Starbucks Lower Earnings Per Share (EPS)
1. the increase in the total revenue by 20.7 per cent
2. the lower effective tax rate (from 38.2 to 33.2 per cent)
The earnings per share is derived by dividing the Net income after tax by the number of outstanding shares of stock.
Thus, when lower net income is posted without a substantial decrease in the number of outstanding shares of stock, the Earnings Per Share is likewise reduced.
In the case of Starbucks, the lower net income did not result due to decline in total revenues. On the contrary, there was an increase by 20.7 per cent compared to last year's figures.
The lower earnings per share was attributed to compliance to FIN 47 which took effect on December 31, 2005. FIN 47 is accounting for conditional asset retirement obligations. Without this accounting requirement, the Earnings Per Share is pegged at 17 cents.
Conditional asset retirement obligations refer to the liabilities that should be recognized in the course of retiring assets that were acquired, developed or constructed. The liabilities are legal obligations because the entity has no choice but to settle the obligation that arose from enacted laws, ordinances, statutes and oral or written contracts. A good example of this is the law about asbestos which requires entities to remove or retire assets that are asbestos-laden.
Before December 31, 2005, there were diverse practices in treating this retirement activity. One of these practices is to take up the liability before it is settled.
The FIN 47 requires the business entities to recognize the liability when the fair value of the liability can be estimated.
But why does the liability decrease the net income? Liabilities are incurred either because of assets acquisition, purchase of goods and services on account and or loans acquisition. The examples have no impact on expense accounts not until the assets are depreciated and the goods are disposed. The conditional obligation is a cost on the part of the business entity to be settled to certain parties at the time the assets are retired.
Another cause of the decline in the net income is the expensing of stock compensation. Stock Compensation includes stock options. Lately, several firms were found by the SEC to be backdating their stock options to benefit the stockholders receiving the stocks. In one corporation, it was found to have been charged to reserve instead of charging it to expense resulting to overstatement of net income.
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posted by cathy at 11:10 PM
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