Valeant: An Accounting Pioneer, Too [WSJ]
Yesterday I wrote about how general, everyday fretting over non-GAAP measures is mostly overblown. That is, so many companies do it that we kinda should just accept it as a part of life and move on. I still stand by that contention, but that doesn't mean we shouldn't pay attention to incredible reporting like this from Michael Rapoport and Liz Hoffman who dismantle Valeant's non-GAAP reporting. They focus on three main areas: custom-made earnings, R&D and segment reporting and man oh man is it good reading, especially the custom-made earnings:
Data show an unusually wide gap between Valeant’s GAAP earnings and its cash-earnings figure. Under GAAP, the company posted $70 million in net income for the first nine months of 2015. Under its own cash-earnings measure, the company reported a profit of $2.7 billion. The cash-earnings measure strips out a host of costs, including acquisition expenses, inventory adjustments and stock payments to employees.
Strip-outs accounted for 97% of Valeant’s adjusted income over the first three quarters of this year, compared with 35% for the median of Valeant’s self-selected peer group, a Wall Street Journal review of filings shows. Only at Allergan PLC, another highly acquisitive company, did adjustments account for a bigger chunk of adjusted financial metrics. Allergan declined to comment.
Bonuses for [Valeant CEO Michael] Pearson and other top Valeant executives are tied to the cash-earnings figure, filings show.
Penn State accounting professor Ed Ketz says the metric is a "ridiculous number" since that Valeant's business model involves acquiring other companies. Another guy says the company is "using non-GAAP numbers that were never intended for companies like Valeant," which is exactly the sort of non-GAAP reporting people should be worried about.
The Tax Acrobatics in the Dow-DuPont Deal [Reuters Breakingviews]
Although most people have said that the DowPont deal isn't about taxes, that doesn't mean taxes weren't a part of it. The big risk in this deal was that a tax liability for either company's shareholders could occur, "When half or more of a unit’s shares change hands in association with a spinoff." However!
The key is that investors who hold shares of both companies before the merger don’t count toward the 50 percent threshold. With the merged business divided equally between the two groups of owners, all that’s needed is overlapping shareholder registers — and the same five institutions, led by Vanguard and State Street, appear in both companies’ top 10, according to Thomson Reuters data.
Another tax law miracle!
Why You Should Pay Attention to the Presidential Candidates’ Tax Proposals [TaxVox]
I'm not wholly convinced that anyone should pay attention to any presidential candidates' tax proposal, but Harvey Galper makes a decent case for it:
[C]ampaign tax plans tell us a lot about a candidate’s priorities. Details certainly matter, and we can learn a lot about how well candidates understand tax issues by reading the fine print and listening to their own descriptions of their tax programs. But the real value is in the major thrust of a candidate’s proposal. How would the plan distribute tax burdens across income groups? Would it make the federal government’s deficit better or worse? How might it affect incentives to work, save, and invest? Even without getting into the weeds, reviewing campaign proposals can reveal a lot about the candidates, even if their specific details will never become law.
Fair enough! The Tax Foundation has a handy tool for comparing the candidates' tax reform proposals. That should help you sound way too smart for the next argument you get into with anyone about the race for POTUS.
In other news: