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Bloomberg Tax: Robert Rostan in GameStop Takes Everyone on a Wild Ride, Except Its Accountants

https://news.bloombergtax.com/financial-accounting/gamestop-takes-everyone-on-a-wild-ride-except-its-accountants

It’s taken over social media, gotten airtime at a White House press conference, and pitted hedge funds against an army of online traders out to bruise them. But there’s one place the saga of GameStop Corp.’s stock price roller coaster ride won’t play out: on GameStop’s financial statements.

The fundamentals of the video game retailer’s performance are unlikely to change when it reports its annual results in March, though the company probably will discuss the stock price volatility in disclosures about the risks it faces.

No line items or footnotes will comment on changes to its revenue, expenses, debt or assets due to the more than 1600% increase in its stock price.

“The financial statements aren’t designed to provide value or even to opine on value but to be an input for value,” said Patrick Badolato, accounting professor at the McCombs School of Business at the University of Texas.

Typical accounting questions don’t come into play because GameStop itself didn’t fuel the stock surge; retail investors did, said Robert Rostan, CFO of Training The Street, an accounting education firm.

“Really, this isn’t on them; this is on the market,” Rostan said. “It’s the market and external forces reacting to a security in the market.”

GameStop did not respond to a request for comment.

Accounting Issues Not at Play

Market surges can spark accounting questions for companies that make heavy use of stock compensation for employees, because share price volatility must be considered when calculating their fair value.

But GameStop’s use of stock-based compensation is limited compared to tech companies where awards are significant parts of executives’ pay. In December, GameStop reported stock compensation expenses of $6.1 million for the prior nine months.

Contrast that with Oracle Inc., which in December reported $488 million in stock expense for three months alone.

“If this were an Oracle or a Salesforce or an Amazon, who was really, really big into stock-based compensation, this could have some implications because volatility does go into play,” Rostan said.

GameStop also doesn’t have to deal with adjusting the value of goodwill, the intangible asset that companies record when they buy another company, which also can be affected by stock price fluctuations. GameStop acquired various digital gaming businesses in the last decade but wrote off the remaining goodwill on its balance sheet in 2019.

Shareholder equity—which reflects past earnings held by a company and the historic value of past capital raised or shares repurchased—also won’t reflect the soaring, tumbling and then rising again stock price.

The few mentions may come in the opening to the financial report, where companies discuss their risks in broad strokes, including stock-price volatility.

Tesla Inc., a company familiar with short-seller hate and wild stock price changes, in its October 2020 quarterly filing described “wide fluctuations” in its stock price over the year, from a high of $502.49 to a low of $61.85 pre share.

“Public perception and other factors outside of our control may additionally impact the stock price of companies like us that garner a disproportionate degree of public attention, regardless of actual operating performance,” the electric carmaker said.

Market Risk

Other brick-and-mortar retailers have experienced a surge of retail investor interest in the past weeks, including struggling movie theater operator AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc.

They all should discuss in their risk disclosures whether there is any basis for the price volatility and whether stock price manipulation poses other risks to the business, said Lynn Turner, a former chief accountant for the Securities and Exchange Commission.

“These are real companies with a real business and real employees that you are impacting here. And you’ve got people falsely inflating their stock. And ultimately that’s a real risk to the reputation of those companies,” Turner said.

Companies already struggling from the shift to e-commerce and the ongoing pandemic could face even tougher financial challenges if their stock price crumbles, including the threat of going out of business, he said.

And the prices will come down eventually, said Asher Curtis, who studies the role of accounting in equity markets at the University of Washington. His research has found that earnings releases —those periodic reminders of a company’s true economic performance and viability—quickly deflate pricing bubbles, usually within five to seven days, he said.

“Accounting gives an anchor to speculation and so typically over time, we expect stock prices to reflect fundamental information,” Curtis said.

GameStop’s annual report for its fiscal year that ended Jan. 30 and its fourth-quarter earnings release aren’t expected until late March.

The disconnect between the reality on paper and the market frenzy points to a greater problem to Barbara Roper, director of investor protection at the Consumer Federation of America.

“We have a market that has become unhinged from the productive economy it is supposed to support,” Roper said.”That function of steering capital to its best uses is an important function. And it requires transparency and it requires some faith that in an efficient market stock prices are going to reflect reality, and if you lose that, you’re damaging the markets that have been the engines of vibrant and innovative economy since the 1930s.”

To contact the reporters on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com; Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Bernie Kohn at bkohn@bloomberglaw.com; Jeff Harrington at jharrington@bloombergtax.com