accounting discussion
MiracleFY
AllInterestingArticles.pdf
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AOL Time Warner, In January 2001, the $165 billion mega-merger between AOL and Time Warner was the largest media merger in history. The new company promised to offer a powerhouse of integrated communication, media and entertainment across all platforms. But shares of the company fell off sharply in the two years following the merger. Heading into 2003, the company's stock is still down and the SEC and the U.S. Justice Department have opened inquiries into AOL's accounting practices prior to the 2001 merger. [Note: The following breakdown reflects interests and assets as of early 2001.
Production/Distribution
Warner Brothers Studios
Castle Rock Entertainment
New Line Cinema
Fine Line Features
AOL
CompuServe
Netscape
AOL MovieFone
Digital City
MapQuest.com
Spinner.com
The Atlantic Group
Rhino Records
Elektra Entertainment Group
London-Sire Records Inc.
Warner Bros. Records
Warner Music International
Time Life Music
Columbia House (joint venture)
Giant (Revolution) Records (joint venture)
Maverick (joint venture)
Qwest Records (joint venture)
RuffNation Records (joint venture)
Sub Pop Records (joint venture)
Tommy Boy Records (joint venture)
Networks
WB Television Network
HBO
Cinemax
Time Warner Sports
Comedy Central (50% -- Viacom
owns other 50%)
CNN
CNN/fn
CNN/SI
CNN Headline News
TBS
TNT
Cartoon Network
Turner Classic Movies
Court TV (partial ownership)
Production/Distribution
HBO Independent Productions
New Line Television
Turner Original Productions
Warner Brothers Television
Warner Brothers Animation
·Looney Tunes
·Hanna-Barbera
Cable Systems
Time Warner Cable
Sports
Atlanta Braves
Atlanta Hawks
Atlanta Thrashers
Turner Sports
World Championship Wrestling Goodwill Games
Books
Time Life Books
Book-of-the-Month Club (managed
by Bertelsmann)
Little, Brown & Co.
Bulfinch Press
Back Bay Books
Warner Books
Oxmoor House
Magazines
Time Magazine
Life Magazine
Fortune Magazine
Sports Illustrated
Money
People
Entertainment Weekly
In Style
Southern Living
Cooking Light
The Parent Group (Parenting, Baby
Talk, Baby on the Way)
This Old House
The Health Publishing Group
Real Simple
Golf Magazine
Popular Science
Ski
Yachting Magazine
American Express Publishing
Corporation (partial ownership;
includes
Travel & Leisure, Food & Wine,
Departures, SkyGuide)
DC Comics
·MAD Magazine
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Viacom The $50 billion merger between Viacom and CBS Corporation was completed in May 2000. Viacom is now the second largest media conglomerate worldwide, after AOL Time Warner, with 1999 sales of over $12 billion. During the industry's slump, 2001-2002, Viacom remained one of the top performing media giants. Its CEO, Sumner Redstone, has expressed interest in acquiring more cable channels and buying broadcasting channels in the U.K. [Note: The following breakdown reflects interests and assets as of early 2001.
Networks
Infinity Broadcasting
(manages Westwood One
Radio Network)
Metro Networks
Stations
Infinity Broadcasting (owns
and operates over 180
stations)
MTVi Group
CBS Internet Group
Nickelodeon Online
BET.com
Contentville.com (35%)
Production and Distribution
Paramount Pictures
MTV Films
Nickelodeon Movies
Theater Operations
United Cinemas International (joint venture with
Vivendi Universal)
Paramount Theaters
Famous Players (Canada)
Video
Blockbuster Video
Networks
CBS
UPN
MTV Network
MTV
Nickelodeon
Nick at Nite
TV Land
CMT
TNN
VH1
Noggin (joint venture with
Children's Television
Workshop)
Showtime Networks
Showtime
The Movie Channel
Sundance Channel (joint
venture with Robert Redford
and Universal
Studios)
FLIX
SET Pay-Per-View (sporting
and entertainment events)
BET
Comedy Central (joint venture
with AOL Time Warner)
Production and Distribution
Paramount
Spelling Entertainment Group
(80%)
Big Ticket Television
Viacom Productions
King World Productions
Stations
16 CBS-affiliated stations
19 UPN-affiliated stations
Famous Music Publishing
(copyright owners)
Theme Parks Paramount Parks
Infinity Outdoor/TDI
Worldwide -- the largest
outdoor advertising group
in the U.S.
