EDS adopts new accounting rule, restates Q1 and Q2

Electronic Data Systems’ earnings for the first half of its 2003 fiscal year are being negatively affected by its retroactive adoption of an accounting rule that changes how the company recognizes some revenue.

As a result of the restatement, the first-quarter per-share loss of 26 cents is growing to a per-share loss of $2.95, while the second quarter per-share earnings of 28 cents are being reduced to 18 cents, EDS said in a release Monday.

Meanwhile, first-quarter revenue, previously reported as $5.37 billion, is being recalculated down to $5.26 billion, while second-quarter revenue is falling from $5.52 billion to $5.30 billion, EDS said. EDS’ first quarter ended March 31; it’s second quarter ended June 30.

EDS postponed its third-quarter earnings report, scheduled for Wednesday of last week, while it sought clarification on this accounting rule and completed a review of its impact. It plans to report third-quarter earnings on Wednesday of this week.

The rule in question is the Emerging Issues Task Force Issue 00-21, or EITF 00-21, which calls, with some exceptions, for certain type of revenue in long-term contracts to be recognized when it is billed. It replaces so-called “percentage of completion” (POC) accounting, which lets companies recognize revenue based on the percentage of the contract’s work completed.

The result is that EDS will now recognize less revenue and income in the early stages of contracts, and higher revenue and income in the latter stages of contracts, EDS said.

EDS is adopting the rule retroactively to Jan. 1, 2003, resulting in a one-time cumulative pre-tax adjustment of $2.24 billion, which has an after-tax earnings impact of $1.42 billion, or $2.92 per share, the Plano, Texas company said.

EDS recognized about 35% of its annual revenue using POC accounting. That is now dropping to 5% with the adoption of the new rule.

EITF 00-21 was finalized in May by the Emerging Issues Task Force of the Financial Accounting Standards Board, the private sector organization that establishes financial accounting and reporting standards.

Companies have the option to apply the rule only to contracts signed after June 30, 2003, without having to issue a one-time adjustment, but EDS decided to apply the rule retroactively in order to establish consistency in its accounting of existing and future contracts, the company said.

EDS also recalculated its 2002 and 2001 earnings as if the accounting rule had been applied to them, so that meaningful comparisons can be made going forward.