Hi All,
I'm working on this case study : Facebook Earnings Enjoya Nearly $1Billion Tax Windfall From Accounting Change
Facebook Inc.’s 2016 earnings got a boost of more than $900million from an accounting change—and the same change could helplift earnings at other technology companies. Facebook saidWednesday after the market closed that its full-year earningsreflected a $934 million reduction in its income-tax provision,including $214 million in the fourth quarter, from a new ruleaffecting the accounting for stock payments to employees. The taxreductions contributed to big increases in the company’sfourth-quarter and 2016 net income. The change, whichaccounting-rules makers enacted last March, is expected to increasethe earnings of companies like Facebook that are heavy users ofemployee stock compensation and have seen their stock prices rise.Companies like Microsoft Corp. and Alphabet Inc. have alreadyadopted the change and saw increases in their earnings, and thesame could happen at Amazon.com Inc., Apple Inc. and others whenall companies are required to adopt the change this year.
“It’s a windfall,” said Jack Ciesielski, president ofaccounting-research firm R.G. Associates, who issued a report inOctober on the effects of the change.
David Wehner, Facebook’s chief financial officer, said on thecompany’s fourth-quarter conference call that the move was “purelyan accounting convention change and doesn't change the cash taxeswe pay.” A Facebook spokesman declined to comment further.
The Financial Accounting Standards Board, which sets U.S.accounting rules, approved the change in an attempt to simplifycompanies’ accounting for employee stock payments. The accountingis changing in several different ways,
but most of the effect on earnings has to do with the taxbenefits that companies get when their employees exercise the stockoptions they have been granted.
That is a compensation cost to the company, and it istax-deductible. When options are exercised, it is typically afterthe company’s stock price has risen, making them more valuable, andso the company recognizes “excess tax benefits”—the deductions overand above those it expected to realize when the options were firstgranted.
Under the old rules, those excess tax benefits go into thecompany’s shareholder equity. But under the FASB change, they willbe recognized on the income statement immediately—and that reducesthe company’s provision for taxes, boosting net income.
The opposite could also happen—a “tax deficiency” that wouldlower earnings, if options expire unexercised—though almost all ofthe companies adopting the change so far have reportedbenefits.
The change helped Facebook’s fourth-quarter net income soar to$3.57 billion, up from $1.56 billion a year ago. Full-year earningswere $10.22 billion, up from $3.69 billion.
In addition, Facebook’s retained earnings—the total of acompany’s past profits and losses, minus any dividends it paysout—got a boost of $1.67 billion as of the beginning of 2016.
The FASB change also boosts Facebook’s operating cash flow,because the excess tax benefits are now classified as cash flowfrom operations instead of from financing. The company’s total cashflow remains the same.
Companies are required to adopt the change effective this year.Hundreds of companies like Facebook have chosen to adopt it early,with 2016 earnings, although Mr. Ciesielski said they haven’talways disclosed the change well.
Microsoft adopted the change effective last March, and said inits annual report that its excess tax benefits lowered its taxprovision by $402 million for the fiscal year that ended in June.Alphabet said it recorded excess tax benefits of $211 million forthe first quarter of 2016, when it adopted the change. Microsoftdeclined to comment; Alphabet couldn’t be reached for comment.
Amazon has yet to adopt the rule change, but the company said inits most recent quarterly report that it expects the change to have“a material impact” on its financial statements. Amazon had $829million in excess tax benefits in 2016, according to its cash flowstatement. The company could not immediately be reached for furthercomment.
Apple will adopt the change in the quarter that ends in December2017, the company said in its quarterly report Wednesday. Apple had$178 million in excess tax benefits in its fiscal first quarterthat ended in December 2016, and $407 million in the fiscal yearthat ended in September, according to its cash flow statements. AnApple spokeswoman could not immediately be reached for comment.
I need help with this section of my paper:
* Implications for future of industry andauditors.
*What to study in the future (future research based onoutcome)
