Martek's Unusual Accounting Methods May Exaggerate Profits - WSJ

In its Heard on the Street column, the Wall Street Journal reports that food-additive developer Martek Biosciences Corp. may be 'cooking the books' by using unconventional accounting methods that make its earnings appear stronger than they actually are. In its FQ1 earnings report, the company noted that $94.3 million of its assets (1/3 of its total assets) are being "held for future use," and therefore are not subject to depreciation. Martek said its policies are in accordance with GAAP and fully disclosed. But the approach is 'pretty rare' -- companies usually depreciate assets that they are or could be using. According to independent sources, the unorthodox accounting methods could boost 2007 net profits by almost $4 million, or about 20%, and accounts for its 30x P/E multiple that would be a richer 37x at full depreciation. Accounting rules don't directly address 'temporarily idle' assets and their depreciation, except to say that they should not be considered abandoned: There isn't much "specific guidance" on the issue, CFO Peter Buzy said. But even if there isn't a "bright-line rule, the principle is clear: Once assets are ready for their intended use, companies should begin recognizing all expenses normally associated with them," said accounting research firm Glass, Lewis & Co. Buzy conceded that a potential impairment of its idle assets could lead to a write-off against profits down the line.

Sources: Wall Street Journal
Commentary: Martek Bioscience -- Premium-Priced • My Martek Biosciences Call Option Misplay • Jim Cramer's Take on MATK
Stocks/ETFs to watch: Martek Biosciences Corp. (MATK)

Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.