Stickneys Comparability Risksin additon to WFOs

1
Stickneys Comparability Risksin additon to WFOs

• Earnings not reflective of actual economic value
  added
• F/S restatement
• F/S classification
• Time variations in excess of 3 mos.
• Global accounting factors

2
Quality of Earnings Issues

• Non-recurring itemssustainability
• Earnings measurementchps. 5-7
• Earnings managementchps. 5-7
• Essentially we are trying to determine if what is
  reported is going to recur in the future.

3
Sustainability Issues

• Discontinued operations
• Extraordinary gains and losses
• Changes in accounting principles
• Impairment of long-lived assets
• Restructuring charges
• Changes in estimates
• Peripheral gains and losses
• Mgt. analysis including the MDA

4
Restructuring Difficulties

• Conservative vs. aggressive accounting practices
• Periodic charges vs. one time event
• Taking a bath

5
Analysts Role

• Is restructuring adequate
• Wall street point of view
• Significant judgement required

6
Earnings Management

• Reasons it occurs
• Incentive compensation factor
• Job security
• Smoothing reduces erratic performance which
  lowers perceived risk
• Govt anti-trust avoidance
• Reasons against
• Cant do it forever
• Capital market penalties for excess

7
Methods of Management

• GAAP choices
• Management judgement and estimates
• Timing of transactions

8
Restated F/S

• Discontinued operations
• Pooling of interests
• Accounting principle changes
• Big issue here is the difficulty of calculating
  prior years impact if information is not
  presented.

9
Global Considerations

• Use SEC Form 20-F
• Discloses equity and net income reconciliation
  between local GAAP and US GAAP
• Evaluate environmental, customs and strategic
  implications as well as GAAP

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Chp. 4 Examples

• Ex. 1 Harley-Davidson-discontinued segment
• Ex. 2 Black Decker-discontinued segment
• Ex. 3 Black Decker-extraordinary item
• Ex. 4 Ford-cumulative effect of actg. Changes
• Ex. 5 Fruit of the Loom-cumulative effect
• Ex. 6 Knight-Ridder-cumulative effect
• Ex. 7 AP-asset impairment
• Ex. 8 PepsiCo-asset impairment
• Ex. 9 DEC-restructuring
• Ex. 10 Coke-restructuring
• Ex. 11 McCormick Co-restructuring
• Ex. 12 Nine West Group-restructuring

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Chp. 4 Examples, cont.

• Ex. 13 Jostens-change in actg estimate
• Ex. 14 Sherwin-Williams-change in actg estimate
• Ex. 15 Hershey Foods-change in actg estimate
• Ex. 16 Tandem-other gains and losses
• Ex. 17 Delta Air Lines-other gains and losses
• Ex. 18 H.J. Heinz-other gains and losses
• Ex. 19 Coke-other gains and losses
• Ex. 20 Coke-MDA, forward looking disclosures
• Ex. 21 Sara Lee-MDA
• Ex. 22 General Mills-restated financial
  statements
• Ex. 23 Ericsson-classification differences
• Ex. 24 Campbell Soup-reporting period
  differences