With Twitter’s upcoming IPO, they used some questionable accounting techniques to come up with the numbers used in their registration statement, which was filed last Thursday. In the statement, Twitter said that “in the eyes of management” the company had a profit of over $21 Million in the first half of 2013. Quite an impressive number. Unfortunate for Twitter (and any investors), however, if you use complete numbers, they have actually lost over $69 Million in that time period. A difference of about $90 Million!
Twitter decided to use an accounting practice called “adjusted EBITDA” which stands for Earnings Before Interest, Taxes, Depreciation and Amortization. In other words, they remove some of their biggest expenses from their reporting, and list their finances without them. Note that these expenses aren’t some future item that they may or may not have to pay, but things like taxes, which are, of course, something they will absolutely be responsible for.
To make it worse, Twitter didn’t just remove the traditional expenses associated with this unusual accounting term. That’s where the ‘adjusted’ in the term comes from. They also removed stock-based compensation from their assessment. If they had left this in, it would look like Twitter only lost about $14 Million so far this year. With the $35 million of restricted stock units, which Twitter handed out to employees, and other items, it looks quite bad.
These stocks which employees were given are a part of their compensation, so excluding the expenses related to them is similar to excluding the salaries of employees. Jack Ciesielski, the publisher of The Analyst’s Accounting Observer said the following about this practice, “It’s like the employees are working for free. It’s silly.” Talking specifically about when companies don’t include these types of expenses in their accounting.
Of course, savvy investors who are thinking about getting in on the Twitter IPO won’t have any trouble understanding what is going on here, but it is questionable ethically anyway. In addition, Twitter isn’t the only company to use this type of shady accounting. LinkedIn has used it before filing their IPO in 2011. Facebook, on the other hand, did not use this practice for their IPO. The fact is, however, the SEC does allow this type of accounting to be used, so while it is questionable ethically, it is entirely legal.
The bottom line here is that Twitter is currently very unprofitable. Even with that fact in the open, it may be a great company to invest in. You can see more about this story HERE.
