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Accounting News Roundup: Apple’s Deferred Revenues; Tesla’s Tax Credits; PwC and Exxon | 10.27.16

Earnings and accounting

Apple sells lots of cool things which results in the company turning a large profit, but even Apple isn't immune from an occasional arbitrary accounting change to boost the bottom line: 

Profits, though down from 2015, were actually bolstered by a decrease in deferred revenue compared to a year ago. That’s because the decrease in deferred revenues increased operating margins and hence profits for 2016.

In its earnings call late Tuesday, UBS analyst Steven Milunovich asked Apple finance chief Luca Maestri about its deferred revenue, and why it was sharply lower compared to a year ago.

Mr. Maestri said the lower deferred  revenue figure was due to an accounting change it made roughly a year ago largely due to the value it assigns to its periodic software upgrades. Because a year had passed, the change will not affect comparable results in the future. 

Of course if the company knew it was going to have thinner margins in 2016 last year, the timing of the accounting change makes even more sense. As you auditors like to say, "Appears reasonable."

Elsewhere in corporate earnings, Tesla surprised everyone with a profit, however, the company got an unusual boost from something other than its cars:

The quarter’s profit—a record and only the second time ever—was driven higher by improved sales of the Model S sedan and Model X sport-utility vehicle, a reduction in spending and a boost from selling pollution tax credits to other auto makers. Gross profit from the credits soared to $139 million from $39 million a year ago—above UBS analyst Colin Langan’s estimate for $30 million during the quarter.

Maybe Elon Musk missed his calling, financial engineering won't eliminate gas-fueled cars or get us to Mars, but it's still an impressive talent.

Clients, amirite?!

As part of its fraud investigation into ExxonMobil's climate science, New York Attorney General Eric Schneiderman subpoenaed "records related to Exxon's assets, reserves and operations from the energy company" from PwC.  Both Exxon and PwC resisted and well, a judge told them to knock it off:

In his decision Tuesday, [Judge] Ostrager rejected Exxon's contention that the Texas law, not New York law, should govern the disclosure of the PWC materials and that a limited accountant-client privilege exists under Texas statue and court precedent that would shield the documents.

Ostrager decided that New York law governs Schneiderman's request, noting that "New York does not recognize an accountant-client privilege." He cited a number of cases, including People v. Greenberg, 50 AD3d 195 (1st Dept. 2008), as setting "the law of the place where the evidence in question will be introduced at trial or the location of the discovery proceeding" as dictating that New York privilege laws take precedent.

Almost as an aside, Ostrager said that even if he determined that Texas law should take precedent, his reading of Texas Occupations Code §901.457 does not support Exxon's contention that Texas' accountant-client privilege would block Schneiderman's subpoena.

PwC's in a tight spot here. I mean, Exxon is one of their crown jewel clients; they have to go along with this. On the other hand, this is ExxonMobil. This company would drill through Thomas Jefferson's grave if they thought there was oil under it. They'll deny climate change until our planet turns to hell on earth and PwC will have sit there with them, smiling, saying, "This is fine."   

Has Donald Trump released his tax returns?

Nope! But you'll enjoy this Ben Walsh report on Trump's tactics for avoiding state and local taxes, which includes this beauty: 

Trump also fought the town of East Fishkill, New York, to retroactively lower the value of his Trump National Hudson Valley golf course from $6 million to $4.6 million for the 2015 tax year. The town settled the case in April 2016, agreeing to reduce the value to Trump’s proposed $4.6 million. Meanwhile, Trump’s 2015 disclosure to the FEC said the property was worth somewhere between $5 million and $25 million.

As part of the settlement, the town, county and local school district had to pay for an audit to determine if Trump’s company had paid any excess taxes in the previous year based on the new, lower, value. In the end, Trump managed to wring out refunds from the local governments: $31,367.06 from the Wappingers Central School District, $5,045.38 from Dutchess County, $4,141.25 from the town of East Fishkill, $1,066.06 from the East Fishkill Fire Department, and $306.99 from the public library. 

Previously, on Going Concern…

I mentioned that the PCAOB is skeptical of the motives behind audit firms' new technology. And in Open Items, someone wonders if it's time to switch jobs.

In other news:

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