Earnings Recast

What Is an Earnings Recast?

An earnings recast is the act of amending and re-releasing a previously released earnings statement, with specified intent. Some of the most typical reasons for recasting earnings are to show the impact of a discontinued business or to separate out earnings-related events that are deemed to be non-recurring or otherwise non-representative of normal business earnings.

Earnings recast is also known as an "earnings restatement."

How an Earnings Recast Works

Earnings, the amount of profit that a company produces during a specific period, are very closely watched by investors. These figures drive share prices more than anything else and are a key component of perhaps the most common method to value companies: the price-to-earnings ratio (P/E ratio). In short, that means that any changes to earnings are a very big deal.

An earnings recast is usually done to several years of income statements, depending on how far back the recasting goes. In theory, restating earnings benefits investors, helping them to get a better comparative sense of how the company is progressing over time.

Example of an Earnings Recast

General Electric Co. (GE) announced in February 2018 a restating of its earnings for 2016 and 2017, in compliance with a new accounting standard issued by the Financial Accounting Standards Board (FASB). The updated accounting standard, which addressed account revenue from long-term service contracts, resulted in a 13-cent cut in reported earnings per share (EPS) for 2016 and a cut of 16 cents per share for 2017, according to the company’s filing.

GE noted that the new standard affected the timing of revenue recognition and the classification between revenues and costs for long-term service contracts, consequently weighing on how much profit it could report. Though the revised figures may look disheartening, the industrial conglomerate’s restating of previous earnings actually did investors a favor. Updating old numbers to reflect the new rules makes it easier for investors to compare them against all earnings reported from 2018 onward.

Special Considerations

Because earnings are an important metric that significantly impacts share prices, companies sometimes manipulate them. Though illegal and highly unethical, this practice is not as rare as it should be.

That means that earnings recasts are not always the result of changes to a company’s business structure or accounting standards. Sometimes, prior earnings are updated because auditors spotted traces of fraud or incompetence in previous financial statements.

Over-reporting a company’s gains can be very misleading, prompting investors to believe the company is in a stronger financial position than is actually the case. Earnings recasts made as a result of such behavior understandably have a habit of seriously denting investor confidence and wiping out share prices.

In the late 1990s, Motorcar Parts of America Inc. (MPAA) was forced to restate its earnings after it became clear that it was engaging in accounting fraud. The automotive aftermarket parts company's stock took a hammering, while the main perpetrators, chief operating officer (COO) Richard Marks and chief financial officer (CFO) Peter Bromberg, were sent to jail.