Volume 8, No. 8

 

"Cash-Flavored" Earnings: Bogus Performance Measure:  Two of the most-discussed recent moves of the Financial Accounting Standards Board are the decisions to ban pooling-of-interests accounting and simultaneously shorten the maximum life of goodwill recognized in "purchase method" business combinations. As an add-on to these decisions, the FASB has made one disclosure resolution which is being fantastically misinterpreted by the investing masses: it's requiring the disclosure of net-of-tax goodwill amortization as a stand-alone line item in the income statement, and permitting firms to display a separate per share amount for net-of-tax goodwill amortization along with earnings per share excluding the same amount. Those "cash earnings per share figures" are being viewed by many marketeers as being a better measure of corporate performance than earnings per share - and they're wrong. Adding goodwill amortization to earnings is no more akin to reporting cash generated from operations than adding chocolate syrup to a vanilla milk shake creates a chocolate bar. The result is a chocolate-flavored milkshake, not a chocolate bar. So it is with adding goodwill amortization to earnings: the result is cash-flavored earnings, not cash generated from operations. The difference is enormous - and deserves understanding by analysts and investors.

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