Star Trek franchise
Books
The Free Press
MTV Books
Nickelodeon Books
Simon & Schuster
Pocket Books
Scribner
Touchstone
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The Walt Disney Company is the third largest global media conglomerate. Its FY 2000 revenues topped $25 billion, with 27% derived from parks and resorts, 24% from studio entertainment, and 17% from media networks. [Note: The following breakdown reflects interests and assets as of early 2001.
Production/Distribution
Walt Disney Pictures
Touchstone Pictures
Hollywood Pictures
Caravan Pictures
Miramax Films
Buena Vista Home
Entertainment
Buena Vista Internet
Group:
ABC.com
ABCNews.com
Oscar.com
Disney.com
Family.Com
ESPN Internet Group
NFL.com
NBA.com
NASCAR.com
Soccernet.com (60%)
Infoseek (43%)
Toysmart.com
(majority stake)
Buena Vista Music Group
Hollywood Records
Lyric Street Records
Mammoth Records
Walt Disney Records
Networks
ABC
The Disney Channel
SoapNet
ESPN (partial ownership
with Hearst)
A&E (partial ownership
with Hearst and GE)
The History Channel
(partial ownership with
Hearst and GE)
Lifetime (partial ownership
with Hearst)
E! (partial ownership with
Comcast, MediaOne and
Liberty Media)
Television Stations 10
television stations
Television
Production/Distribution
Buena Vista Television
Touchstone Television Walt
Disney Television,
Animation
Radio
ABC Radio Networks
Radio Disney
ESPN Radio
27 radio stations
Sports
Mighty Ducks of
Anaheim
Anaheim Angels
(partial ownership)
Theme Parks
Disneyland
Walt Disney World
Disney-MGM Studios
EuroDisney (partial
owner)
Disneyland Japan
Epcot
Disney's Animal
Kingdom
Disney's California
Adventure
Disney Cruise Line
Theater
Walt Disney Theatrical
Productions
Books
Walt Disney Company
Book Publishing
Hyperion Books
Talk/Miramax Books
Magazines
Discover Magazine
Disney Magazine
ESPN Magazine
Talk
US Weekly (50% stake)
Daily Newspapers
County Press (Lapeer,
MI)
Oakland Press and
Reminder (Pontiac, MI)
Narragansett Times
St. Louis Daily Record
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Japan-based Sony Corporation started in 1946 as Tokyo Telecommunications Engineering, with three employees. Now, it boasts more than 180,000 employees worldwide and over $58 billion in sales for 2001. Its Sony Pictures Entertainment is one of the seven major movie houses in Hollywood, while Sony Music is one of the top five distributors of albums worldwide. Heading into 2003, Sony's strategy is a gamble: connecting each of its consumer products to the Internet and then using them as a platform to deliver content from its entertainment divisions. Meanwhile, revenue from video games and movies has kept it atop of the Japanese electronics industry. [Note: The following breakdown reflects interests and assets as of early 2001.
Sony Electronics
Sony Life Insurance
Metreon (a mall in San
Francisco)
Sony Pictures Digital
Entertainment
Sony Online
Entertainment
Sony Computer
Entertainment (computer
games, PlayStation)
Production/Distribution
Columbia TriStar Domestic
Television
Columbia TriStar
International Television
Sony Pictures Family
Entertainment
Telemundo Group (partial
ownership)
Cable
Sony Entertainment
Television (India, Latin
America)
Game Show Network
(jointly owned with Liberty
Digital)
HBO Asia (partial
ownership)
SET Asia (partial
ownership)
Cinemax Asia (partial
ownership)
HBO Ole, Latin America
(partial ownership)
Cinemax, Latin America
(partial ownership)
E! Entertainment
Television, Latin America
(partial ownership)
The Movie Channel, Middle
East (partial ownership) Showtime, Australia
(partial ownership)
Encore, Australia (partial
ownership)
Sky Cinema, Japan (partial
ownership)
Record labels
Columbia Records
Epic Records
Harmony Records
Legacy Recordings
Loud Records
Sony Music
Soundtracks
Monument and Lucky
Dog
Soho Square
Mambo
Rubenstein
Dragnet
Squatt
Sony Classical
Arc of Light
Masterworks
Sony Broadway
SEON
Vivarte
Distribution
Columbia House Music
Club (joint venture
with AOL Time Warner)
pressplay (joint
venture with AOL Time
Warner)
Production/Distribution
Sony Pictures
Entertainment
-Columbia Pictures
-Sony Pictures Classics
-Screen Gems
TriStar Pictures
Columbia TriStar Films
(U.K.)
