to large deals announced just days before each
quarter ended. In a moreelaborate variant of this
strategy,twotechnologyfirms,bothofwhichneedto
boostrevenues,canenterintoatransactionswapping
revenues.
10
- Capitalizeoperatingexpenses. Justaswith revenue
recognition, firms are given some discretion in
whethertheyclassifyexpensesasoperatingorcapital
expenses, especially for items like software R&D.
AOL’s practice of capitalizing and writing off the
costoftheCDsanddisksitprovidedwithmagazines,
for instance, allowed it to report positive earnings
through much of the late 1990s.
- Write-offs.Amajorrestructuringchargecanresultin
lower incomein thecurrentperiod,butitprovides
two benefits to the firmtaking it. Sinceoperating
earnings are reported both before and after the
restructuringcharge,itallowsthefirmtoseparatethe
expense from operations. It also makes beating
earnings easier in future quarters. To see how
restructuringcanboostearnings,considerthecaseof
IBM.Bywritingoffoldplantsandequipmentinthe
year they were closed, IBM was able to drop
depreciationexpensesto 5 percentofrevenuein 1996
from an average of 7 percent in 1990–1994. The
difference,in 1996 revenue,was$1.64billion,or 18
percent of the company’s $9.02 billion in pretax
profit that year. Technology firms have been
particularly adept at writingoff a large portion of
acquisition costs as “in-process R&D” to register
increases in earnings in subsequent quarters. Deng
