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IBM's New Financial Reporting Fails to Satisfy A ll Critics

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  • Janet_Krueger@common.org
    http://www.iseriesnetwork.com/nwn/story.cfm?ID=14140 by Jill R. Aitoro Industry Reporter March 28, 2002 Earlier this month, IBM stockholders big and small sat
    Message 1 of 1 , Mar 28, 2002
      by Jill R. Aitoro
      Industry Reporter

      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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