CSGS: CSG Tax Disclosure Confusing

By William Trent, CFA of Stock Market Beat

Small Cap Watch List member CSG Systems (CSGS) issued its 10K last week. We haven’t had a chance to review it thoroughly, but did notice some comments from Jack Ciesielski at the Analysts Accounting Observer Weblog.

First, this mention of SAB 108 in Note 3: “During the fourth quarter of 2006, we adopted SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”)… Our adoption of SAB 108 did not have any impact to our consolidated financial statements.”

But that bland statement of business-as-usual is contradicted by this one in the MD&A:

Income Tax Provision. The following are the key changes related to our income tax provision from continuing operations between years:

• For 2006, we recorded an income tax provision of $38.4 million, or an effective income tax rate of approximately 38%…
For the fourth quarter of 2006, we recorded an effective income tax rate of approximately 42%. The higher effective income tax rate was primarily the result of a correction of minor income tax expense items from previous periods that were not considered material to the current or past periods, giving consideration to the SEC’s Staff Accounting Bulletin No. 108, and thus were recorded in their entirety in the fourth quarter….
Hello? The effective tax rate was higher for the fourth quarter by 4% because of an adjustment for the SAB 108 correction of tax items – but simultaneously, the “adoption of SAB 108 did not have any impact to our consolidated financial statements?”

Which premise is correct? Not both.

Give them credit for taking the high road and not revising history through retained earnings – they’re one of the rare companies observed so far who have taken the SAB 108 corrections into earnings.

We decided to look at the numbers fo answer Jack’s question. And if the 38% tax rate had been used, income taxes would have been about 850,000 lower for both the fourth quarter and the full year. And that would have made a $0.02 difference in earnings per share (without SAB 108 EPS would have been $0.02 higher), suggesting that there was a material impact. With all of the tax accounting intricacies it is possible the tax rate would have been higher than 38% in the fourth quarter anyway, but the apparent discrepancy deserves more of an explanation than investors have so far received.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Tempur-Pedix (TPX) put options; Landstar (LSTR) put options; Plantronics (PLT) put options

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