As if investors do not have enough to worry about, along comes another problem. There is a growing movement to allow, perhaps eventually require, American companies and foreign companies trading in ADRs, to keep their books according to International Financial Reporting Standards, IFRS, instead of the venerable GAAP method we all know and love.

The move to IFRS makes a fair amount of sense given the global nature of capital markets. American investors will simply have to learn to read a balance sheet constructed using different rules. The problem looming on the horizon is, who will construct the IFRS balance sheets?

Continue reading GAAP vs. IFRS: New accounting rules could mean trouble

GAAP vs. IFRS: New accounting rules could mean trouble originally appeared on BloggingStocks on Thu, 26 Jun 2008 16:30:00 EST. Please see our terms for use of feeds.

Anti-naked short selling conspiracy theorists receive a boost when Overstock.com (NASDAQ: OSTK) announced that the SEC had closed its formal investigation of the company without recommending any enforcement action.

In a familiarly self-congratulatory press release, CEO Patrick Byrne opined that "I believe that this inquiry was initiated, and persisted, because of false allegations made by a cohesive group of short sellers and a few financial journalists who dutifully serve them. In this case, I believe these folks fomented the SEC investigation against Overstock.com then tried to claim that the existence of an SEC investigation was evidence of wrong doing. We knew that was false."

But who cares what the SEC thinks about Overstock! Remember, this is the same agency that signed off on Enron's perversion of mark-to-market accounting. Instead, let's look at what Patrick Byrne said in 2004, as recently noted by Tracy Coenen: "Well, first of all, I'm all about GAAP. I have been so critical of the companies that do -- I don't believe in one-time charges; I don't believe in EBITDA. If somebody talks EBITDA, put your hand on your wallet; they're a crook."

Overstock's latest earnings release contains the word EBITDA seven times. So regardless of what the SEC thinks, Patrick Byrne considers himself a crook.

Who cares what the SEC says about Overstock? originally appeared on BloggingStocks on Sat, 07 Jun 2008 16:40:00 EST. Please see our terms for use of feeds.

The CEO of a small-cap research company called RedChip has started his own blog about small-cap stocks. While I'm not very familiar with the company or his background, his initial post is interesting in its discussion on non-GAAP financial metrics, which rose to prominence during the Internet bubble.

For the uninitiated, non-GAAP metrics are any of the ways of reporting earnings that a company might use in addition to their regular GAAP (generally accepted accounting principles) earnings. EBITDA (earnings before interest, taxes, depreciation, and amortization) is probably the most common non-GAAP measure of earnings. Non-GAAP earnings allow room for all kinds of voodoo. For instance, a company could borrow money at 15% interest, and earn a 5% return on invested capital. While paying 15% to earn 5% is bad business, it is profitable based on EBITDA, because EBITDA is calculated without taking into account interest charges.

Dave Gentry goes on to retell an old joke about accounting attributed to Abraham Lincoln: How many legs does a dog have if you call the tail a leg? Answer: four, because a tail is not a leg. Companies can report earnings in all kinds of ways but, ultimately, it's the real state of the business that matters.

I don't know whether RedChip's future blog posts will be any good. But if they're as interesting as this one, it's worth bookmarking.

Bookmark this blog: Redchip.com originally appeared on BloggingStocks on Sat, 03 Mar 2007 12:10:00 EST. Please see our terms for use of feeds.