A General Electric Co. (GE) logo sits on an M601 turboprop aircraft engine at the GE Aviation Czech s.r.o. plant in Prague, Czech Republic. (Photographer: Martin Divisek/Bloomberg)

GE’s 2017 Loss Widens as Results Restated After Rule Change

(Bloomberg) -- General Electric Co. trimmed last year’s earnings by $1.56 billion to align its results with new U.S. accounting rules for sales of industrial equipment.

A profit cut of 17 cents a share was a penny worse than the reduction GE had signaled to investors in recent weeks. Earnings for 2016 were pared 13 cents, the Boston-based maker of jet engines and gas turbines said in a regulatory filing late Friday detailing the new standards for recognizing revenue.

The restatement risks putting additional pressure on GE as it deals with challenges ranging from weak demand to an accounting probe by the U.S. Securities and Exchange Commission. While the adjusted results won’t affect the company’s earnings forecast for 2018, cash flows or the underlying value of contracts, lowering last year’s profit may hurt GE’s credit metrics and increase borrowing costs, according to a Cowen & Co. report this week.

In addition to the blow from the new accounting standards, GE also said the effects of the U.S. tax overhaul would trim 14 cents a share from 2017 earnings with another small bite coming from a change in inventory measurement. After the changes, GE lost 99 cents a share last year, worse than the originally reported loss of 68 cents a share.

The shares fell 1.5 percent to $13.29 in late trading in New York. During the regular session Friday, GE had risen 2.4 percent. The company has tumbled 23 percent this year, the biggest decline on the Dow Jones Industrial Average.

New Rules

Including the accounting impact and the tax effect, GE’s total loss from continuing operations in 2017 deepened by $2.79 billion to $8.54 billion, according to the filing. After the restatement, sales declined to $118.2 billion from $122.1 billion.

The manufacturer will take a $4.24 billion non-cash charge to the retained earnings balance as of Jan. 1, 2016, in line with an earlier estimate.

The impact of the new standard won’t always be negative for GE. The company has said it expects reported earnings to be higher in the future as contracts related to new products begin to mature.

The restatement stems in part from a set of revenue recognition principles issued by the Financial Accounting Standards Board in 2014. The new standard, adopted by GE at the beginning of this year, affects how and when companies record sales from equipment and service contracts, more closely aligning work with the impact on financial statements.

For instance, when accounting for the sale of a jet engine under old rules, GE’s aviation business could estimate future costs and apply a margin rate reflecting expected profitability over the life of a contract. That helped smooth out the long-term earnings impact of engine sales, which typically are costly for the manufacturer initially and more profitable over time.

Aviation, Power

Under the new rules, GE will recognize the financial impact at specific milestones, taking into account the actual price and manufacturing costs for the engines at those moments.

The changes are likely to have the biggest impact on GE’s aviation and power-equipment businesses. The company invests heavily to develop big-ticket items with the expectation that the outlays will pay off over time.

The new rules don’t affect GE’s cash or alter the underlying economics of customer contracts, but they will result in “significant changes in the presentation of our financial statements,” GE said in a February regulatory filing. The company said then that it expected 2017 earnings to be cut by 16 cents a share with 2016 earnings reduced by 13 cents.

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