All public companies are required by law to report their financial results using Generally Accepted Accounting Principles (“GAAP”). The earnings figures that we present differ from that official presentation in several ways. The adjustments are designed to show the genuine earnings power that each company possesses, and to create a consistent approach for comparability purposes.
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Tax Rate – Companies are required by the Financial Accounting Standards Board (“FASB”) to report income taxes that often include nonrecurring charges and benefits. That can cause the tax rate to change dramatically from period to period, making income comparisons less meaningful. We will use the reported tax rate if it is in the vicinity of the rate likely to be paid over the long term. Otherwise, we’ll adjust it to that figure. In cases where there is no reliable track record to go on – for instance, where no taxes are being paid currently due to the availability of tax loss carry forwards – we typically will use a 35.0% rate for U.S. companies. For international companies we will use whatever rate makes the most sense.
Tax Rate – Companies are required by the Financial Accounting Standards Board (“FASB”) to report income taxes that often include nonrecurring charges and benefits. That can cause the tax rate to change dramatically from period to period, making income comparisons less meaningful. We will use the reported tax rate if it is in the vicinity of the rate likely to be paid over the long term. Otherwise, we’ll adjust it to that figure. In cases where there is no reliable track record to go on – for instance, where no taxes are being paid currently due to the availability of tax loss carry forwards – we typically will use a 35.0% rate for U.S. companies. For international companies we will use whatever rate makes the most sense.(2)Non Cash (“123”) Stock Option Expense – Following the 2000-2002 stock market decline the SEC and FASB implemented accounting rules that required companies to “double count” the cost of stock options issued. The change stemmed from political pressure and was designed to reduce the total number of options issued. There was no genuine economic basis for the new policy. Options always had reduced EPS by increasing the number of shares outstanding. The SEC and FASB required companies to start deducting a theoretical estimate of the options’ value from earnings, as well. Our figures exclude that non cash deduction. The amount is added back to Pretax Income, and then taxed at the “fully taxed” rate referred to above.
Non Cash (“123”) Stock Option Expense – Following the 2000-2002 stock market decline the SEC and FASB implemented accounting rules that required companies to “double count” the cost of stock options issued. The change stemmed from political pressure and was designed to reduce the total number of options issued. There was no genuine economic basis for the new policy. Options always had reduced EPS by increasing the number of shares outstanding. The SEC and FASB required companies to start deducting a theoretical estimate of the options’ value from earnings, as well. Our figures exclude that non cash deduction. The amount is added back to Pretax Income, and then taxed at the “fully taxed” rate referred to above.(3)Amortization of Intangible Assets – Accountants have argued forever over the best way to treat acquisitions, mergers, and other business combinations. The present scheme requires the buyer to capitalize assets equal in amount to the price of the deal. (There are a few exclusions, like acquired R&D, but not many.) Usually the hard assets obtained are of less value than the total purchase price. To fill the gap, accountants create intangible assets such as Goodwill and a variety of other things. Some items must be expensed over a period of time even though there is no real proof of their worth to begin with, or that they are going down in value. Unless there is obvious evidence that a real cost is being incurred, our figures exclude those non cash amortization charges. The amount is added back to Pretax Income and taxed at the “fully taxed” rate.
Amortization of Intangible Assets – Accountants have argued forever over the best way to treat acquisitions, mergers, and other business combinations. The present scheme requires the buyer to capitalize assets equal in amount to the price of the deal. (There are a few exclusions, like acquired R&D, but not many.) Usually the hard assets obtained are of less value than the total purchase price. To fill the gap, accountants create intangible assets such as Goodwill and a variety of other things. Some items must be expensed over a period of time even though there is no real proof of their worth to begin with, or that they are going down in value. Unless there is obvious evidence that a real cost is being incurred, our figures exclude those non cash amortization charges. The amount is added back to Pretax Income and taxed at the “fully taxed” rate.(4)Change in Value of Financial Instruments – FASB accounting rules require companies to adjust the value of certain financial instruments, as they appear on their balance sheets, every quarter. These obligations cover a lot of ground, from bonds that are denominated in foreign currencies to synthetic derivatives. For these particular assets, any changes in value that occur are charged or credited to income every quarter even though no operating expense was incurred. Unless the change appears to be permanent we exclude those adjustments from our calculation of pretax income.
Change in Value of Financial Instruments – FASB accounting rules require companies to adjust the value of certain financial instruments, as they appear on their balance sheets, every quarter. These obligations cover a lot of ground, from bonds that are denominated in foreign currencies to synthetic derivatives. For these particular assets, any changes in value that occur are charged or credited to income every quarter even though no operating expense was incurred. Unless the change appears to be permanent we exclude those adjustments from our calculation of pretax income. (5)Non-recurring Gains and Losses – One time costs, usually associated with acquisitions or restructuring activities, are excluded from our earnings calculations. We also exclude gains and losses on the sale of subsidiaries and other assets, unless selling those assets is a regular feature of the business.
Non-recurring Gains and Losses – One time costs, usually associated with acquisitions or restructuring activities, are excluded from our earnings calculations. We also exclude gains and losses on the sale of subsidiaries and other assets, unless selling those assets is a regular feature of the business. Accounting Notes
