RE: RE: RE: precautionary principle

["Davies, Daniel" <daniel.davies@xxxxxxxxxxxx>]

>I don't know very much about accounting, but what I was thinking of is as
>follows: there's a big issue of how "one time charges" are counted in
>reporting earnings. Are they discounted (minimized) the way Enron did and
>other high-flyers do? or are they simply subtracted from current earnings?
A
>"precautionary principle" would say that when in doubt, they'd be
subtracted
>from current earnings.

depends.  Amortising a one-off over time would seem like a pretty strange
thing to do to me, but anything goes these days ....
It used to be the case that there was something called "extraordinary
items", whereby you could declare a whole P&L, and then put extraordinaries
"below the line" at which EPS was calculated, encouraging people to discount
them.  But extraordinaries were massively abused, and so they have now been
all but banned (UK standards; I believe that FASB is slightly more
permissive, but not much).

>It seems to me that if the financial investors were smart, they'd realize
>that the one-time charges are exactly that and care about a company's
>earnings over a longer time horizon.

This is true but with two big caveats:

1)  Companies go bankrupt *right now*, not over the long term, so the short
term matters.  Particularly, if the company is overstating shareholders'
funds because of some rinky-dink profit smoothing exercise, it can get into
huge trouble (this is a big issue in insurance company accounting, where the
long term solvency is by its nature a matter of actuarial guesswork)

2)  As I have preached before on lbo-talk, it is unwise to try to make a
company's accounts into something other than what they are.  Accountancy
predates capitalism, it is well to remember, and the purpose of accounts is
to be an accurate record of the transactions which took place over a period
of time.  If stock market investors care about long term earnings, then let
them make estimates, but their estimates will be better if based on accurate
information about the recent past and worse if the accountants try to do
their job for them.

dd



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