Is this a good use of company resources?

Last year the FASB released Emerging Issues Task Force Issue No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share," which became effective on December 31, 2004. EITF 04-8 requires that the calculation of diluted earnings per share of common stock reflect shares issuable under contingently convertible debt regardless of whether the contingent feature has been met.

This resulted in AGCO , a global manufactucturer of ag equipment deciding that it is better to spend money getting rid of its old debt and replacing it with essentially equal debt, but debt that is not subject to EITF 04-8. Here is the important portion of the release:

May 26, 2005--AGCO Corporation (NYSE:AG - News), a global manufacturer and distributor of agricultural equipment, announced today that it has filed a registration statement with the Securities and Exchange Commission to register its offer to holders of its $201,250,000 outstanding principal amount of 1 3/4% Convertible Senior Subordinated Notes due 2033 (the "Old Notes") to exchange the Old Notes for an equivalent principal amount of its 1 3/4% Convertible Senior Subordinated Notes, Series B, due 2033 (the "New Notes"). The New Notes provide for (i) the settlement upon conversion in cash up to the principal amount of the converted New Notes with any excess conversion value settled in shares of AGCO common stock, and (ii) the conversion rate to be increased under certain circumstances if the New Notes are converted in connection with certain change of control transactions occurring prior to December 10, 2010, and otherwise are substantially the same as the Old Notes.

The conversion settlement feature of the New Notes will result in the inclusion of fewer shares in the calculation of diluted earnings per share than the Old Notes, since exercise of the conversion feature would result in a payment of cash, rather than shares, for the principal amount of the New Notes.

This type of behavior can't inspire confidence.

Autozone and EPS

Autozone reported higher than expected quarterly EPS numbers today.

The Memphis, Tenn., aftermarket seller of automotive parts (AZO) posted earnings of $147.8 million, or $1.86 a share, for the quarter ended May 7, up from $143.4 million, or $1.68 a share, a year earlier.

Results for the year-ago quarter included a warranty-related gain of about seven cents a share.

Sales reached nearly $1.34 billion in the period, off 1.6% from the prior year's $1.36 billion, in what CEO Bill Rhodes called a "considerably weaker" performance.

The average estimate of analysts polled by Thomson First Call was for earnings of $1.80 a share on revenue of nearly $1.38 billion.

One item that is interesting is that the company repurchased 3.2 million shares during the quarter:
In addition, the company noted its repurchase of 3.2 million common shares at an average price of $87 during the latest quarter, amounting to $278.6 million.

So what was the effect of this treasury stock transaction on EPS? In the second quarter Autozone's weighted average shares outstanding were 80,860,000 in the current (third) quarter that total dropped to 79,494,000. By repurchasing 3.2 million shares during the period Autozone increased its quarterly EPS by $0.03 . Here is the calculation:

Third quarter net income = $147.8 M
Third quarter weighted average shares outstanding (diluted) = 79,494,000
Third quarter diluted EPS = $1.86

Now instead divide by 80,860,000 shares (the weighted average shares at the end of the second quarter) and you get $1.83.

Its important to understand the effect treasury stock repurchases have on EPS calcualtions. In fact if you compare this quarter's results to a year ago when Autozone had weighted average shares outstanding (diluted) of 85,202,000 the improvement does not look that great.

Maxtor's Inventory Error

When I discuss inventory errors it is always in a mechanical sense if inventory is overstated then cost of goods is understated, etc. We very seldom have a real world example of this type of situation. However, Maxtor disclosed yesterday that it had made just this type of error. In an 8-K filing the company announced that it had simply reversed an end of period adjustment to inventory. Here is the relevant part of the announcement:

Maxtor Corp. (MXO) said Tuesday that it will restate its financial statements for its first quarter ended April 2, after it discovered a data entry error related to inventory and cost of goods sold in its previously issued first-quarter financial statements.

As a result of the data entry error, inventory at April 2 was understated by $4 million, cost of goods sold was overstated by $4 million, the net loss for the quarter was overstated by $4 million and the net loss per share for the quarter was overstated by 2 cents a share, according to a Form 8-K filed with the Securities and Exchange Commission.

This is the type of item I like to bring into the classroom to get students dicussing what might have happened, what is the effect on the share price, how could this type of error have been made.

Is accounting too complicated?

There was an interesting speech given by Robert Herz, the FASB's chairman at the AICPA's spring council meeting. In the speech, Herz suggested that the current literature is too complicated and that it is time to get to work on the FASB's long-term codification project:

"There's a lot of cross-currents in the profession and water coming out of a lot of places in terms of accounting standards," Herz said during the opening session of the three-day confab. "The question is what do we do with this morass of accounting literature?"

Herz outlined the profession's need to codify GAAP, and outlined FASB's multi-year codification project, where existing standards would be restructured by topic and accompanied by all relevant literature.

