April 24, 2008
IMPAIRMENT REVERSALS – IMPACT ON COST OF GOODS SOLD
Analysis: Traditionally, the components of Costs of Goods Sold are: Land (20-25%), capitalized interest (3-5%), materials and labor (65-70%), and capitalized indirect costs such as insurance, property taxes, construction superintendents (4-5%). However, these traditional relationships change when the land portion has been written down for impairment, particularly considering the impact of present value discounting that occurs with impairments. In this scenario, the land component of Cost of Goods Sold could be 5% or less of Cost of Goods Sold, causing an overall improvement in the gross margin from the home sale. Thus, as homebuilders begin to work through previously impaired land, it will be important for investors to understand the impact such impairment reversals have had on the reported gross margins. In some cases, much of the reported gross margin may have come from such recoveries. This is important to know when evaluating overall gross margins and whether, in fact, operating results are improving or whether the improvement is due to accounting. My expectation is we have and will begin to see some significant reversals occur. Lennar’s last quarter contained significant, yet unquantified boosts to the gross margin when listening carefully to their conference call. These recoveries will be spread out over the next 2-3 years and then the impaired land should have worked its way through the system. In the meantime, it will continue to be important to measure this impact.
Report a Concern
More GLG News in
Accounting & Financial Analysis
Fed sits tight as ECB chief signals rate rise
www.ft.com
US mortgage fraud probe nets 406, plus Bear Stearns two
afp.google.com
FASB Agenda Takes on Global Spin
www.cfo.com
Aging Baby Boomers Will Drive Demand for Healthcare Properties Over Next Decade, Grubb & Ellis Report Reveals
www.bio-medicine.org
The Role of Fair Value in the Subprime Mortgage Metltdown
www.aicpa.org
Accounting Statements and Economic Policy - The reality of the age of inflation amidst falling wealth
July 1, 2008
Convergence of Accounting Standards - Good, Bad or Ugly?
July 1, 2008
Example of Fraud Prevalent From the Bottom to the Top of Every Organization
June 23, 2008
Fair Value Accounting and Reporting as Messenger of Truth
June 23, 2008
Global Warming is not a myth, but a reality
December 26, 2007

