Stock Repurchases And EPS; Latest From FASB, PCAOB

In recent weeks, several prominent companies have announced or engaged in stock repurchase plans, including PG&E, Gap, Comcast, IAC/InterActiveCorp, and others. Stock repurchases can raise "earnings per share" by reducing the number of shares outstanding.

But experts note that the move can also produce more stable EPS figures for companies that are facing significant hits to earnings when stock options expensing becomes mandatory in 2005.

Swieringa

Companies repurchase stock for a number of reasons.

It’s become increasingly common in recent years as cash-flush companies return cash to investors in a one-time event, without creating the future payout expectations often associated with dividends, said Robert Swieringa, professor of accounting at the University of Illinois and a former member of the Financial Accounting Standards Board.

But an additional upside for companies facing stock option expensing rules is that a repurchase can hold the EPS stable as well. That's because, while expensing options may lower earnings, a repurchase lowers the number of shares outstanding. Depending on the numbers involved, the result may be a wash on EPS.

Dan Noll, director of accounting for the American Institute of Certified Public Accountants, helps with the math:

If a company has 2,000 shares outstanding and net income of $500, its EPS is $500 divided by 2,000 shares, or 0.25. If the same company expenses $250 worth of stock for net income of $250, the EPS drops to 0.125. If the company then buys back 1,000 shares, the EPS calculation is $250 divided by 1,000 shares outstanding, for a newfound EPS of 0.25.

“Just like magic,” he said.

According to experts, watch for many more companies to announce stock repurchase plans in coming months.

FASB Considers Impact Of Tax Act On Accounting Standards

At its next meeting on Wednesday, Nov. 10, the Financial Accounting Standards Board will discuss whether it should issue any staff positions in relation to the newest tax law, the American Jobs Creation Act of 2004, which was signed into effect Oct. 22.

The board will examine whether the tax law relates in any way to financial standards regarding accounting for income taxes. Of specific interest to the Board are the tax benefits that the new law provided to U.S.-based manufacturers and the one-time tax benefit provided when companies “repatriate,” or return to their U.S. books, earnings from abroad.

FASB and the International Accounting Standards Board both have been reviewing how companies should account for the prospective tax liability associated with foreign-invested earnings. The IASB agreed recently it will make its rules consistent with U.S. Generally Accepted Accounting Principles, which do not require companies to recognize a future liability if earnings are regarded as permanently or indefinitely invested abroad. Both boards plan to revisit the issue in a future project, however.

At the same Nov. 10 meeting, FASB also plans to revisit its project on fair value to examine and address issues raised in comment letters. The Board is attempting to create guidance on how to measure fair value, to help make it more relevant for users of financial statements and to answer concerns about how it can be applied in the context of GAAP.

The latest update from FASB, as well as recent coverage on the AJCA, can be found in the box above, right.

PCAOB Assembles Advisory Group Meeting To Map Out Agenda

The Public Company Accounting Oversight Board is calling on its Standing Advisory Group to help set the standard-setting agenda into 2005.

The Board, which oversees auditors of public companies to protect investor interests, has asked the advisory group to convene Nov. 17-18. The Board’s advisory group is a 30-member panel representing expertise in accounting, auditing, corporate finance, corporate governance and investing in public companies. According to the PCAOB's latest update, the advisory group includes executives like Intel Controller James Campbell, Eli Lilly Chief Accounting Officer Arnie Hanish, GE Operating Controller John Morrissey, Pfizer CFO David Shedlarz, and several other auditors, academics, regulators and experts.

The advisory group will discuss potential future auditing and related professional practice standards and help establish PCAOB’s standards-setting priorities for the coming year. Details and related documents are available from the box at right.