Columbia TriStar Film
Distributors
Sony Pictures
Imageworks (animation)
Sony Pictures Studios
Theaters
Loews Theatres (partial
ownership)
Star Theatres (partial
ownership)
Cineplex Odeon (partial
ownership)
Plitt Theatres (partial
ownership)
RKO Century Warner
Theatres (partial
ownership)
Walter Reade Theatres
Merchandise
Sony Pictures Consumer
Products
Video
Columbia TriStar Home
Entertainment
Columbia House Video &
Disc Club (joint venture
with AOL Time Warner)
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The Future Ain't What it Used to Be, So Borrow Now SEPTEMBER 14, 2010, By RANDALL W. FORSYTH
Microsoft's reported plan to borrow to pay dividends speaks to the existential crisis facing investors who
need current income.
MICROSOFT HAS SHOWN ITSELF TO BE UTTERLY INEPT in engineering technology products
but it may be more deft in its financial engineering. Bloomberg reported late Monday afternoon Microsoft
(MSFT) is mulling issuing debt to boost its dividends and to repurchase shares whose price has languished for
years, much to the frustration of its millions of holders. The stock responded with a 5% pop as the news crossed
the wires minutes before the 4 PM EDT close.
Microsoft, like many technology companies, has a bulletproof balance sheet with a triple-A credit rating
and some $33 billion in cash. Unlike other tech behemoths such as Cisco (CSCO), Google (GOOG) and
erstwhile rival Apple (AAPL) that pay no dividends, Mr. Softy does pay out 52 cents a year, which figures to a
2.07% yield—a bit less than the 2.16% yield on the seven-year Treasury note. Microsoft can issue debt so
cheaply that it makes sense, says David Goldman, senior editor of First Things magazine (www.firstthings.com)
and former head of credit research at Bank of America. Recall that International Business Machines (IBM) was
able to sell three-year notes recently at the vanishingly low yield of 1%.
Indeed, Microsoft believes it can invest the proceeds of a debt offering at a higher yield than the notes will
likely cost; or it may be planning acquisitions, he adds, though that is difficult to say. In any case, Microsoft
believes borrowing costs are heading higher, an assessment apparently shared by the stampede of corporations
to the bond market.
Microsoft is acting like a utility, Goldman concludes, an appellation that Barrons.com applied to the
company nearly two years ago ("Microsoft: Like a Utility Stock," Dec. 18, 2008 ) He says that, in an era of
permanently elevated equity risk premia—stocks' excess return over bonds owing to aging investors' need for
income—dividends matter more. While many technology companies have resisted paying significant dividends
(because of the perception that returning cash to investors means they've lost their growth mojo), Microsoft has
tried to satisfy desire, albeit ineptly.
In 2004, Mr. Softy paid a $3 a share special payout to take advantage of the reduced, 15% tax rate on
dividends. That translated into an almost equal drop in the stock price, so the $32 billion payout did little to
increase the wealth of company shareholders. Indeed, Microsoft common has spent most of the past decade
fluctuating around its current $25 price—and less than half the $60 it fetched at the peak of the Nasdaq in 2000.
That's more because Redmond, Wash., software colossus has proved itself less than adept in bringing
innovative tech products to market. Indeed, Apple has moved past Microsoft in terms of stock market value
even though Windows still maintains the lion's share of the personal computer market. But I'm typing this on a
laptop running Windows XP, still the most- used operating system even though it's two generations old.
Meanwhile, iPods, iPhones and now iPads have become market-beaters. There are Zunes out there; I
know it because I read it but I've never seen anybody use one instead of an iPod. While iPhones may be
criticized for reception problems, Windows Mobile has faded into irrelevance. And there have been Windows
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tablet computers for years, but nobody cared about those devices until the iPad came along. The Xbox is a great
video-game platform but so is Sony's PS3; and Microsoft will emulate the Wii's ability to play sports—years
after Nintendo introduced it. Finally, "Bing" isn't about to become a verb like Google.
