SEC challenges popular accounting method used by Motorola to defer gain from sale

Weekly Corporate Growth Report, Jun 16, 1997

The Securities and Exchange Commission is challenging the practice of the popular accounting treatment that enabled Motorola Inc. to defer a $429 million gain on a 1995 sale of mobile radio properties to Nextel Communications. The challenge could prevent companies from using such stock-for asset swaps, or nonmonetary exchanges, to help manage their earnings. This has been done by timing sales of the shares received as consideration for asset sales.

At issue is the way that Motorola accounted for 59.5 million shares of Nextel stock that Motorola received in exchange for mobile radio systems and licenses sold to Nextel. The stock, which was valued at $937 million, was treated by Motorola as a similar productive asset. This allowed Motorola to postpone reporting any gain on the appreciation in the value of the radio properties.

Instead, Motorola credited the stock directly to shareholders equity as part of its portfolio of marketable securities. This enables companies to smooth out their earnings growth by timing the sales of stock to generate gains and losses as needed during years when earnings are particularly strong or weak. (Source: Wall Street Journal)