Industry News

Live Nation warned over accounting terms

Live Nation is among a clutch of companies told to alter their accounting practices by the US financial market watchdog.

The Securities and Exchange Commission (SEC), an agency set up to regulate the securities markets and protect investors, has warned more than 20 companies in the last six months about their potential misuse use of the non-standard metric ‘free cash flow’.

Free cash flow is typically calculated as cash flows from operating activities, a standard accounting metric, less capital expenditures. However, the SEC warned companies in May 2016 that the term does not have a universal definition and its title does not describe how it is calculated. It explained in guidelines that companies should be careful to avoid “inappropriate or potentially misleading inferences” about the usefulness of any free cash flow metric.

According to the Market Watch website, Live Nation defined free cash flow as cash and cash equivalents less ticketing-related client funds, less event-related deferred revenue, less accrued expenses due to artists and cash collected on behalf of others, plus event-related prepaids.

Market Watch said the SEC told Live Nation to either calculate the free cash flow metric the way everyone else does or call it something else. Other major companies such as 3M and Dunkin Brands were also warned that their definition and calculation of free cash flow differs from the typical one that is derived from numbers that comply with Generally Accepted Accounting Principles (GAAP), the standard accounting required for all US public companies.

Important perspective

Market Watch said Live Nation chose to retitle the metric rather than recalculate it. In February, when releasing its full year and Q4 2016 results, it presented a reconciliation of adjusted operating income (loss) to free cash flow.

In its 2016 results, Live Nation said: “The company uses free cash flow, among other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than maintenance capital expenditures.

“The company believes that information about free cash flow provides investors with an important perspective on the cash available to service debt and make acquisitions.”

In its 2016 results, Live Nation said its free cash flow was up five per cent to $352m (£272m/€310m).

It added: “Free cash flow should be considered in addition to, and not as a substitute for, operating income (loss) and other measures of financial performance reported in accordance with GAAP.

“Furthermore, this measure may vary among other companies; thus, free cash flow as presented herein may not be comparable to similarly titled measures of other companies.”

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