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Underpants Gnome Accounting of the Day: NuVasive Inc.

Today in accounting-sleight-of-hand news, medical device maker NuVasive Inc. announced that its first quarter profits doubled thanks largely to an accounting policy change:

The company said its profit more than doubled to $2.4 million, or 6 cents per share, from $1.1 million, or 3 cents per share. Excluding one-time items like non-cash stock-based compensation expenses, amortization costs, and intellectual property litigation charges, NuVasive said it earned 24 cents per share. The accounting change added 2 cents per share to both measures of profit. Revenue increased 14 percent, to $124.5 million from $109.1 million.

What exactly was this accounting rule switcheroo? A change in the way it “accounts for the value of loaned instruments” that will be paying off in spades for the rest of this year and into the future!

NuVasive said it changed the way it accounts for the value of loaned instrument sets that went into service before Jan. 1. The change is expected to add 8 cents per share to its annual profit. It also said lower tax rates will add 4 cents per share to its annual profit, and greater-than-expected revenue will contribute a penny per share.

The company said it now expects an adjusted profit of $1.20 to $1.23 per share in 2011, with $530 million to $540 million in revenue. Previously NuVasive called for a profit of $1.07 to $1.10 per share and $525 million to $535 million in revenue.

Accounting change lifts NuVasive 1Q profit [AP]
Underpants Gnome Accounting of the Day: CapitaLand Ltd.

Underpants Gnome Accounting of the Day: CapitaLand Ltd.

Sometimes when your profits need a little boost, the best thing to do is change an accounting policy, amiright?

CapitaLand Ltd., a property developer in Singapore has pulled the double-entry sleight of hand to get a big boost in their first quarter profits:

The company […] said net profit for the three months ended March 31 was 101.5 million Singapore dollars (US$82.1 million), up from a restated S$29.8 million a year earlier, and was “underpinned by higher development profits and portfolio gain.” The company’s year-earlier net profit before the revision was S$115.4 million.

Okay, “higher development profits and portfolio gain” sounds a little vague so let’s see what else is helping these numbers:

The large increase also reflects a change in comparable figures for the year earlier due to an accounting policy change at the start of this year.

The new policy means overseas projects and local projects on a deferred payment scheme have to be fully completed before they are recognized.

This will result in “income recognition that is lumpy and back-ended, thus creating more volatility in profit recognition even though the underlying projects’ cashflows have not changed,” CapitaLand said in a statement.

Investors will likely view the results with caution as a result, analysts say.

“As CapitaLand has mentioned, this new policy gives rise to lumpy earnings that are not very meaningful, especially since over 50% of CapitaLand’s earnings are from overseas,” CIMB analyst Donald Chua said, adding other developers with large overseas market exposure will also be affected.

CapitaLand Net Surges on Accounting Change [WSJ]

One More Voice For Ending U.S. GAAP

It’s been said before so the argument that GAAP is bulky and pointless is really nothing new but in a WSJ op-ed this morning, guest writer Mike Michalowicz insists that GAAP is wrong… for profits, that is.

The GAAP actually directs us to spend first, then pay ourselves, and call the leftovers profit. How are you going to grow a successful business and accumulate wealth using that method? Generate more revenue, you say? Well, sure. Except that you’re going to spend it. So you’re right back where you started—working with the leftovers, if you have any.

I propose a new type of accounting: Profit First Accounting (PFA). The difference between GAAP and PFA is simple: Deduct profit first, from the top down. On a PFA income statement, the first line item is revenue, followed by a profit deduction, then your salary, followed by cost of goods and all other expenses.

Hey, guess what? We already have an alternative accounting system lurking in the wings. Allegedly IFRS will help companies that spend quite a bit on R&D buff up equity as R&D costs are considered assets, isn’t that an improvement over GAAP? IFRS also allows for financial statements to come together in whatever order, however those preparing the statements feel is most relevant to the entity’s economic picture. So what’s to stop them from slapping them together as the author suggests above?

GAAP is not meant to transform internal accounting departments into psychics and I doubt any U.S. companies use it because they feel it helps construct a useful picture of the entity that can be used for goal-setting and forecasting. That’s just not what it’s there to do and I think we can all agree on that.

Oh and by the way, Mike is the author of The Toilet Paper Entrepreneur, which he will be able to follow up with a sequel if we actually take his suggestion and try this Profit First idea. Yes business is all about profit but I think Mike is forgetting that companies file for the good of investors and regulatory bodies breathing down their necks, not necessarily for their own good or for the good of their almighty profits.

It’s Not Impossible To Make Money on Small Audits

The following post is republished from AccountingWEB, a source of accounting news, information, tips, tools, resources and insight–everything you need to help you prosper and enjoy the accounting profession.

Most small firm practitioners can offer lots of answers as to why it is difficult to profit from small audits. Ever-changing professional standards, increasing quality control requirements, using standard “one-size-fits-all” audit documentation and increasing legal liability are a few of the common answers. The problem is that knowing the answer doesn’t solve the problem!

Maybe we need to change the question to solve the problem. A better question may be, “What changes do we need to make in our audit practices to profit from small audits?” Answer this question correctly and we solve a major problem!

Here are changes in audit practices some smaller CPA firms are considering:

• Developing the technical and leadership abilities of engagement leaders is at the top of the list. Recognizing this takes time and money, small firms are making increasing investments in training and consultations to expand the knowledge resource base of their leaders and the firm. Making sure leaders are technically current in all professional standards affecting auditing engagements is a first step. Teaching leaders to pass their knowledge on to all assistants is the second.

• Designing firm policies and procedures within existing professional standards that provide reasonable assurance audited financial statements are not misstated. While we’d like to achieve absolute assurance the financial statements are not misstated, we have to assume some risk they may contain misstatements. In short, we have to give up some of our traditional approaches to audits in exchange for uniquely tailored audit strategies designed to gather the minimum amount of evidence necessary to verify relevant financial statement assertions. Gathering the minimum required evidence in the most efficient ways results in maximum profits!

• Creating proprietary audit documentation packages by eliminating or modifying documentation purchased from major publishers. Extensive audit documentation is not a substitute for the knowledge of staff personnel! We cannot afford to complete practice aids and other documentation containing everything we need to know on every engagement, particularly on small audits. Many small firms are realizing they can modify their quality control documents to permit engagement leaders to tailor documentation on every audit. Using major publisher’s practice aids for reference is the most any firm should do on small audits. When we know the requirements of professional standards, it isn’t difficult to tailor or create basic practice aids to guide small audit performance.

These are just a few of the small audit changes CPA firms must consider to increase profits. I’ve designed my Small Audit Series of live and on-demand webcasts to provide holistic solutions that will enable practitioners to make more money on small audits. You can obtain over 300 pages of instructional text materials and illustrative practice aids designed for CPE credit on the left sidebar of our website, Don’t be left behind! Small audits can generate BIG profits!