On Re-imagination

From AAO Weblog

Just to clarify a point or two on yesterday’s post about the possible “re-imagination” of UnitedHealth’s (UNH) earnings history between 1994 and 2005…

What happens here could set a precedent for the way the remedies from the other investigations are handled. So, let’s hope that the Office of the Chief Accountant thinks this one through before signing off. There’s an important question to be addressed here, specifically, what’s the right way to handle new accounting treatments that can be handled retrospectively? Are investors better served by “re-imagining” history as if the new accounting treatment is handled all the way back to the beginning of time (like in the fictional environments of James Bond and Batman)? Or are such treatments misleading?

(Of course, little is known to date about the cash effects stemming from tax consequences. They’re far from unimportant – but we’re concerned with how operating performance has been portrayed and will be portrayed.)

When UnitedHealth chose to adopt the modified retrospective method of reporting stock compensation under Statement 123R on 1/1/2006, it was taking the accounting high road. Because of the awkward history of the stock compensation standard (optional adoption, with pro forma footnote info required for all), the FASB allowed firms to retrospectively adopt the recognition of stock compensation expense for all periods presented in the financial statements. That was NOT contemplated to be a twelve year stretch; I think that the typical three-year presentation is what the Board had in mind.

That interpretation is not likely to be construed by many firms other than UnitedHealth. It might interpret the retrospective provisions that way only because it chose the modified retrospective adoption method in the first place, which was a rarity among firms. If a firms elected to adopt Statement 123R under the modified prospective method (in other words, burdening future earnings with the nonvested fair value of option grants plus future grant fair values), they have no basis for trying to go all the way back to the beginning of their option problems in presenting a revised history. They never had an entry point for revising the past in the first place.

When a firm like UnitedHealth contemplated its policy of stock option compensation in the 1990’s, it consciously chose to adopt APB Opinion No. 25 – and misapplied it. When revising the history, it should show the effect of that conscious decision, correctly applied. To wipe out the history of that decision and its consequences with a favorable accounting treatment (the 123R results cost less than the correct application of Opinion 25.) When they chose to adopt Statement 123R on a modified retrospective basis, they knew that they were getting a three year retrospective treatment – another conscious decision. So, a fair resolution would show APB 25 treatment, correctly executed, up until 2002, with the retrospective application of Statement 123R in 2003 – the beginning of the retrospective period for Statement 123R application under their decision to present history in that fashion, before they learned there was an upside to having taken the high road over a decade earlier.

http://www.accountingobserver.com/blog/