Bed Bath & Beyond Does Spring Cleaning With SAB 108

One of the more notable SAB 108 applications showed up in Bed Bath & Beyond’s (BBBY) 10-K filed last week. There was a $72.6 million downward adjustment to retained earnings for two items: improper option dating effects worth $61.8 million, and rent and lease accounting errors worth $10.8 million.

What’s notable is that the stock option errors stretched back to 1993 and up to 2005. Those errors came to light in 2006, when Bed Bath & Beyond formed a special committee to investigate deficiencies surrounding the option-granting process. The company relied on SAB 108 to get the beginning of year retained earnings adjustment treatment - but that treatment is supposed to be used when one method or the other of error assessment (either rollover or iron curtain) had been used properly in the past. If the errors weren’t discovered until 2006, it doesn’t seem that the beginning of the year adjustment method is intended by SAB 108.

Those errors ranged from effectively zero percent of 1993 net income up to 3.4% of 2003 net income, as shown by the company’s quantitative assessment in its discussion.

As for the lease accounting problems, they stretched from 1993 to 2003. Being significantly smaller, they had probably been passed on previously based on immateriality. Probably SAB 108 offered a chance to get them out once and for all.

Hopefully other firms don’t look to this treatment of stock option accounting corrections as a “best practice.” Earlier this year, there was a communication from the SEC’s Division of Corporation Finance to companies that had been investigating their stock option practices, and the treatment outlined in that letter was far different than taking a SAB 108 flush through retained earnings.

BBBY 1-yr chart: