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Closing an Earnings Expectation Gap with Nonrecurring Items

Efforts to meet the consensus earnings estimate of Wall Street will in many cases prove to be ineffective. That is, credit often will not be given for closing the gap between earnings and the consensus forecast if the revenue and gain increases or loss and expense decreases are judged to be nonrecurring or nonoperating. Many of the items in Exhibit 3.8 that would move earnings toward a target would be reversed in the process of computing pro forma or operating earnings. While in no sense a recommendation that more clandestine tactics be employed, it seems clear that the booking of nonrecurring items typically will be ineffective in closing an earnings shortfall and by extension in avoiding a reduction in share value. (more…)

Posted in: General | Posted by: Donalds | January 31st, 2009 | No Comments

Role of Pro Forma Earnings and Associated Adjustments (2)

A variety of items that were removed from net income for purposes of judging whether the consensus forecast was met are provided in Exhibit 3.8. Most of the listed items are plausible adjustments based on their nonrecurring character. The rationale for some is less obvious. The adjustment for goodwill amortization by CNET Networks is common in the determination of EBITDA. Its presence here is probably more industry specific and reflects the view that goodwill does not have a limited life, and, therefore, its amortization should not be included in judging financial performance. Notice that goodwill amortization was also an adjustment for Juniper Networks and Palm, Inc. (more…)

Posted in: General | Posted by: Donalds | January 30th, 2009 | No Comments

Role of Pro Forma Earnings and Associated Adjustments

Removing nonrecurring items from reported results can involve a substantial degree of judgment. As a result, pro forma or operating earnings may lack comparability. The concept of nonrecurring, which guides the determination of pro forma and operating earnings, is not well defined in GAAP. Recent debates in this area have involved the inclusion or exclusion of gains on the sale of investments, especially by technology firms with substantial holdings in newer technology firms.50 Contention also has focused on the role (more…)

Posted in: General | Posted by: Donalds | January 29th, 2009 | No Comments

EFFECTIVENESS OF EARNINGS MANAGEMENT (2)

It is standard practice for news items on company earnings releases to include commentary on whether the consensus earnings forecast was achieved. If present, nonrecurring items are removed from actual results to produce a pro-forma or operating result. It is this earnings result that is then compared to the consensus forecast. Implicit in this practice is that Wall Street analysts do not include nonrecurring items in their forecasted amounts. In addition, it is usually held that earnings without the inclusion of nonrecurring
items are a better measure of periodic financial performance. The relevant portions of several such items follow: (more…)

Posted in: General | Posted by: Donalds | January 28th, 2009 | No Comments

EFFECTIVENESS OF EARNINGS MANAGEMENT

The effectiveness of earnings management is determined by whether it results in the associated incentive being realized.46 These incentives, as outlined in Exhibit 3.2, range from the avoidance of declines in share values to maximizing incentive compensation and avoiding violations of financial covenants in debt or credit agreements. (more…)

Posted in: General | Posted by: Donalds | January 27th, 2009 | No Comments

The Review of the Chargeback Defense

Are you working in such a business field? If so, you would need to consider having a merchant account as the tool in helping you running your company well. But if in fact you have already had it, you would need to consider applying for the specific protection for it as it is the most important supporting tool in your business. (more…)

Posted in: General | Posted by: Donalds | January 27th, 2009 | No Comments

How to Easily Find the High Quality Paintball Gears?

Of course everybody knows about the paintball. But it is not all of them who know about where to get when they need to find the high quality of paintball gear. So here is some suggestion: turn your computer on and then get yourself into the pntball.com website. Why this website? It is because this website is offering many affordable gears for paintball including the Tippmann barrel. The simplicity of the website’s design will help you to easily find the items that you want to buy online through it. So paintball lovers, what would stop you from visiting this website and buy the items?

Posted in: General | Posted by: Donalds | January 27th, 2009 | No Comments

Studies Using Statistical Models (3)

There is also some evidence of earnings management aimed at maximizing the price received on initial public offerings (IPO). A study by Friedlan found that firms made accruals that increased net income in the period before the IPO.42 (more…)

Posted in: General | Posted by: Donalds | January 26th, 2009 | No Comments

Studies Using Statistical Models (2)

Healy’s findings were consistent with the above predictions. Accruals were mainly income decreasing when earnings were below the bogey and above the cap. Forty-six percent of accruals were positive when earnings were in the range between the bogey and the cap.35 However, only 9% and 10% of accruals were positive when earnings were either below the bogey or above the cap, respectively. These results are consistent with more income-increasing earnings management being practiced in the interval where income increases boost incentive compensation. (more…)

Posted in: General | Posted by: Donalds | January 25th, 2009 | No Comments

Studies Using Statistical Models

Early work using statistical models tested the hypothesis that earnings management was used to maximize the bonuses or incentive compensation of managers. Some of the areas considered in later work investigated whether earnings management was used to maximize the proceeds from both initial and seasoned stock offerings, to prevent the violation of financial covenants, and to meet consensus analyst forecasts of earnings. (more…)

Posted in: General | Posted by: Donalds | January 24th, 2009 | No Comments

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