EXCERPT FROM THE JSFB. SUBSCRIBERS CAN READ THE FULL ARTICLE IN THE MARCH 2014 EDITION.

Investors should be aware that first quarter earnings could have a little extra “noise” in them this year, and may not be comparable to previous years.  The problem results from Congress not extending the R&D tax credit again.  The credit has a significant impact on the amount of research performed – in February 2013 the Joint Committee of Taxation estimated the amount of credits in fiscal 2012 at $6.1 billion. The expiration and retroactive renewal of the tax credit has wreaked havoc on earnings of companies that take the R&D tax credit because, even without tax reform, the credit’s periodic extension is always probable, we believe investors should use the pro forma earnings provided by companies to normalize the uneven GAAP benefits.  And when forecasting earnings, investors should be comfortable assuming a future tax rate that is reduced by the R&D tax credit.

Janet Pegg, CPA, is the Head of Valuation & Accounting at Cornerstone Capital Inc. and former Managing Director and Analyst of U.S. Accounting Research at UBS Investment.