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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Investors overlooking red flags

Ellen Simon Associated Press

NEW YORK – Double-digit earnings growth over the past 14 quarters has prompted some investors to ignore the main lesson of the go-go years, which is that the nitty-gritty details of corporate finance are still the main story.

At some companies, one-time charges have become a way of life. By treating the charges as extraordinary events, the company can say its earnings would be ever-so-much stronger without them. But, considering that the charges seem unrelenting, that argument looks wobbly.

As for pension accounting, under current rules, a company can legally book a pension credit, even if its pension fund is losing money.

Under a process called “smoothing,” the company can set an assumed return for its pension fund. Across the S&P 500, that assumed return is 8.22 percent – and it’s the rare fund manager who is getting the assumed return.

But, thanks to smoothing, a company doesn’t actually have to see that return to act as if it did. It can add its expected return right into its net earnings.

Finally, “most companies will be required to expense employee stock options beginning in 2006, but earnings guidance and analyst estimates for many companies have yet to reflect this cost,” wrote analyst David Zion.