Amortization Schedule With Balloon Payment

When the Securities and Exchange Commission moved to crack down on amortization schedule with balloon payment aggressive in-process research-and-development charges, it intended to make corporate accounting more transparent. Little did it know that, at least initially, the fruit of its actions would be more confusion.

As Network Associates' earnings recently illustrated, Wall Street hasn't fully decided how to read SEC-guided restatements. The security software maker posted a fourth-quarter profit of 50 cents a share excluding amortization expenses, 40 cents including them. Adding to the confusion, the First Call consensus of analysts, which called for a 46-cent profit, was unclear as to whether forecasts included the amortization costs.

Most analysts and investors, seeking to determine the health of firms' everyday operations, judge earnings excluding extraordinary items such as acquisition-related charges. Now, restated earnings throw a new wrench into the balance sheet: Should analysts look at earnings before the adjusted amortization, or after? A week into the current earnings season, the confusion over whether to use post amortization or pre amortization earnings has come to the foreground. For example First Call, Wall Street's arbiter of analysts' estimates, is moving to create new forecast tables to accommodate both figures.

"We've never had this before, so we're in the process of setting up two tables -- one excluding amortization and one including amortization," says Greg Dowling, earnings analyst at First Call. When the SEC asks a company to restate in-process R&D charges, it often means regulators think the company took too large a write down. Tech companies in particular have taken large charges in recent years to lessen the long-term burden on earnings of amortizing the costs of their myriad acquisitions. To comply with SEC guidelines for one-time in-process R&D charges, some companies are restating earlier earnings to reflect a smaller in-process charge and bigger amortization expenses.

Last week, chip design software company Cadence Design and Network Associates said they restated previous earnings and took on bigger future amortization charges. Cadence restated 2007 results, cutting in-process R&D charges to $194 million from $339 million, and posted revised figures for the year. The company earned $1.20 per share before amortization, up from $1.18 as a result of lower one-time charges, and 14 cents per share including all charges and amortization. A Cadence spokesman says the company will continue to post both figures in the future, but he encourages analysts to focus on the pre amortization figure, which he says provides a better picture of the company's cash flow.