T-Mobile US Inc (NASDAQ:TMUS) has been grilled over its accounting and disclosure policies by an activist investor. The CtW Investment Group, which is backed by unions, disclosed that it had requested the Securities and Exchange Commission (SEC) to conduct an investigation into how T-Mobile reports non-standard accounting measures. The investor also wants the methodology employed by T-Mobile in accounting for defaulters of some of its installment plans.
Non-standard metrics
In the 8 page complaint to the SEC, the CtW Investment Group referred to T-Mobile’s habit of citing non-standard financial results without offering details on how the figures could be reconciled with standard measures as laid out in the GAAP, or Generally Accepted Accounting Principles. While the SEC permits companies to present non-standard metrics to investors, the companies are however required to explain in detail how those non-standard metrics are different from the standard metrics.
In the case of T-Mobile, CtW revealed that the telecom presented investors with a non-standard measure of cash flow referred to as Adjusted EBITDA – Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization. Citing an example, CtW said that last year the mobile carrier moved some of its customers who were on the phone installment payment plans to phone leases. CtW reasoned that this shift would ordinarily have impacted cash flow but such details were left out leaving investors in the dark.
Spectrum licenses
Also added to the list of complaints by CtW was the fact that T-Mobile failed to include amounts it had used to purchase spectrum licenses in its cash flow report, a measure employed to give a picture of how much cash a firm is generating after capital costs and current expenses are deducted. In a period of 36 months, CtW said that T-Mobile failed to include in its free cash flow statement the $4.6 billion it spent to purchase the spectrum licenses, a fact which made its cash flow appear stronger.
CtW’s final complaint was on the allowance made for credit losses.
“Despite the decrease in allowance for credit losses, all of the publicly available indicators of potential credit risk…implied that if anything, credit risk was increasing rather than declining,” wrote CtW.