Microsoft's utility-like characteristics come from its annuity-like cash flows from corporate customers
wedded to Windows and Office. Redmond remains attached to holding onto its cash hoard that grows by the
billions each quarter, a trait shared by other tech companies, as Andrew Bary writes in this week's print edition
of Barron's ("Tech's Payout Problem," Sept. 13)
The article posits that if tech giants were to adopt a utility-like 70% payout ratio, Microsoft would yield
over 7% while Hewlett-Packard would yield 9%. Using a more industrial-like 40% payout, Cisco would still
yield over 3%, Google would yield 2% as would Apple. As Morgan Keegan analyst Tavis McCourt observed in
the article, "What dividend-oriented manager wouldn't want to buy Qualcomm at a 3% to 4% yield, rather than
a no-growth utility at 4.5%?" (Qualcomm would yield 4.6% at a 70% payout ratio, based on last week's prices.)
Those yields would be paid out of current earnings. Debt financing to augment dividends or share
repurchase would take advantage of current, extraordinarily low bond yields. Treasury yields have fallen owing
to the likelihood that the Federal Reserve will maintain short-term rates at nearly zero well into 2011, if not
2012, which was bent the long end of the yield curve lower. Investment-grade companies can take borrow at a
relatively small increment over Treasury yields owing to the insatiable demand from institutional bond investors
to provide for future liabilities such as pension payments.
So, why not take advantage of this state of affairs for shareholders' benefit? Profitable companies can
deduct the interest cost at higher tax rates than the 15% current levy on dividends. Given that the Obama
administration proposes raising the rate to 20%, it's a fair bet it won't revert to the full ordinary income rate,
which is slated to rise to a top 39.6% bracket at the turn of the year. House Republican leader John Boehner's
willingness to support a partial retention of the Bush tax rates would seem to bode well for staving off a sharp
jump in tax rates on dividends, especially as a growing number of voters become dependent on income from
investments as they retire.
All very rational, to be sure, but the corporate decision to alter the financial structure speaks to the
existential crisis now besetting investors, most notably Baby Boomers looking ahead to retirement. They need
the bird in the hand now and can't wait for the two or more in the bush. That demand has helped to drive down
bond yields. In turn, they need to realize more current income from what had been their investments in future
growth. The future has arrived and it has been found wanting. If it takes borrowing from the future to pay for
current payouts, as Microsoft is contemplating, so be it. As the great American philosopher, Yogi Berra,
observed, the future isn’t what it used to be.
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New York Stock Exchange
Number of Corporations Listed in the NYSE by
Region in the World
NYSE 11/12/2007 5/20/2008 1/1/2009 9/9/2010 11/13/2011
North America - US, Canada,
Mexico, Caribbean, Bermuda,
Puerto Rico) 3289 3340 2986 2910 2949
Europe 153 156 154 157 159
Asia 99 106 103 115 132
Latin America 62 87 69 62 82
Middle East/ Africa 9 9 9 7 8
3612 3698 3321 3251 3330
A Portion of the Largest Number
of Firms Incorporated and
Traded in the NYSE by Country 11/12/2007 5/20/2008 1/1/2009 9/9/2010 11/13/2011
US 3133 3204 2830 2766 2819
Canada 82 79 79 69 71
UK 44 46 48 47 46
Bermuda 43 42 42 39 41
Brazil 37 37 27 33 33
China 35 42 41 56 72
Netherlands 29 25 25 26 27
Mexico 18 18 20 18 18
Chile 17 15 15 12 12
Argentina 12 11 11 10 12
India 11 11 12 12 11
Germany 11 13 11 5 7
Switzerland 11 14 10 11 11
France 9 9 8 7 8
South Africa 6 6 6 5 6
Israel 3 3 3 2 2
Others 111 123 133 133 134
http://www.nyse.com/about/listed/lc_ny_region.html
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SEC Road Map for Transition to IFRS Available
UPDATE: SEC Extends Comment Period on IFRS Road Map The SEC on Friday released a long-awaited road map for the transition by U.S. public companies to the use of International Financial Reporting Standards (IFRS). The Commission set a longer-than-expected 90-day comment period for the proposal, which puts forth milestones that, if met, could lead to the required use of IFRS by U.S. issuers beginning in 2014. The Commission is also seeking comment on two alternative proposals under which U.S. issuers that elect to use IFRS would disclose U.S. GAAP information. The 165-page document echoes the broad outlines of the plan unveiled Aug. 27, when the Commission voted unanimously to seek comments on the road map. Under the proposal, the SEC would decide in 2011 whether to proceed with rulemaking to require that U.S. issuers use IFRS beginning in 2014. Early adoption beginning with filings in 2010 would be allowed for certain issuers (see the milestones below for details on eligibility). “The Commission has long expressed its support for a single set of high-quality global accounting standards as an important means of enhancing … comparability,” the proposal states. “We believe that IFRS has the potential to best provide the common platform on which companies can report and investors can compare financial information.” The 90-day comment period shifts the potential adoption of the road map to an SEC led by President-elect Barack Obama’s pick to succeed current Chairman Christopher Cox, who has said he intends to resign at the end of President Bush’s term. The road map spells out seven milestones that would influence the SEC’s 2011 decision on whether to move forward. The milestones are:
• Improvements in accounting standards • The accountability and funding of the International Accounting Standards Committee Foundation • Improvement in the ability to use interactive data for IFRS reporting • Education and training in the U.S. relating to IFRS • Limited early use of IFRS, beginning with filings in 2010, where this would enhance comparability for U.S.
