After being asked how General Electric has maintained such consistent earnings growth over the past decade, Dennis Dammerman, the company’s chief financial officer, said, “We’re the best company in the world.” However, the Wall Street Journal offered another explanation. It noted that over a ten-year period General Electric recorded six discretionary restructuring charges, ranging in magnitude from $147 million to over $1 billion—totaling $3.95 billion. Coincidentally, in each of the years when a restructuring charge was recognized, GE booked a sizable one-time gain. In one year, for example, the company recognized an $858 million one-time gain due to changes in accounting methods for taxes and inventory while taking a $1,027 million restructuring write-off. In another year, GE matched a $1 billion restructuring charge against the $1.4 billion one-time gain it recognized on the sale of an aerospace unit to Martin Marietta. “To smooth out fluctuations, GE frequently offsets one-time gains from big asset sales with restructuring charges; that keeps earnings from rising so high that they can’t be topped the following year. GE also times sales of some equity stakes and even acquisitions to produce profit gains when needed.”
a. Determine what reporting strategy GE seems to be using, and explain how it works.
b. Explain how discretionary restructuring charges help GE to implement that reporting strategy and why the company would want to pursue it.
c. The Wall Street Journal reported that “investors love restructurings” and that such charges seem to boost stock prices. Yet the FASB later cracked down on this popular corporate practice. Explain why investors might love restructurings, why stock prices seem to rise when they are announced, and why the FASB acted to limit such behavior.
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