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A new accounting change will alter the way some companies present the most basic measurement of their performance - net income - and could make some companies look less leveraged than before.
The change, which takes effect with the first quarter for most companies, affects how companies report "noncontrolling interests" - investments in other firms in which a company owns only a minority stake and doesn't control.
Companies have always taken out income from such investments in calculating their own net income, but before now that hasn't always been obvious - it has been buried within an expense line-item on their earnings statement. The change requires companies to break that out, and report net income before and after income from noncontrolling interests.
As a result, what used to be simply called "net income" at a company holding these interests will now be "net income attributable to" the parent company - even though it's the same figure, calculated the same way. It changes the presentation and terminology used on the earnings statement, but not the numbers.
For instance, McGraw-Hill Cos. (MHP) said Tuesday that it had first-quarter "net income attributable to The McGraw-Hill Companies Inc." of $63 million - after deducting $3 million from noncontrolling interests - compared with $81.1 million a year ago. That $81.1 million was originally reported by McGraw-Hill last year as simply "net income." Per-share earnings figures will be based on the "attributable" number.
The Financial Accounting Standards Board's intent in passing the rule that made the change, known as FAS 160, was to make the treatment of noncontrolling interests more transparent, and to bring it more in line with international accounting rules. But E.J. Atorino, a media and publishing analyst for Benchmark Research, said the new rule doesn't add any information to company disclosures.
"I think these accountants have gone crazy, they're just making life more complicated," he said.
The change may have a greater effect on the balance sheet, where noncontrolling interests will have to be presented as part of the equity calculation at the bottom. Previously, companies had been classifying them as liabilities or under the "mezzanine" section of the balance sheet, between liabilities and equity.
As a result, shareholder equity at some companies may increase, and so measurements of leverage such as the debt-to-equity ratio will decline, said Charles Mulford, a Georgia Institute of Technology accounting professor.
"I think that it makes leverage appear to be lower than it really is," Mulford said. He noted, however, that, even before the new rule, many analysts already did their own leverage calculations to take noncontrolling interests into account.
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