Restatement Rerun: Picture Is No Clearer

Cablevision Systems is still twiddling those dials. Also: PCAOB's McDonough is sniffing out abusive tax shelters; pumping bonds in California, and other weighty debt issues; FASB, IASB slowly converging on stock-based compensation standards; and more.


Cablevision Systems Corp. announced on Monday that it will delay the issuance of its most recent quarterly report and amend an earlier financial report.

Sounds somewhat familiar? Perhaps you’re thinking of Cablevision’s announcement last week, when the company said it would restate its results — its third restatement since June — for the first three quarters of 2003 to account for about $15 million of expenses incorrectly recorded in 2002 and earlier periods.

Yesterday Cablevision said in a filing that it needs more time to prepare and file its September 2003 quarterly report so it can revise its results to reflect the impact of those incorrectly recorded expenses.

The company also said it must amend its March 31, 2003, financial statements because they were not reviewed by an independent public accountant. “The staff of the SEC may take the position that the March 31, 2003 (quarterly report) is deficient because the required review has not been completed,” it added.

On June 18 Cablevision management said $6.2 million of expenses recorded in 2003 at the national services division of its Rainbow Media Group were accelerated, and therefore improperly accrued or expensed in 2002, rather than 2003.

In early July the Securities and Exchange Commission opened a formal investigation into the accounting problems at the company.

In August Cablevision officials said they found $3.4 million of accounting irregularities; at the time, the company indicated that they entailed no further restatements.

Cablevision plans to break into two separate operating companies in January, but it won’t be able to complete the spin-off until the SEC ends its inquiry into the company’s accounting practices.

PCAOB’s McDonough Is Sniffing Out Abusive Tax Shelters

The most powerful person overseeing the accounting industry warned he will not tolerate the marketing of abusive tax shelters.

“Anything that looks like, smells like an abusive tax shelter is a very ill-advised thing” for firms to be doing, said Public Company Accounting Oversight Board Chairman William McDonough, according to Reuters.

The wire service pointed out that accountants, bankers, and lawyers have aggressively marketed abusive tax shelters to taxpayers at a cost of billions of dollars to the U.S. Treasury, citing a new report from the Senate Permanent Subcommittee on Investigations. The report found that accountants designed abusive tax schemes, such as phony paper losses or phony charitable donations, and marketed them. Reuters also pointed out that the report focuses on accounting firm KPMG.

“Do I share the concern over some of the stuff that the committee is discovering?” asked McDonough in an interview with the wire service. “Of course, I do. It sure tells you why the law got passed and the PCAOB got created.”

Added McDonough, “I don’t think you can restore the faith of the American people when you’re found to be in the ongoing business of abusive tax shelter advice.”

McDonough noted that the PCAOB, the accounting industry’s congressionally created regulator, can bar auditors from advising audit clients on tax shelters if it would lead the auditor to be auditing its own work. The board, however, cannot bar auditors from offering tax shelter advice to non-audit clients.

“Legally we can’t prohibit their doing it because it’s not within our area of jurisdiction,” McDonough told the wire service. “But we sure can tell them what we think.”

Pumping Bonds in California, and Other Weighty Debt Issues

Arnold Schwarzenegger, who on Monday was sworn in as governor of California, is planning for the state to borrow $18 billion to $20 billion to solve the state’s financial crisis, according to Bloomberg.

If he is successful with the plan, it would be the largest municipal or corporate bond sale ever.

Carl DeMaio, a senior fellow at the Los Angeles-based Reason Foundation who has advised Schwarzenegger on budget issues, told the wire service that the money would repay $14 billion of warrants and notes due in June and help finance a deficit now estimated to be at least $10 billion.

California’s budget shortfall this year is nearly $38 billion.

In other debt-related news, Sears, Roebuck and Co. and two of its subsidiaries repurchased $11.8 billion in notes, including $9.7 billion issued to institutional investors and $2.1 billion marketed to retail investors. The company said it used a portion of the proceeds from the recent sale of its Credit and Financial Products business to Citigroup to finance the tender offers.

Louisiana-Pacific Corp. said it offered to repurchase all of its outstanding 10.875 percent senior subordinated notes due 2008.

“Our intent is to reduce our overall level of indebtedness and interest expense,” said Curt Stevens, executive vice president of administration and chief financial officer. “We also expect to enhance our future operating and financial flexibility by relaxing the restrictive covenants associated with these notes.”

The company said it would pay $1,170 for each $1,000 of principal amount of the notes, whose principal amount outstanding is $200 million. It also offered note holders $10 per principal amount of $1,000 of notes to suspend certain covenants of the notes, which would be effective should the company’s credit rating worsen, and relax other covenants. The company said that these covenants include restrictions on dividends and stock repurchases.

American Express Co. was expected to price $1.8 billion of convertible debt securities due in 2033. The company will use the proceeds for general corporate purposes.

