Newspaper article THE JOURNAL RECORD

AOL, SEC Tangle with Accounting

Newspaper article THE JOURNAL RECORD

AOL, SEC Tangle with Accounting

Article excerpt

NEW YORK -- Has the Securities and Exchange Commission begun voicing subtle warnings about the unusually high prices of Internet industry stocks?

Of course, the SEC would never tell investors not to pay sky-high prices for the stocks of young, money-losing companies. Nor can it stop companies from buying each other at equally high prices.

But the agency can send some signals through its regulation of how those acquisitions are accounted for on the buyers' financial statements. And at the root of recent fights the agency has picked with companies that try to write off most of the price of their acquisitions up front is a sense that the prices of technology companies just cannot be reconciled with conservative accounting.

The most prominent example is America Online, which was not able to release its quarterly and full-year earnings last week because it is still wrestling with the SEC over the accounting for two recent acquisitions: Netchannel, for which it paid $29 million, and Mirabilis, acquired for $287 million. The issue is how much of the price that the online service paid for the acquisitions can be written off now -- a one-time hit investors tend to dismiss -- vs. how much must be deducted over many quarters, a weight on profit that more investors would be likely to heed.

Accounting rules force companies to add up the apparent value of the assets in companies they acquire -- both tangible things like real estate and intangibles like patent rights. If they paid more for the company than the value of its assets -- and most do -- the excess is classified as good will, which must be charged against earnings over a period of three to 40 years.

Since many companies do not want that continuing drag on profits, they look for ways to reduce good will charges, and technology companies in particular have latched on to an obscure rule that allows them to write off immediately the value of continuing research and development activities in the companies they buy. …

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