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.