General Mills: Picky, Picky, Picky

From AAO Weblog

Warning: this post is sort of a Seinfeld episode – a show sometimes described as “a show about nothing.”

One of the strangest non-reliance 8-Ks I’ve ever seen was filed by General Mills on January 4, where absolutely nothing happened in terms of differences in financial statements. A snippet:

“On January 4, 2007, the Audit Committee of our Board of Directors, after consultation with management and KPMG LLP, our independent registered public accounting firm, concurred with management’s conclusion that we had a material weakness in our internal control over financial reporting and determined that neither management’s report nor KPMG LLP’s report regarding the effectiveness of our internal control over financial reporting contained in the Form 10-K should be relied upon. As a result of this determination, we intend to file an amendment to the Form 10-K to reflect a change in management’s assessment of our disclosure controls and procedures as of May 28, 2006 and to restate Management’s Report on Internal Control Over Financial Reporting … The amended Form 10-K will not change our consolidated financial statements or the Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Related Financial Statement Schedule dated July 27, 2006, included in the Form 10-K.”

So the 8-K was filed because there was a flaw in the internal controls over the proper application of valuation methodology for brand intangibles. That’s got to be a letdown to all those 8-K zombies who hope for an interesting demonstration of an accounting change. (All three of us.)

There are some lessons to be gleaned from the filing anyway. Statement No. 142 requires an annual test of the carrying value of a firm’s intangible assets. The proper way to value “brand intangibles” – those intangibles so important to consumer goods companies when acquiring each other – is to measure them separately, not bundled together.That way, if there’s one particular brand of, say, acquired flour with a damaged carrying value (it’s worth less than the recorded amount), then an increase in the value of a brand of, say, an acquired line of yogurt snacks doesn’t mask the decreased value of the flour’s brand. General Mills plainly states that its “policies and procedures requiring an annual impairment assessment of goodwill and other indefinite-lived intangible assets on a combined basis were ineffective for the separate annual impairment assessment of our brand intangibles.” So, there was the potential for the impairment testing to be flawed: by working out its impairment tests on a combined basis, some impairments might have gone undetected by General Mills’ managers.

As it turns out, when done correctly in disaggregated fashion, there were no impaired brand intangibles. And no restated financials. And no reason to get too upset about the filing of the 8-K. Maybe someday, long down the road, there will be a breed of investors who actually worry deeply about the presence of working internal controls in an investee company. I don’t think there are too many of them yet.

(Tip o’ the eyeshade to Caleb S. for pointing out this 8-K.)

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