Why we still need to care about Defined Benefit Plans.

When teaching pensions I sometimes think that maybe I should just give the pension expense/ Cash entry that is needed by firms that provide defined contribution plans, since it seems that no company would start (or maybe even continue) a defined benefit plan.

However, we have to remember that most companies still maintain separate defined benefit plans for highly compensated employees. These pension plans are non-qualified plans, in that they do not qualify for tax benefits but they are still provided by companies and they are quite lucrative.

A nice article about these types of plans.

Intergraph's Accelerated Share Buyback program

From Intergraph's July 29, 2004 8-K:

Share Repurchase Update
On July 28, 2004, the Company repurchased 3,797,949 shares from Goldman, Sachs & Co. in a private transaction in connection with an Accelerated Stock Buyback (ASB). No trading activity has occurred in the public market related to this transaction prior to the issuance of this press release. The shares were repurchased for an upfront payment of $100 million or $26.33 per share, subject to a market price adjustment provision based on the volume weighted market trading price over the next nine months. Separately, during the second quarter the Company
repurchased 250,000 shares of its common stock through transactions on the open market for approximately $6.4 million. As a result, giving effect to the ASB, the Company has approximately $28 million remaining (subject to any accelerated buyback adjustments) under its $250 million open market repurchase program. In total, the Company has repurchased more than 20 million shares for approximately $485 million since late 2001.

Accelerated Share Buyback

Buying back shares outstanding has been a pretty straight-forward accounting topic, but here is a new twist that will add to a lecture. Obviously the benefit of a stock buyback is that it reduces the number of shares outstanding (or keeps the shares outstanding constant given all of the employee stock options that are being issued). However, one problem that has occurred is that buybacks take a good bit of time and thus any boost to your EPS is not directly shown.

Accelerated Share Buyback programs are a new way of buying back a large chuck of stock all at one point in time. Here is how it works:

Company X talks to its investment bank and says that it wants to repurchase 10% of its outstanding shares. The investment bank "borrows" 10% of the outstanding shares immediatly and sells them to Comp. X. (The investment bank has shorted the stock)

This would seem dangerous for the investment bank since lower shares outstanding may lead to higher EPS which would boost the stock and make it more expensive to buy back. However, in most of these agreements the investment bank price protects itself from higher future prices by making company X reimburse it for any additional costs of buying back the stock.

This is the issue: this means that the true cost of the buyback program is not known until much later while the company is showing higher EPS right away.

Leasing, FASB and the IAS

I start teaching leasing tomorrow and it is always a difficult subject for everyone. In addition, it is hard to get through to students how much of an impact the leasing standard has had on the leasing profession. There is currently before the FASB a motion to adopt the international standard on leasing, which would greatly curtail operating leasing. CFO Magazine had a good article about the how the adoption of the international accounting standard would even affect outsourcing which can be found here:

Under an accounting rule enacted in January 2004 by the International Accounting Standards Board, moreover, much of any cost savings could disappear, since companies would no longer be able to transfer any of their outsourced assets from their balance sheets to that of the service provider. That's because the contract would be considered a form of leasing, and the IASB rule won't allow assets financed by leases to be transferred for purposes of financial reporting. While the international rule won't automatically become part of U.S. GAAP, standards-setters in the United States and are bent on aligning their regimes as closely as possible (see "The Narrowing GAAP," Experts say the change could have a sizable effect on a company's reported results. "Outsourcing customers are likely to find that these new rulings have a significant impact on their balance sheets, depreciation schedules, and potentially even their earnings," Julie Giera, an analyst for Forrester Research, noted in a research report last June.

Amazon's earnings miss

Amazon released its earnings last night and one of the interesting things is that the company is running out of tax benefits. It seems almost hard to believe that the company that had so many years of losses and had built up so many tax benefits is now profitable and having to pay taxes.

The Seattle-based Internet retailer said net income for the quarter ended March 31 fell to $78 million, or 18 cents a share, from $111 million, or 26 cents a share, from the same period a year ago. Profits for the latest period were affected by $56 million in income tax expense, compared with a $2 million income tax benefit in the same period a year ago.

FASB Update

The FASB released information from its Jan. 18th board meeting. The meeting focused on Pensions and leveraged leases. There would be a number of changes to Pension disclosures:

The disclosure requirements of FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, would be revised as follows:

• The existing requirement to disclose a reconciliation of the over- or underfunded status to amounts recognized in the statement of financial position would be eliminated (paragraph 5(c) of Statement 132(R)).
  
• The existing requirement to disclose information about a recognized additional minimum liability would be replaced with a requirement to disclose the nature and amount of changes in plan assets and benefit obligations recognized in net income and in other comprehensive income of each period (paragraph 5(i) of Statement 132(R)).
  
• Disclosure would be required in the postretirement benefits footnote of the accumulated amount of changes in plan assets and benefit obligations that have been recognized in other comprehensive income and will be recycled into net income in future periods.
  
• The examples in Statement 132(R) would be amended to clarify and illustrate the existing requirement to disclose the current and noncurrent portion of postretirement benefit plan assets and liabilities.
  
• The current requirement to disclose the measurement date (if other than the reporting date) would be eliminated when the measurement date change is effective (paragraphs 5(k) and 8(j) of Statement 132(R)).
  
• Disclosure would be required of the amount of estimated net actuarial gains and losses and prior service costs that will be amortized from accumulated comprehensive income into net income over the next fiscal year.

Google: Taxes

Last night Google's earnings were announced and one of the interesting questions focused on the company's tax rate, which climbed to 41% for Q4 and increased to 31.6% for all of 2005 (Google had estimated the tax rate at 30%).

Teaching Deferred taxes is difficult as it is, but the Google conference call provides an interesting discussion that might make DT a bit more "real", here it is from the conference call:

George Reyes, Chief Financial Officer

Now I’ll turn to taxes. Our effective tax rate for Q4 increased to 41.8% this quarter and to 31.6% for the year, above expectations of approximately 30% for the year. The amount of tax expense we recognized in any particular quarter is driven by our estimates for the year. And as we’ve said in the past, our estimates for the year are sensitive to the mix of earnings in the US and overseas. These estimates are complex and 2005 was the first year we realized any reduction to our effective tax rate as a result of profits earned overseas under our international structure. At the end of the year, we must true up the tax provision for the year, which could and in the case of Q4, did have a disproportionate impact on the 4th quarter. In calculating our true up for the year, the proportion of expenses allocated to international operations was greater than we expected. Primarily as a result of this a greater percentage of our profits were taxed at a higher domestic tax rate, which resulted in a greater effective tax rate, compared to our expectations. Keeping in mind the complexity of projecting tax rates, we expect our effective tax rate for 2006 to be approximately 30%.