GE charge, restatement may help explain cash issues

NEW YORK (Reuters) - General Electric Co is poised to shine light into a sizable part of its financial black box, an area that governs how it estimates revenue from long-term contracts.

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The 126-year-old, Boston-based industrial conglomerate is due to publish figures soon that analysts say should help explain why it receives less cash from earnings than the industry average. The company has indicated it may release the figures by the end of this month.

The increased disclosure stems from new accounting standards that require companies to reveal more about how they estimate revenue from such long-term contracts, known as contract assets.

Companies typically use the cost of providing services as a basis for revenue estimates, but the process can lead to over- or under-estimating the value of the contracts, experts say.

GE’s contract asset tally has soared 70 percent to $28.8 billion in 2017, from $16.9 billion in 2014, most of it in its power and aviation units. The majority of the total reflects revenue GE has already booked but for which it has not billed customers, which creates the gap between profit and cash flow, according to GE’s regulatory filings.

GE’s accounting is under scrutiny after earnings swung to a loss last year and GE said its 2018 results would be at the low end of its forecasted range. The U.S. Securities and Exchange Commission also is looking into GE’s accounting for contract assets, raising investor concern. GE has said it is not overly concerned about the investigation.

GE said in February that it expects to take a $4.2 billion accounting charge as it switches to the new standard. Some analysts think the charge could be higher, since competitors of GE’s power business say the company is signing long-term service contracts at low prices to win equipment sales.

“That’s what the competitors have been grousing,” Deane Dray, analyst at RBC Capital Markets, said on Wednesday.

If the charge is close to what GE disclosed, it could bolster GE Chief Executive John Flannery’s credibility, which has been dented by falling profit and a charge for old insurance policies revealed in January.

GE also is restating financial results for 2016 and 2017 so that 2018 results will be comparable. The company’s financial situation has prompted talk that it might raise capital. Its shares rose on Tuesday after reports that billionaire investor Warren Buffett may buy a stake after selling last year.

GE declined to comment on the Buffett reports. It said it chose to restate prior earnings - a more exacting standard under the new rules - because it will allow investors to compare 2018 results with the prior years on the same basis. “We chose that approach because we believe that it is the most helpful to our investors,” GE spokeswoman Jennifer Erickson said.

Reporting by Alwyn Scott; Editing by Matthew Lewis