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Markets (Economics)

Tech Industry Profits Face Uncertainty Amidst Changes to Accounting Rules

Strategic Insights

— 1 min read

The technology industry is on the brink of facing a significant hit in 2005 due to changes in US accounting rules that will require companies to deduct the cost of employee stock options. Despite the rearguard fight from Silicon Valley, the standards-setters are unlikely to back down, potentially wiping out a third of the industry's reported profits in 2004. The impact of option expensing has sparked growing nervousness, with analysts at Sanford C. Bernstein warning that companies may resort to creative accounting to minimize the effects.

Key Takeaways:

  • The US accounting rules change will force companies to deduct the cost of employee stock options, potentially wiping out a third of the industry's reported profits in 2004.
  • Companies like those in Silicon Valley are fighting against the changes, but it seems unlikely that the standards-setters will back down.
  • Analysts at Sanford C. Bernstein warn that option expensing could have a significant impact on the industry's profits.
  • The potential for creative accounting is high, with companies using goodwill amortisation and restructuring charges to minimize the effects of option expensing.
  • The GAAP (Generally Accepted Accounting Principles) and pro forma profits may diverge significantly, making it harder to persuade investors to ignore the issue.
  • Tech companies may try to sweep option costs under the carpet by using accounting loopholes.

Statistics:

  • 1/3 of the industry's reported profits could be wiped out by option expensing in 2004 (according to analysts at Sanford C. Bernstein).
  • The impact of option expensing will be one of the biggest wild cards for tech stocks in 2005.
  • Share prices have not budged so far, possibly indicating that the stock market is efficient or that investors are ignoring the reported option costs.

Sources:

  • Analysts at Sanford C. Bernstein, unnamed
  • US accounting regulators, unnamed
  • "The rearguard fight from Silicon Valley and the likely dent to tech industry profits" by The Economist, exact date and publication not specified.

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