IBM's New Financial Reporting Fails to Satisfy A ll Critics
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by Jill R. Aitoro
March 28, 2002
Earlier this month, IBM stockholders big and small sat at the edge of their
swivel chairs in anticipation of IBM
's 2001 annual report. Big Blue promised to
provide more information about how it arrived at its numbers. But while some
observers say IBM delivered on that promise, others say the factors driving
IBM's public numbers are as elusive as ever.
The 2001 annual report released last week brought with it new and expanded
information in the management discussion and analysis section, as well as in the
financial statements. For starters, a couple of added items make the chore of
wading through the 112-page report somewhat less arduous.
A Road Map discussion gives perspective on the financial section and helps with
navigation, and a Focus Items of 2002 section highlights the year's performance
benchmarks. IBM better illustrates its Global Financing operation in the Debt
and Equity section with expanded discussion and a newly incorporated graph. And
formerly omitted details concerning such things as real estate and accounts
receivable are now in its Notes to Consolidated Financial Statements. "The data
in the annual report doesn't answer all the questions," says Gary Helmig, a
financial analyst at Soundview. "[But] it certainly provides the data so people
can understand it."
But of more interest to analysts and stockholders alike is the expansion of
disclosures included in the Retirement-Related Benefits section and in the
Expense and Other Income section. Specifically, IBM responded to the ruckus
caused by its arguably sneaky -- but entirely legal -- treatment of pension fund
surpluses as income. In an effort to come clean, Big Blue revised the pension
disclosure to include "the combined impact of all retirement-related benefit
plans and to provide a clearer discussion of pension assumptions," an IBM
announcement stated. That meant expanded discussion and a table with historical
actual average rates of return and assumptions about expected return.
"It doesn't answer the concerns raised in the past" regarding pension assets
because IBM still adds pension surplus to its bottom line, Helmig says. "But it
provides the data relevant to the issue. People still want to agitate about
whether or not it's fair to have a company report gains on the pension plan as
income gains, but that is the way companies are supposed to report."
Companies typically take an average of returns on pension plan investments and
predict what will happen going forward based on changes in the previous year,
Helmig says. "This is not something IBM just gooses around with," he says.
"People don't understand there are formulas -- a company can't make stuff up to
force a number."
Still, some folks are perturbed by the lack of explanation for the disappearance
of $17 billion from the pension fund over the course of two years, says Bob
Djurdjevic, president of Annex Research. "The report makes no reference as to
where the money went," he says. "Seventeen billion dollars vanished."
IBM handles the pension fund through a diversified asset management program,
says IBM spokeswoman Carol Makovich. Like millions of investors around the
world, IBM lost money -- including the $17 billion from the pension fund -- on
the international financial market. "The pension asset value still exceeds
future obligation," Makovich says. "Despite the decline, IBM doesn't anticipate
a need to make a contribution to the fund. It's still in good shape."
The 2001 annual report also included separate listings for intellectual property
and custom development income on the statement of earnings. While IBM should get
credit for showcasing just how much money its ingenuity generates, Helmig says
that this separate listing could lead to yet another debacle. "People are
probably worse off knowing the information because IBM used it to manage
earnings results," just as it did with its pension assets, Helmig says. "Being
invisible as to how it flowed quarter to quarter allowed IBM to do that. Now
that people see it visibly, they realize that what they thought was an element
of predictability on IBM's earnings actually can't be predicted at all."
All said, the changes to IBM's financial report amount to no more than a
facelift, Djurdjevic says. "The changes are cosmetic and a means of pulling the
wool over people's eyes." As compared to last year, he says, little of
significance changed in format.
But major change takes time, counters Helmig, particularly for a mammoth company
like IBM. "There's always more to report," he says. As time goes, he expects
that stockholders will get a more detailed look at IBM's finances. For example,
Helmig expects IBM will eventually break out the short-term, project-oriented
orders and the long-term, outsourcing orders from Global Services earnings.
"There will be more that IBM reports as time goes on," he says. "But it's a very
big company, with a huge number of $30 million transactions happening every
quarter. Analyzing every single one would drive anybody nuts."
-- Jill R. Aitoro, Industry Reporter, iSeries Network
Copyright 2002, Penton Technology Media
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