Reading the FASB-mandated financial report of his company, T.J. Rodgers can't figure out what his company is worth (full PDF here):
In the original version of this hallucinogenic accounting rule, the intangible assets were “amortized,” taken as quarterly losses in equal amounts over a period such as five years. Thus, in the example above, the “amortization of intangibles” created a phony loss for the acquirer of $200 million per year for five years. What do you get when you merge two identical companies, each like the one described above—valued at $2 billion, with $1 billion in real assets and $100 million per year in profit? Don’t say a company valued at $4 billion with $2 billion in real assets and $200 million in profit. The answer, according to FASB, is a company valued at $4 billion with $3 billion in assets — one-third of them intangible — and zero profit.
Imagine hiring hundreds of accountants to keep track of ghosts. That's what Cypress Semiconductor (Rodgers's company) has done. FASB made these rules in order to improve "transparency," but of what and to whom is at least as unclear as the reports themselves:
In a recent review of potential acquisition candidates, I noted an obvious error in the financial analysis of one very good target company. Its financial statements showed the company nearly breaking even, when I knew that it consistently produced 20 percent pretax profit. The disconnect came from the fact that the young MBA doing the analysis used GAAP financial statements that included all the accounting distortions described above. We adjourned the meeting until a useful analysis could be completed.
And that is how Wall Street must work today: Companies produce the official GAAP report, and then they produce a non-GAAP report to which everyone looks when they want to know what's really happening. Et voila!, cash is called "cash," and there's a difference between liquid and illiquid assets. Imagine that!
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