Restating Revenues and Earnings at INVESTools Inc.
1. Years Ended December 31, 2004 2003 2002
Revenue (pre-tax) $99.6 $73.4 $56.1
Cost of sales (Revenue x 40%) ($39.8) ($29.4) ($22.4)
Selling expense ($23.3) ($18.5) ($17.5)
General and Administrative expense ($19.9) ($13.2) ($14.2)
Depreciation and Amortization ($0.9) ($0.6) ($0.7)
Other Income (expense) $0.0 ($1.4) $0.2
Net profit (loss)--GAAP $15.7 $10.3 $1.5 Add back amount eligible for capitalization
Under SAB 104 (40% of total costs X 85%) $33.9 $25.0 $19.1 Adjusted Net Income (loss) Reported Internally $49.5 $35.3 $20.5
INVESTools should definitely capitalize these expenses. The practice of not capitalizing these expenses has led to routine recording of net losses lately due to the company’s new focus on deferred-revenue contracts. By capitalizing these expenses, management can paint a much clearer picture of the company’s financial health, especially since the deferred-revenue streams will hopefully continue to grow in the future.
2. Board members are right to be concerned about the restatement being issued because of the severely negative consequences it may cause. The current business climate has caused INVESTools forthcoming restatement to be just another in a long line of accounting problems being experienced by the business community, this time specifically related to realizing subscription revenue too early. An internal study, performed by the company’s new CFO, of other companies’ recent restatements shows that INVESTools’ impending restatement was most closely related to that of Red Hat Inc., who also had to deal with accounting issues relating to subscription issues. Red Hat suffered a 23% drop in their stock price as a result of the news of its restatement, and everyone at INVESTools feared a similar fate. The CFO’s review revealed that many companies’ restatement announcements were soon followed by large declines in their stock price that lasted even a month after the
Revenue (pre-tax) $99.6 $73.4 $56.1
Cost of sales (Revenue x 40%) ($39.8) ($29.4) ($22.4)
Selling expense ($23.3) ($18.5) ($17.5)
General and Administrative expense ($19.9) ($13.2) ($14.2)
Depreciation and Amortization ($0.9) ($0.6) ($0.7)
Other Income (expense) $0.0 ($1.4) $0.2
Net profit (loss)--GAAP $15.7 $10.3 $1.5 Add back amount eligible for capitalization
Under SAB 104 (40% of total costs X 85%) $33.9 $25.0 $19.1 Adjusted Net Income (loss) Reported Internally $49.5 $35.3 $20.5
INVESTools should definitely capitalize these expenses. The practice of not capitalizing these expenses has led to routine recording of net losses lately due to the company’s new focus on deferred-revenue contracts. By capitalizing these expenses, management can paint a much clearer picture of the company’s financial health, especially since the deferred-revenue streams will hopefully continue to grow in the future.
2. Board members are right to be concerned about the restatement being issued because of the severely negative consequences it may cause. The current business climate has caused INVESTools forthcoming restatement to be just another in a long line of accounting problems being experienced by the business community, this time specifically related to realizing subscription revenue too early. An internal study, performed by the company’s new CFO, of other companies’ recent restatements shows that INVESTools’ impending restatement was most closely related to that of Red Hat Inc., who also had to deal with accounting issues relating to subscription issues. Red Hat suffered a 23% drop in their stock price as a result of the news of its restatement, and everyone at INVESTools feared a similar fate. The CFO’s review revealed that many companies’ restatement announcements were soon followed by large declines in their stock price that lasted even a month after the