Biz Combo Rule Trips Up Bassett

Bassett Furniture will restate after an SEC review says it mishandled the accounting of an acquisition under FAS 141.

Bassett Furniture Industries said it will restate its financial statement for the fiscal year ended November 26, 2005 and amend its quarterly financial information for 2005 and 2006 in the 2006 Annual Report.

The company said the Securities and Exchange Commission had recommended Basset change the way it had accounted for acquisitions of three retail licensee operations in fiscal 2005 and its classification of certain notes receivable activity in the statement of cash flows.

The furniture maker elaborated that when it acquired three retail licensee operations in 2005, it recognized pre-tax charges of $4.2 million to eliminate the gross profit on inventories previously sold to the licensees by Bassett (and subsequently acquired in the acquisitions) and reduce goodwill associated with the acquisitions to a value the company believed was appropriate. The company now says that no charges should have been recognized with the acquisitions.

As a result, the inventories should have been stated at their estimated selling prices less cost of disposal, as directed under Financial Accounting Standards Board Standard No. 141, “Business Combinations,” and the full amount of the goodwill should have been recorded on the balance sheet and allocated among the company’s respective reporting units.

The company said it will increase pre-tax income by $2.5 million in the second quarter and $1.7 million in the third quarter of 2005. It elaborated that the third quarter of 2005 and all quarters subsequent to the three acquisitions will in turn include slight increases to cost of sales and lower pre-tax income amounts to reflect the additional costs of certain of the acquired inventories that have subsequently been sold, the company added.

These retail inventories consist of a mix of floor samples, store accessories, inventory committed for delivery and other inventories held for resale.

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