IBM Profits Scrutinized Over Optics Sale

Today's accounting enviroment provokes examination

Investors aregenerally pleased when a company adds $300 million to its balance sheet, butthe events of last week prove that in today’s accounting environment that maynot be the case.

On Friday, a NewYork Times article suggested IBM Corp’s claims of beating fourth quarter2001 earnings expectations were muddied by the way it present a sale of one ofits units. In a call with analysts, IBM treated the sale as a normal part ofits revenue stream, rather than a one-time gain.

IBM sold itsoptical transceiver business to JDS Uniphase Corp. on December 28 – the lastFriday of 2001 – for $340 million in cash and stock. The New York Timesarticle suggested IBM used this sale to offset its costs in the quarter andbring its per-share profits above Wall Street’s earning expectations.

In accountingpractice, sales of business units are often treated as one-time gains, ratherthan part of its normal revenue stream. Including the value of the sale asnormal revenue for the quarter may violate accounting rules.

For its part, anIBM spokesperson told the Times the company considered the purchase andsale of assets a legitimate part of its business.

Sensitive toaccounting issues after the Enron collapse, the markets were unkind to BigBlue. Shares of IBM dropped three percent Friday to $100 and continued to falltoday. The markets were closed yesterday for the Presidents’ Day holiday.

IBM said thismorning it would provide information in greater detail about its earnings andlosses. The Securities and Exchange Commission does not require Big Blue tofile its fourth quarter earnings statement until March.

About the Author

Chris McConnell is Product and Technology Editor for Enterprise Systems.