This morning, a non-reliance 8-K was filed by private investment trust on its results from fiscal 2001 to 2004 and the first three quarters of fiscal 2005, for a couple of reasons. One, fairly common; the other, kind of surprising, by this time.

Let’s start with the mundane first. (After all, we have the weekend to look forward to. It’s Friday! Work first, pleasure later.) Polo Ralph has a retail presence, which should make the alert reader think of … leases. Yes, leases. It seems that the company had received construction allowances from lessons, and netted them against the dollars spent on leasehold improvements – not the way it’s supposed to be done. And Polo Ralph also accounted for rent escalation clauses incorrectly, too.

Pretty common stuff, in the last few months. Maybe the only surprise about this restatement issue is that it’s so late in the game; the lease restatement mean culpa pretty much died down over a month ago.

It’s the second restatement issue that’s really long in the tooth, one that involves the much-despised FIN 46(R). This is the interpretation of the accounting rules on consolidation that required companies to figure out which party with an interest in a “special purpose entity” (an SPE) is the primary beneficiary of its existence. When the determination is made, that primary beneficiary should consolidate the SPE’s balance sheet with its own. This was supposed to have been effective “no later than the end of the first reporting period that ends after March 15, 2004,” according to FIN 46(R).

Apparently, Polo Ralph Lauren’s 50/50 media joint venture with NBC slipped under the FIN 46(R) radar for a while. According to the filing:

“Upon subsequent review and with the benefit of addition interpretations … consolidation of Ralph Lauren Media into the Company’s financial statements was required as of April 3, 2004. The impact on the Company’s balance sheet as of April 3, 2004 is to increase assets by approximately $18 million and liabilities by approximately $9.0 million. There was no effect on prior years’ reported earnings.”

The revisions will be made in the 10-K to be filed in July.

&R Block Rethinks Income Taxes

Here’s a strange one for you students of irony.

H&R Block, the income tax preparers, filed a non-reliance 8-K this morning, advising investors not to rely on their 2005 quarterly financial statements and financial statements for fiscal years 2004 and 2003. It’s an amalgamation of errors that gave rise to the filing:

  • Erroneous acquisition accounting (mostly related to a 2000 acquisition) caused an understatement of deferred tax liabilities and goodwill of approximately $129 million – which overstated the income tax provision each year thereafter. The tax provision errors were about $11 million in each of years 2003 and 2004.
  • Erroneous gain-on-sale accounting calculations for securitizations in 2003 overstated revenues by $36 million that year. The correction will defer the gain into future years, putting about half in 2004.
  • Erroneous lease accounting for rent holidays and rent escalations, worth about $7 million in overstatement of retained earnings.
  • Income tax calculation errors, in the neighbourhood of $10 to $14 million after-tax, related to internal control weaknesses over tax reporting that were identified in the 2004 10-K.
  • Erroneous calculations on the accrual of incentive compensation in 2004, resulting in an $12.4 million (pre-tax) understatement expense.
  • Erroneous capitalization of branch office costs in the Investment Services segment which understated pre-tax operating expenses by about $4 million in 2004 and $2 million in 2003.

Block will correct the errors as part of its filing of the April 30, 2005 10-K.

Metro Bovine could spot the irony in this one: H&R Block making errors in its income tax reporting? It’s like Starbucks forgetting how to make coffee, or GM forgetting how to make cars. Wait a minute…