FASB, IASB Slowly Converging on Stock-Based Compensation Standards

U.S. and international accounting standards are going through some convergence pains. One sore spot is the income tax effects of stock options, especially regarding the method of allocating those effects to the income statement and the equity statement, and the classification of cash flows associated with income taxes.

The International Accounting Standards Board (IASB) plans to meet again to address the issue today, while the Financial Accounting Standards Board (FASB) is scheduled to deliberate on Wednesday.

Ed Trott, a FASB board member, singles out the tax issue as “the area that we are having the most difficulty in obtaining convergence.” Trott spoke Monday on a stock-based compensation panel at the FEI Current Financial Reporting Issues conference in New York City.

Last month, the two standards boards met in Toronto to discuss convergence of accounting standards for share-based payments, such as stock options. The discussion progressed toward an agreement that would see some tax impacts recognized in the income statement (as compensation expense) and some allocated to the equity statement (the exercise of the option).

In its own deliberations, the IASB originally proposed that all tax effects go through the income statement. For its part, FASB chose to keep the Statement 123 treatment, but modified so it would not require that the write-down — for the expected income-tax benefit related to recognized compensation — would be run through the income statement.

Convergence on income tax is not a sure thing, however. Trott notes that he was surprised that “our taxation rules for stock options are totally unheard of around the rest of the world.”

Nonetheless, Trott expects to make a valiant effort to reconcile any lingering differences. “As all of you know, the devil’s in the details,” he told the packed audience of senior financial executives. “I really hope that if the two boards are apart after the discussions this week that we will make another effort to come to the same conclusions.”

The FASB plans to issue final rules on accounting for stock-based compensation, which includes the expensing of stock options, in the second half of 2004. The board has already agreed to require the expensing of options beginning in 2005, coinciding with international standards.

Outback Restates Some Ownership Interests as Compensation Arrangements

Restaurant operator Outback Steakhouse Inc.’s most recent quarterly filing contained a restatement of its results for the three and nine months ended September 30, 2002. The restatement reflects a change in its accounting for the compensation of general managers and area operating partners.

Outback explained that since its inception, it has required its both groups of employees to enter into employment agreements — five-year agreements for the area operating partners, five to seven years for the general managers. Each employee would pay the company for the right to receive a percentage of their restaurant’s annual cash flows for the duration of the agreement.

Upon completion of an agreement with a general manager, the company said it generally grants stock options equal to an amount prescribed by a formula in their employment agreement. Stock option grants are issued at the weighted average closing price of the company’s common stock in the prior three months and are exercisable in periods up to 10 years. Options expire five years after the options become exercisable.

As for area operating partners, upon completion of the restaurant’s fifth year of operation, the company said it generally grants common stock to the area operating partners equal to the fair value of the partners’ percentage of the cash flows.

Outback further explained that it had previously accounted for the arrangements under these programs as ownership interests in the underlying restaurants. These interests were reflected as minority interests in the consolidated financial statements.

At the conclusion of the arrangements under the general managers’ program, the company recorded an intangible asset, amortized over five years, for amounts paid in excess of the carrying amount of the minority interests. Under the area operating partners’ program, the company recorded goodwill for value granted in excess of the minority interest’s share of the restaurant’s cash flow at the conclusion of the agreement.

Outback said it will restate the arrangements under the general managers’ and area operating partners’ programs as compensation arrangements. As a result, amounts received from the company’s general managers and area operating partners will be recorded as “other long-term liabilities.”

The company elaborated that payments made to both programs will be recognized as compensation expense in the period earned by the general managers and the area operating partners and included in the line “distribution expense to employee partners” in the consolidated statements of income.

The company also said it will estimate future purchases of its area operating partners’ cash flow interests using current information on store performance to calculate and record a liability in the line item “partner deposit and accrued buyout liability” in the consolidated balance sheets, with associated expenses in the line “employee partner stock buyout expense” in the consolidated statements of income.

As a result of the restatement, Outback reduced net income by nearly $3 million for the September 30, 2002, quarter and by about $4.5 million for the nine-month period ending September 30, 2002.

Short Takes

Two big deals were announced on Monday.

St. Paul Cos. agreed to buy Travelers Property Casualty Corp. for about $16 billion in stock, creating the second-largest U.S. commercial insurer. Citigroup Global Markets and Lehman Brothers Inc. reportedly advised Travelers on the transaction, while Goldman Sachs & Co. and Merrill Lynch & Co. advised St. Paul.

  • DuPont Co. said it agreed to sell its clothing and carpet-fiber business to Koch Industries for $4.4 billion, enabling it to get out of a low-growth industry so it can focus on making chemicals for nutrition and electronics. DuPont said the deal will be neutral to positive to its 2004 earnings.
  • Verizon Communications Inc. said 21,000 employees accepted an early-retirement buyout offer and will leave by the end of the week.
  • U.S. business inventories unexpectedly rose 0.3 percent in September as unsold stocks of autos accumulated at the fastest clip since February, a government report showed on Monday.

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