Herz also stated:

"Auditors have become tired and strained and there's a real fear of second-guessing," Herz said. "It's come to the point where they're saying, 'Just give me a rule.'"

What does this suggest for accounting education? How should we go about teaching accounting when it appears that we want principles but end up wioth standards?

Once again - Accountants are cool!

From a story in the Seattle Times:


The bean counters have arrived. After years of operating under the shadow of the legal and investment-banking industries, the plain-vanilla world of accounting suddenly has more sex appeal.

...

As the industry basks in its newfound glory, auditors and accountants are in short supply nationwide. It takes longer to find and hire them, and salaries in a number of specialties have moved up briskly.

"The business is out there. The bigger issue is finding good people. We're always looking for qualified people," said Richard Preston, a managing partner and a certified public accountant at a Miami Beach CPA firm.

Abercrombie's inventory problem

I like using popular companies like Abercrombie and Fitch in classroom discussions. Today the company reported that its first quarter earnings increased 33% over the prior year's quarter. This would seem like excellent news and student's would probably think that the stock price would go up, however here is the 2-day chart:


Abercrombie's price performance

Here is Abercrombie's unaudited partial balance sheet at the end of the quarter:
Abercrombie & Fitch Co.
Condensed Consolidated Balance Sheets
(in thousands)

(unaudited)
ASSETS April 30, 2005 January 29, 2005

Current Assets
Cash and Cash Equivalents $136,578 $350,368
Marketable Securities $177,174 -
Receivables 32,284 26,127
Inventories 227,205 211,198
Store Supplies 38,944 36,536
Other 27,844 28,048

Total Current Assets 640,029 652,277

No specific details are provided in the press release, but it is interesting that a $16 million dollar increase in inventory can result in a 15% stock price decrease.

A restatement involving Cash?

Sometimes it seems like it is difficult to find anything to talk about when discussing Cash. I mean cash is cash and cash equivalents and now lets move on to accounts receivable. However, GSI Commerce is a tech company that has discussed its cash balance in a number of its press releases, I assume to show the company's fiscal strength. However, it now appears that maybe that the company's cash equivalents really weren't equivalent. In an 8-K filing GSI stated that:

In its press release dated April 27, 2005, GSI Commerce, Inc. (the "Registrant") reported that it had reclassified $6.3 million from cash and cash equivalents to marketable securities as of January 1, 2005. As discussed below, as of January 1, 2005 and January 3, 2004, the Registrant expects to reclassify $36.5 million and $18.8 million, respectively, from cash and cash equivalents to marketable securities. Additionally, in its press release dated April 27, 2005, the Registrant reported cash and cash equivalents of $11.7 million and marketable securities of $31.5 million as of the quarter ended April 2, 2005, instead of $10.7 million and $32.5 million, respectively.

Before the restatement GSI reported $56.5 M in cash and after will report $20 M. It is difficult to imagine that the company's auditors would have an issue with this topic. I wonder what the controversy was in the audit process. Maybe we will see in a lawsuit.

SRS Labs - What kind of mistake is this?

SRS Labs reported that is was going to restate its 2004 results because of the way it treated costs associated with trade shows.

The restatement will increase sales and marketing expenses in periods when it attended trade shows, while lowering such expenses in other periods in fiscal 2004, the company said. As a result, the restatement will reduce SRS's previously reported earnings in the first two quarters, and increase earnings in the year's second half SRS reported restated earnings to break even per share, down from a previously reported 1 cent per share, for the first quarter, and to a penny per share, down from a previously reported two cents per share, in the second quarter.

Previously, SRS Labs capitalized costs associated with trade shows. I just don't understand under what circumstances justified a capitalization of trade show costs. I can't believe that there is not more to this issue than is being reported. I wonder if bonuses are involved.

Cisco and stock options

There is an interesting article on Bloomberg today concerning Cisco's decision to try to launch a new derivative security that will have employee stock option like properties. John Chambers, Cisco's CEO has been a huge opponent of stock option accounting and believes that models place to high of a value on stock options. Chambers is trying to come up with a new security because no market prices currently exist for employee stoick options.

The expensing rule, passed by the U.S. Financial Accounting Standards Board in December, also encourages companies to value the options using an ``observable market price.'' Unlike call or put options that trade on exchanges such as the International Securities Exchange, employee stock options can't be bought or sold, so there is no market.

Cisco's derivatives would function under the same terms as its employee stock options, including the same exercise prices and five-year vesting schedule. They would be sold once and couldn't be traded or hedged. Settlement of any gains would be with Cisco shares.

Powell told SEC officials that Cisco wants to begin selling the derivatives as early as August and the company would need 15 buyers to create a proper market, the people familiar with the meetings said. Earnhardt declined to comment on timing of any sale. Melissa Stonberg, a spokeswoman for Morgan Stanley, declined to comment.

Cisco must begin deducting the cost of employee stock options from earnings in the first quarter of its fiscal year, which starts in August.