American Capital Avoids Loss With Fishy Math

In a research note published Wednesday morning, Bank of America analyst Robert Lacoursiere flagged this latest issue at American Capital.

"Curiously, the ECAS investment was written up by $2mm after foreign currency translation, which implies the adoption of a $141.5mm (Euro 100mm) control premium," he wrote, adding that the "arrangement was puzzling."

On its earnings call Wednesday, American Capital management said the ECAS valuation method was allowed under FAS 157. "The methodology is price times quantity ... plus a control premium," management said.

But American Capital made no mention of the fact that the company may lose its ability to apply this control premium to the ECAS value in six months, as TheStreet.com has learned from conversations with FAS 157 experts. Furthermore, using a "control premium" in the first place is an example of very aggressive accounting.

American Capital did not return several emails and phone messages from TheStreet.com seeking clarification.

Sources at the Financial Accounting Standards Board say companies that own stock of another firm should nearly always base the valuation of the stock on the Level I formula: price of stock multiplied by quantity owned. Level I prohibits adding control premiums, the FASB sources say.

If you own stock in another public company, there are only two ways to get around the Level I valuation, say the sources, who have been privy to discussions by the FASB about FAS 157. FASB declined to comment.