Accounting rule mars EDS results

Electronic Data Systems' earnings for the first half of its 2003 financial year are being negatively affected by its retroactive...

Electronic Data Systems' earnings for the first half of its 2003 financial year are being negatively affected by its retroactive adoption of an accounting rule that changes how the company recognises some revenue.

First-quarter revenue, previously reported as $5.37bn, has been recalculated down to $5.26bn, while second-quarter revenue has dropped from $5.52bn to $5.30bn. EDS' first quarter ended 31 March and its second quarter ended 30 June.

EDS postponed its third-quarter earnings report while it sought clarification on this accounting rule and completed a review of its impact. It will report third-quarter earnings this week.

The rule in question is the Emerging Issues Task Force Issue 00-21, or EITF 00-21, which calls for certain type of revenue in long-term contracts to be recognised when it is billed. It replaces the "percentage of completion" (POC) accounting, which lets companies recognise revenue based on the percentage of the contract's work completed.

The result is that EDS will now recognise less revenue and income in the early stages of contracts, and higher revenue and income in the latter stages of contracts.

EDS is adopting the rule back  to 1 January 2003, resulting in a one-time cumulative pre-tax adjustment of $2.24bn, which has an after-tax earnings impact of $1.42bn.

EDS recognised about 35% of its annual revenue using POC accounting. That has now dropped to 5% with the adoption of the new rule.

EITF 00-21 was finalised in May by the Emerging Issues Task Force of the Financial Accounting Standards Board, the private sector organisation which establishes financial accounting and reporting standards.

Companies have the option to apply the rule only to contracts signed after 30 June 2003, without having to issue a one-time adjustment, but EDS decided to apply the rule retroactively to establish consistency in its accounting of existing and future contracts.

EDS also recalculated its 2002 and 2001 earnings as if the accounting rule had been applied to them, so that meaningful comparisons can be made.

Juan Carlos Perez writes for IDG News Service

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