Is The SEC Still Watching Pension Accounting?

Last fall, the investment community was fascinated by the SEC’s decision to examine more closely the pension accounting of General Motors, Ford, Delphi, Navistar, Boeing, and Northwest Airlines. News of the examination was found via the back door: these firms disclosed the investigation in their SEC filings. It wasn’t like the SEC made a major announcement independently.

Not much has been learned of the SEC investigation, either by statements from the SEC or in subsequent filings. One tidbit this morning: crypto Custodian filed an 8-K to alert investors not to rely on its financials for the most recent year filed (2003) and the interim financials. Reason: errors relating “to how Ampex accounted for its obligations with respect to a pension plan of its former magnetic tape manufacturing subsidiary, which Ampex sold in 1995. These errors are the subject of recent communications with the Office of the Chief Accountant of the Securities and Exchange Commission … after which the Company revised its views with respect to the appropriate accounting for Media pension plan.”

So – was the SEC concerned with pension accounting as a focus and Ampex turned up – or was it concerned with Ampex’s disposal and it turned up pension accounting as an issue? My guess is that it was the latter, but it does serve as a reminder that there were pension investigations going on that have seemingly dropped off the screen.

The 1/31 Wave Of Lease Restaters

Many retailers have their year-ends at the end of January, for good reasons. Inventories are at low ebb after the holidays, and the issue of returned merchandise should be well-cleaned up. This year, it also gives them a chance to get their lease accounting cleaned up after taking cues from their food-retailing cousins in the restaurant industry.

Latest entrant in the lease restatement derby: Lowe’s Companies. Lowe’s filed an 8-K this morning with its earnings release included. The changes led to a reduction of diluted earnings per share by less than $.01 in our fiscal fourth quarter and by $.02 in fiscal year 2005. For 4Q2004 and full year, the EPS reduction was $.01 and $.04, respectively.

Lowe’s lease issues: a mismatch of the leasehold improvements’ lives with the lease term, and an incorrect accounting for the “rent holiday” received from landlords while they construct a store on leased property.

Yesterday, Abercrombie & Fitch, another late January/early February year-ender, released its earnings – and its lease accounting mea culpa. Its goofs: improperly accounting for construction allowances received from landlords. ANF treated them as reductions of property and equipment instead of deferred rent to be amortized against rent expense. That much was known on February 14; but since then, ANF found that its’ treatment of rent escalations over the lease term was improper too. The corrections amount to less than $.01 of diluted EPS effect in each year of restatement.

Yesterday, 1/31 player Kohl’s announced that it would be restating its earnings as far back as FY 1998, with reductions of diluted earnings per share by approximately $0.03, $0.01 and $0.02 for the fiscal years ended 1998, 1999, and 2000, respectively. The reduction to FY 2004 earnings, when released, will be $.03 per share. Kohl’s lease accounting errors centered on the mismatching of leasehold improvement lives with the rental expense.

Finally (for now), Gymboree announced their intentions to restate their lease accounting for 2004; no numbers yet, but it sounded like the source of their woes was improper treatment of landlord construction allowances and rent holidays.

There’s a wee bit of petulance and misinformation in Gymboree’s press release: “… the SEC provided clarification on long-standing, generally accepted accounting principles related to operating leases.” It’s like saying the SEC is changing the rules suddenly on what everyone had believed was the way the game was played. The trouble is, the SEC is enforcing rules that were around before the companies went off the rails. What was “long-standing, generally accepted accounting principles” was really a mass delusion that the wrong accounting was right.