Topics: Generally Accepted Accounting Principles, Revenue, Overtrading Pages: 2 (603 words) Published: May 4, 2006
Criticisms of Blockbuster by Seidler
1. The bulk of 1988 per share earnings were due to
a) Very slow goodwill amortization
b) Stretched out life for "hit" tapes
c) Nonrecurring items of initial franchise fees, area development fees and sales to new franchises. 2. Steeper growth curve resulting from acquisitions that were treated as pooling 3. Inflation of sales in the fourth quarter. Revenues are recognized when products are shipped with no indication that the stores purchasing were actually open for business. 4. Running out of cash

Our position -
1. On the EPS related issues
a) Regarding the goodwill amortization issue, we suggest a position that is in between the current BV practice (40 years) and Bear's recommendation (5 years), by using 10 years as the amortization period for goodwill. b) We believe that BV purchases multiple copies of "hit" tapes to meet the initial demand. Three year period seems to be a too long for all of these copies. Furthermore, BV is selling some tapes to store customers (32% of sales). While there is no information, we believe that some of these sales could be coming from the extra copies of "hit" tapes. Hence, we agree with Seidler regarding stretched out life of "hit" tapes. c) The nonrecurring items mentioned by Seidler do not meet definition of "extraordinary items" because they are not unusual and infrequent. In fact, they are neither unusual nor infrequent. Although we agree that these are one time revenues received when a store opens, the opening of a new video store is occurring very frequently and there is no sign that this activity will cease completely in near future.

2. We agree that pooling is creating an artificial steeper growth curve. To force BV to have more transparency in earnings growth, we recommend that BV should treat all acquisitions as purchases.

3. We agree that there is an unusual pattern of higher franchise store openings in fourth quarter. It is possible that more stores are being...
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