Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

and Lev (1999) studied 389 firms that wrote off

in-process R&D between 1990 and 1996;

11 these writeoffs amounted, on average, to 72

percent ofthe purchasepriceon theseacquisitions

and increased the acquiring firm’s earnings 22

percent in the fourth quarter after the acquisition.

• Usereserves.Firmsareallowedtobuildupreserves
  for bad debts, product returns, and other potential
  losses.Somefirmsareconservativeintheirestimates
  ingoodyearsandusetheexcessreservesthatthey
  have built up during these years to smooth out
  earnings in other years.


• Income from investments. Firms with substantial
  holdings ofmarketable securities orinvestments in
  otherfirmsoftenhavetheseinvestmentsrecordedon
  theirbooksatvalueswellbelowtheirmarketvalues.
  Thus,liquidatingtheseinvestmentscanresultinlarge
  capital gains that canboost income in the period.
  TechnologyfirmssuchasIntelhaveusedthisroute
  to beat earnings estimates.

Adjustments to Income

To the extent that firms manage earnings, we have to be
cautiousaboutusingthecurrentyear’searningsasabasefor
projections. In this subsection, we consider a series of
adjustmentsthat wemightneedtomaketo statedearnings
beforeusingthenumberasabasisforprojections.Webegin
byconsideringtheoftensubtledifferencesbetweenone-time,
recurring, and unusual items. Wefollow up by examining
how best to deal with the debris left over by acquisition
accounting.