WASHINGTON-Earlier this year, the Securities and Exchange Commission began scrutinizing what has been reported to be a “popular accounting treatment” of stock that is used as cash when one company buys assets of another, and how shares traded by Nextel Communications Inc. to Motorola Inc. for specialized mobile radio properties have been put under this microscope.
In 1995, Motorola sold SMR properties to Nextel for 59.5 million shares of Nextel stock, valued at the time at $937 million. Instead of reporting these shares as earnings for the 1995 tax year, the company referred to them in a March 21 proxy statement filed with the SEC as “an exchange of productive assets with no gain realized in the company’s 1995 statement of consolidated earnings.” The proxy statement also stated that the Nextel stock was “reported directly to the stockholders’ equity as part of Motorola’s holdings of marketable securities.”
In doing this, Motorola was doing what many other publicly held companies that opt for a stock-for-asset sale have done-defer the capital gains made from a sale. By putting the Nextel stock in its securities portfolio, Motorola could pick and choose the times to sell off the stock to coincide with financial reporting periods when revenues either are too weak or too strong. According to one communications tax expert, “Smoothing company earnings is a common corporate game. If there was anything wrong with it, company auditors never would allow it.”
Motorola wrote in its proxy statement that if it had reported the stock as pretax earnings, it “would have recorded a gain of approximately $439 million (net of taxes) in third-quarter 1995. In that event, Motorola believes it would have been necessary to recognize the decline in price of Nextel’s shares between June 1995 and December 1995, as a realized loss of approximately $157 million in fourth-quarter 1995.”
As a result of such a stock loss, Motorola said its 1995 earnings before taxes would have increased from the reported $2.7 billion to the stock-included $3.2 billion. The value of individual shares would change from $2.93 to $3.38.
“The gain recognition proposed by the SEC is not expected to materially impact Motorola’s 1995 or 1996 balance sheet,” the company added. “Motorola believes its treatment of the transaction is appropriate but it is considering the SEC’s position on the matter.” No decision has been made regarding treating the Nextel stock any differently than it was nearly two years ago, but Motorola said it would “make all appropriate filings with the SEC to disclose the change” it does decide to refigure its earnings.
