Facebook Enjoys a Tax Windfall From Accounting Change -- Update
February 02 2017 - 3:59PM
Dow Jones News
By Michael Rapoport
Facebook Inc.'s 2016 earnings got a boost of more than $900
million from an accounting change -- and the same change could help
lift earnings at other technology companies.
Facebook said Wednesday after the market closed that its
full-year earnings reflected a $934 million reduction in its
income-tax provision, including $214 million in the fourth quarter,
from a new rule affecting the accounting for stock payments to
employees. The tax reductions contributed to big increases in the
company's fourth-quarter and 2016 net income.
The change, which accounting-rules makers enacted last March, is
expected to increase the earnings of companies like Facebook that
are heavy users of employee stock compensation and have seen their
stock prices rise. Companies like Microsoft Corp. and Alphabet Inc.
have already adopted the change and saw increases in their
earnings, and the same could happen at Amazon.com Inc., Apple Inc.
and others when all companies are required to adopt the change this
year.
"It's a windfall," said Jack Ciesielski, president of
accounting-research firm R.G. Associates, who issued a report in
October on the effects of the change.
David Wehner, Facebook's chief financial officer, said on the
company's fourth-quarter conference call that the move was "purely
an accounting convention change and doesn't change the cash taxes
we 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 simplify
companies' accounting for employee stock payments. The accounting
is changing in several different ways, but most of the effect on
earnings has to do with the tax benefits that companies get when
their employees exercise the stock options they have been
granted.
That is a compensation cost to the company, and it is
tax-deductible. When options are exercised, it is typically after
the company's stock price has risen, making them more valuable, and
so the company recognizes "excess tax benefits" -- the deductions
over and above those it expected to realize when the options were
first granted.
Under the old rules, those excess tax benefits go into the
company's shareholder equity. But under the FASB change, they will
be recognized on the income statement immediately -- and that
reduces the company's provision for taxes, boosting net income.
The opposite could also happen -- a "tax deficiency" that would
lower earnings, if options expire unexercised -- though almost all
of the companies adopting the change so far have reported
benefits.
The change helped Facebook's fourth-quarter net income soar to
$3.57 billion, up from $1.56 billion a year ago. Full-year earnings
were $10.22 billion, up from $3.69 billion.
In addition, Facebook's retained earnings -- the total of a
company's past profits and losses, minus any dividends it pays out
-- 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 flow
from operations instead of from financing. The company's total cash
flow 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't
always disclosed the change well.
Microsoft adopted the change effective last March, and said in
its annual report that its excess tax benefits lowered its tax
provision by $402 million for the fiscal year that ended in June.
Alphabet said it recorded excess tax benefits of $211 million for
the first quarter of 2016, when it adopted the change. Microsoft
declined to comment; Alphabet couldn't be reached for comment.
Amazon has yet to adopt the rule change, but the company said in
its most recent quarterly report that it expects the change to have
"a material impact" on its financial statements. Amazon had $493
million in excess tax benefits in the first nine months of 2016,
according to its cash flow statement. The company could not
immediately be reached for further comment.
Apple will adopt the change in the quarter that ends in December
2017, the company said in its quarterly report Wednesday. Apple had
$178 million in excess tax benefits in its fiscal first quarter
that ended in December 2016, and $407 million in the fiscal year
that ended in September, according to its cash flow statements. An
Apple spokeswoman could not immediately be reached for comment.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
(END) Dow Jones Newswires
February 02, 2017 15:44 ET (20:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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