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Monday, April 25, 2016

Strategic CSR - Pro-forma earnings

The article in the url below is interesting because it demonstrates the extent to which corporations are increasingly seeking to manipulate investor perceptions by massaging their accounting:
"Over the past year there has been a large, and growing, divergence between the pro forma earnings—those excluding items such as restructuring charges accounting rules require them to include—that companies emphasize and their results under generally accepted accounting practices, or GAAP. In the fourth quarter, pro forma earnings for companies in the S&P 500 were 59% above GAAP, according to figures from FactSet and S&P Dow Jones Indices."
The chart accompanying the article illustrates the recent divergence between what companies have to report to the SEC and the picture they would like investors to see:
Whether a charge or other cost is directly related to a company's underlying performance, of course, does not change the fact that the firm has to pay it. As such, it diminishes profits. And while investors can ignore it if it truly is a one-off event, the problem comes when these charges that firms would like investors to ignore are happening frequently:
"In the fourth quarter, pro forma earnings were 29% higher than the S&P operating figures, the biggest absolute difference since the fourth quarter of 2008. And while the ailing energy sector was a big contributor to that, it wasn't the only place where pro forma was being used more aggressively. Indeed, excluding energy, the gap between the pro forma and operating figures was 14%, which also represented a post-financial crisis high. The bad stuff is getting harder to ignore."
If there is a 'one-off' charge in most earnings statements, then those charges are no longer properly thought of as 'one-off.'
Take care
David Chandler & Bill Werther
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Investors Should Pay Attention to What Companies Ask Them to Ignore
By Justin Lahart
April 1, 2016
The Wall Street Journal
Late Edition – Final