New FASB Rule Aims to Clarify ‘Net Income’

May 1, 2009 · No Comments

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(WSJ, May 1, 2009)

By Michael Rapoport

U.S. accounting-standard setters threw some observers of corporate profits a curveball this earnings season by fiddling with what companies mean by “net income.”

The decision to replace the time-honored bottom line — the most basic measurement of corporate performance — with formulations like “net income attributable to the company” has changed the familiar look of earnings statements at a time when corporate profits are being closely scrutinized for signs of the economy’s health.

The move by the Financial Accounting Standards Board is aimed at giving investors more detail about companies’ investments. But E.J. Atorino, a media and publishing analyst for Benchmark Research, said the improvement is marginal at best.

“I think these accountants have gone crazy,” he said. “They’re just making life more complicated.”

A FASB spokesman declined to comment. The changes are a result of Financial Accounting Standard 160, which took effect with the first quarter for most companies. It requires companies to disclose income related to so-called noncontrolling interests — investments in other firms in which a company owns only a minority stake. That would make such income easier to see and bring U.S. rules more into line with international accounting standards.

So far so good. But the change also requires companies to report net income before and after income from noncontrolling interests. As a result, “net income” is no longer the bottom line.

What used to be simply called “net income” at a company holding minority stakes is now called “net income attributable to” the parent company — even though it is the same figure, calculated the same way. The presentation and terminology change, but not the numbers themselves.

For instance, McGraw-Hill Cos. on Tuesday reported first-quarter “net income” of $66.0 million. It then deducted $3 million from noncontrolling interests and reported “net income attributable to The McGraw-Hill Companies, Inc.” of $63 million — compared with $81.1 million a year earlier. That $81.1 million was originally reported last year as simply “net income.”

Colgate-Palmolive Co., seeking to avoid possible confusion when it reported earnings Thursday, took a different tack. It started with “net income including noncontrolling interests,” allowing it to keep “net income” as its bottom line. Colgate spokeswoman Hope Spiller said the company chose the wording for the purpose of “simplicity and consistency.”

When writing about corporate earnings, The Wall Street Journal will focus on “net income attributable” to the company or the equivalent. Earnings per share — the figure closely watched by analysts — are also based on the “attributable” number.

The change has no effect on the bottom-line number, as companies have always excluded income from minority stakes. There may be a greater effect on the balance sheet, however, where noncontrolling interests will now figure into calculations of shareholder equity.

Categories: News
Tagged: FASB, Accounting, Net Income, Rules

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