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Is T-Mobile US (TMUS) in Trouble for Accounting Practices?

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T-Mobile US Inc. (TMUS - Free Report) –the fastest growing wireless carrier in the U.S. – has been accused of dodgy accounting practices by the CtW Investment Group.

Non-GAAP Figure Issues

Present Securities and Exchange Commission (SEC) rules allow companies to report non-GAAP performance metrics. However, since non-GAAP measures are generally presented as per the discretion of management, companies are required to show a reconciliation statement detailing the exact reasons for the difference between the GAAP and the non-GAAP numbers. CtW group claims that T-Mobile US has provided inadequate details on the same.

The CtW group’s claims are largely focused on the revenue estimates adopted for accounting of T-Mobile US’s Equipment Installation Plans (EIP). Additionally, T-Mobile US has been held accountable for providing a lower amount of credit loss allowance while in reality, its customers have been unable to meet their contractual obligations. Thus, by disregarding the credit risks associated with the EIPs, T-Mobile US may have inappropriately boosted its profits. Notably, shady accounting practices relating to EIPs have been a concern for investors in the wireless industry. T-Mobile US’ rival Sprint Corp. (S - Free Report) has also been facing similar issues.

Other Concerns

CtW group also claims that T-Mobile US has not disclosed the amount spent on spectrum licenses in its cash flow statement, boosting its periodic cash flow in the process. Additionally, T-Mobile US may have also manipulated the cash flow statement by shifting some of its customers in the ‘installment plan’ system to the ‘phone lease’ system.

Our Take

Recently, T-Mobile US has been fast gaining traction as a wireless carrier in the U.S. In order to pose a challenge to bigger rivals like Verizon Communications Inc. (VZ - Free Report) and AT&T (T - Free Report) , the company needs to invest further. However, investors give utmost importance to earnings and hence deceitful accounting practices may dent the company’s ability to draw investments.

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