Getting Granular Accounting Speak for the IRO

Speakers:
Tricia Gugler, Director, Investor Relations, Electronic Arts Inc.
Melinda Whittington, Accounting Director, The Procter & Gamble Company
Gary Willenbrecht, Vice President, Finance, Global Financial Planning & Analysis, Beckman Coulter, Inc.

As accounting principles and reporting standards change, companies are often caught having to state results in new ways which can lead to a temporary hit to some major metric, like earnings or gross margin. This occurs despite no underlying changes to the operation or prospects for the business, just that some earnings were deferred for one year or, some aspect of the move towards fair value has caused a new valuation to be posted for the same old asset.

Regardless of the lack of actual change at the company, the effect of seeing a large change in revenue or earnings caused by these accounting adjustments can lead to a lot of confusion to analysts and shareholders taken by surprise, and a dent in the share price.

These changes may also be a result of changes to the business model, such as Electronic Arts changing their revenue model to account of online gaming in addition to the straight sale of games and equipment. Or to Beckman Coulter, medical equipment maker, who switched to a leasing model rather than a sale only mode — both events causing a deferral in earnings reporting.

The lesson of the day: begin to inform shareholders and stakeholders of the effect far in advance of the actual instance of reporting in the new method. Provide FAQs on the effects of the change, and examples of how the new effects may look on statements.

Some companies will also introduce non-GAAP metrics which better show the real state of the business, and try to ensure analysts understand that this is the real metric to watch, and how this measure is tracked before the change and after, demonstrating that performance has not been impacted, and the future is as rosy as the investor thought it was (before the accounting change which appeared to spell doom).

Main lesson: if accounting changes are going to show up as worrisome events in perceived corporate performance, then IRO’s have an important job to educate and prepare their shareholders, rating agencies and analysts in the true effect of this changes.

Some things Tricia Gugler from EA suggested doing:
- Talk to the street early, at least one quarter ahead, give advance notice and time to digest
- Explain why the change is being made
- Explain how future accounting will be impacted
- Explain how there’s no change to economics of business; no change to cashflows, or valuation of business
- show, perhaps using a non-GAAP metric how performance is actually comparability to previous years
- Add materials to website so folks could get used to new reporting templates.
- Supply an FAQ, (always a good approach with something that is complicated).
- “Asked for feedback. Do a lot of listening. It was important for stakeholders to move to the non-GAAP metric.”
- Expect that many “still won’t get it”
- “Communicate early. And repeat.”

As a shareholder who keeps up on such events, this may also signal a buying opportunity, as many shareholders who haven’t done their homework panic and drive the shareprice down, for essentially no good reason, and temporarily.

Of course this also highlights the painful fact that the accounting a company uses to run its own operation is often a fair bit different than the way GAAP requires reporting to be done.