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NPR’s Marketplace: Robert Rostan in Accounting in the COVID era is more subjective than ever

https://www.marketplace.org/2020/08/05/accounting-in-covid-era-more-subjective-than-ever/

By: Marielle Segarra

Disney reported a rare quarterly loss Tuesday — nearly $5 billion. Most of its business segments, from theme parks to cruise lines, are faring poorly in the pandemic. There was a bright spot, though: Steep losses were somewhat offset by the performance of its media business. Disney explained that one big reason has to do with an accounting decision it made.

Disney pays for the rights to broadcast sports like baseball and basketball. And under corporate accounting rules, when companies crunch their quarterly numbers, they’re not supposed to factor in costs from a purchase like that until they see the revenue. In this case, after the games air.

Enter COVID. Disney didn’t get to broadcast these games last quarter, which ended in June.

“So essentially, they’re saying since we haven’t broadcasted their season, we haven’t recognized this expense yet,” said Robert Rostan, chief financial officer at the financial education firm Training the Street.

That makes the company’s results look better.

Rostan said this is a standard accounting practice.

Parts of the calculation are subjective, though. For instance: How much of the cost should Disney push to the future? That depends on whether it thinks all of the scheduled NBA and MLB games will actually air.

The pandemic has created a lot of uncertainty, “and since accounting involves a lot of estimates about the future, it makes the accounting numbers much less reliable,” said Eli Bartov, an accounting professor at New York University’s Stern School of Business.

The pandemic could also tempt some companies to cross the line. They might use accounting tricks to smooth out revenue so it looks steady from quarter to quarter. Or include other metrics in their financial statements that say, well, if it weren’t for COVID-19, here’s what our numbers would have looked like.

“That has a time and a place, but we all know that you can’t keep that up forever,” Rostan said.

Because at a certain point, the pandemic becomes the new normal — and those kinds of metrics can be misleading.