lot of paperwork being filed, I don’t see anything to worry about.”

Smulyan also tried to calm employees’ nerves with regard to a recent threat by Nasdaq to delist the company’s stock, which hasn’t traded above $1 since September 2008. Emmis has until March 15 to get its stock trading at that level or higher for 10 consecutive business days or face delisting.

“The trigger for delisting is months away, and we believe improvements in our business could drive our stock price up in time to prevent delisting,” said Smulyan. “However, if the market does not respond to our progress as we expect, we can address the problem through other means over which we have direct control.” He did not spell out what those other means would be.


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