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The public debate on accounting standards and financial disclosure lurched into even-more arcane territory Monday as investors reacted to information about more than 700 small deals closed by acquisitive conglomerate Tyco International Ltd. over the past three years. Shares of the Bermuda-based company tumbled 16 percent to close at $29.90 after The Wall Street Journal published a story highlighting a $2.5 billion gap between the price Tyco paid for acquisitions during the 12 months ending Sept. 30 and disclosures in its Securities and Exchange Commission filings. The discrepancy is due to the assumption of cash on the books of acquired business. Tyco, like most other public companies, reports the cost of acquisitions on its cash flow statement net of assumed cash. Shares were also battered by concerns Tyco’s CIT financial services arm may face short-term liquidity problems. “The CIT situation could get interesting but the acquisition story really doesn’t hit on any new points,” said a fixed-income analyst who asked to remain anonymous. But with more than a dozen Enron-related congressional hearings scheduled, further debate on what should be classified as a material event is likely. As a rule of thumb, any event resulting in a 5 percent impact is material and should be disclosed, according to SEC staff accounting bulletin No. 99, the most recent proclamation discussing materiality. Auditors can measure the 5 percent threshold against revenues, profits or other metrics. That 5 percent, however, is only a guideline and a list of qualitative factors, such as the appearance of self-dealing, the potential for masking earnings trends and other factors also must be considered before deciding to disclose or not. “No general standards of materiality could be formulated to take into account all the considerations that enter into an experienced human judgment,” the SEC guidelines say. When formulating guidelines, the SEC specifically mentioned case law in Basic Inc. v. Levinson in 1988 and the 1976 ruling in TSC Industries v. Northway Inc. Determiniation of materiality requires a “delicate assessments of the inferences a ‘reasonable shareholder’ would draw from a given set of facts and the significance of those inferences to him,” according to the TSC ruling. “Perhaps the SEC needs to consider providing tighter language on materiality,” said an attorney who advises companies on financial disclosure. “Perhaps a minimum threshold of say a quarter million dollars so small companies aren’t bogged down with every little move and $1 billion for a larger company.” While few transactions meet the 5 percent threshold, a reasonable person might be interested in stripping away the aggregate impact of a buying binge. Indeed, Tyco, and nearly every large conglomerate offers quarterly disclosure of reported growth and a so-called core growth number, which strips away acquisitions and other one-time events such as currency changes. “We haven’t receive any complaints from investors about the level of disclosure,” said Susan Bishop, press officer for Textron Inc. The Providence, R.I.,-based company discloses the number of acquisitions and cash flow impact in its annual reports. Some companies go much further than the SEC requires. Dover Corp. discloses the quarterly impact of acquisitions on revenue and profits for each of its three business segments. The company also reports Ebitacq, that is earnings before interest, taxes, and non-cash charges arising from purchase accounting for acquisitions. With M&A declining over the past year, the impact of mergers is no longer material for many companies. “We haven’t made much disclosure in the past quarter because there hasn’t been much to talk about,” said Tom Crane, a spokesman for Honeywell International Inc. When mergers affect growth, Honeywell discloses figures for core growth and actual growth. Copyright (c)2002 TDD, LLC. All rights reserved.

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