Tuesday, January 2, 2018

Looking for one more reason to stall going back to work, now that the holidays are behind us? Calcbench is happy to help.

We spent last week pondering some of the big financial reporting issues of 2017, and what might emerge as subject of discussion in 2018. So if you want to kill a few more minutes before opening your To Do list on Outlook, read on…

The new revenue recognition standard. We devoted plenty of attention in 2017 to the new revenue standard, which went into effect last month. That means that as companies file their annual reports this year, investors and financial analysts will see how the timing and nature of companies’ revenue streams might change.

Some companies, like Microsoft, already adopted and did see material changes. We also studied the software sector in-depth last fall, and that sector seems particularly likely to see turbulence this year.

In 2018, companies will still need to disclose lots about how the new standard might affect all the other parts of their business: volatility of revenue streams, costs related to sales commissions, and the like. It will be a learning curve that Calcbench follows closely.

The new leasing standard. Next up for Corporate America will be the new accounting standard for leasing costs, which goes into effect this coming December. The standard will require companies to report the costs of operating leases on the balance sheet; until now, those costs have been buried in the footnotes.

The challenge is that for many companies, those costs buried in the footnotes have been quite large. In some cases, those off-balance sheet leasing costs are several times larger than all other liabilities already on the balance sheet. Dropping that leasing liabilities bomb without advance preparation could cause all sorts of headache, from investor dismay to violating debt covenants.

Calcbench has done some early work to track those operating lease costs and measure their potential effect on companies’ balance sheets. We’ll do more in 2018.

Share repurchase programs. The tax reform law enacted last month cuts the statutory corporate tax rate from 35 to 21 percent. The law’s supporters say companies will use all that extra cash to raise wages, increase hiring, and invest in new products or services. Its detractors say companies will use that extra cash to repurchase shares and enrich large shareholders.

Which one side is right? We don’t know yet. But Calcbench can, and regularly does, track corporate spending on share repurchase programs. In 2017 the pace of repurchase spending slowed, because the booming stock market made those shares more expensive. We’ll keep tracking (and reporting) the numbers in 2018, to see whether the extra cash will now make those pricey shares more attractive.

R&D and SG&A spending. Likewise, we also track corporate spending on research and development, as well as “Sales, General, and Administrative” costs. If companies do take their newfound cash supplies and invest them in operations, we’ll see that reflected in higher numbers for these line-items.

The challenge will be whether we can distinguish between “natural” increases in spending on those items, versus additional spending caused by tax reform. For example, SG&A costs have been risings briskly for years, because skilled labor is getting more expensive. It would probably rise again in 2018 regardless of tax reform.

So, how can financial analysts understand what’s really happening with tax reform’s implications? We’re not sure yet, but we have 363 more days to figure it out.

Other tax reform implications. Yep, we’re still on consequences of tax reform. First, as you may have seen last week, some firms (mostly banks so far) have been announcing write-downs on the tax-deferred assets they carry on the books. That’s because those assets were originally recorded when the statutory tax rate was 35 percent. Now at 21 percent, those assets are worth less.

Second, companies will also need to decide whether to bring cash parked overseas back to the United States. The tax reform law imposes a one-time tax on repatriated earnings of 15 percent—that is, lower than the 21 percent rate, to entice companies to bring their cash home. Zion Research estimates that the S&P have $2.8 trillion parked overseas, and will incur $235 billion in tax charges this quarter as they repatriate those funds.

The good news is that these charges are a short-term phenomenon. As life under the lower rate continues, banks and other firms will resume making gobs of money.

Non-GAAP metrics. Yes, non-GAAP metrics are still a big deal. Calcbench last did an in-depth report on companies’ use of non-GAAP in 2016, but the Securities and Exchange Commission still keeps one eye on possible abuses of non-GAAP. The regulatory agency for audit firms also said last week that it plans to revisit non-GAAP metrics in 2018, and perhaps give fresh guidance to audit firms about how to handle such numbers.

Those are a few of our big issues as we finally turn off our Out of Office email reply. What’s on your mind? Let us know at info@calcbench.com.

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