investors. Eligibility would be based on both the prevalence of the use of IFRS and the significance of the issuer in a given industry. The SEC estimates that a minimum of 110 companies could be eligible.
• The anticipated timing of future rulemaking by the Commission • Implementation of the mandatory use of IFRS, including considerations relating to whether any mandatory use of
IFRS should be staged or sequenced among groups of companies based on their market capitalization. Under a staged transition, IFRS filings would begin for large accelerated filers for fiscal years ending on or after Dec. 15, 2014. Remaining accelerated filers would begin IFRS filings for years ending on or after Dec. 15, 2015. Non-accelerated filers, including smaller reporting companies, would begin IFRS filings for years ending on or after Dec. 15, 2016. The Commission believes a staged rollout would help mitigate the costs of the shift to issuers and the resource demands on auditors, consultants and others. But the Commission acknowledges in the document that a staged rollout would lead to a lack of comparability of financial information and would temporarily create a dual system of reporting that would require investors to be familiar with U.S. GAAP and IFRS. The road map spells out two alternative proposals under which U.S. issuers that elect to use IFRS would disclose U.S. GAAP information. Under the first alternative, Proposal A, a U.S. issuer that elects to file IFRS financial statements would provide the reconciling information from U.S. GAAP to IFRS called for under IFRS 1, First-time Adoption of International Financial Reporting Standards, in a footnote to its audited financial statements.
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Under the second alternative, Proposal B, U.S. issuers that elect to file IFRS financial statements would provide the reconciling information from U.S. GAAP to IFRS required under IFRS 1 and would also disclose on an annual basis certain unaudited supplemental U.S. GAAP financial information covering a three-year period. The Commission stressed the importance of uniformly applying IFRS. “Any decision we may take to expand the use of IFRS to U.S. issuers would necessitate our evaluation of whether global developments support the assertion of IFRS as the single set of high-quality globally accepted accounting standards that is applied consistently across companies, industries and countries,” the proposal states. The release does not address the method the Commission would use to mandate IFRS for U.S. issuers. One of the options, according to the road map, would be for FASB to continue to be the designated standard setter for purposes of establishing the financial reporting standards in issuer filings with the Commission. Under that option, FASB would likely incorporate all provisions under IFRS and all future changes to IFRS directly into U.S. GAAP. Similar approaches have been used by a “significant number of other jurisdictions when they adopted IFRS as the basis of financial reporting in their capital markets,” the document states. Discussion of potential costs and benefits is part of the road map. In industries with a large number of companies using IFRS, allowing U.S. issuers to move to IFRS could help eliminate accounting differences within the industry and potentially help investors by improving comparability, the Commission states. For the large companies the Commission expects to be eligible for early adoption, based on data used for purposes of the Paperwork Reduction Act, the SEC estimates the costs for issuers of transitioning to IFRS would be approximately $32 million per company and relate to the first three years of filings on Form 10-K under IFRS. Total estimated costs for the approximately 110 issuers estimated to be eligible for early adoption would be approximately $3.5 billion. The road map is available at www.sec.gov/rules/proposed/2008/33-8982.pdf. The comment period ends 90 days after the document is published in the Federal Register.
http://www.journalofaccountancy.com/web/roadmapfortransitiontoifrsavailable.htm
NOVEMBER 16, 2008
Will IFRS take over the accounting world by 2014?
Throughout the years the globalization of businesses has steadily increased causing a growing
acceptance of a generalized set of standards for accountants across the world. In April 2001, the International
Accounting Standards Board (IASB) was founded to undertake the responsibilities of the International
Accounting Standards Committee (IASC) established in 1973. The IASB is made up of fourteen members
representing nine countries, including China, Japan, Australia, and the U.S., and is sponsored by a variety of
financial institutions, companies, banks, and accounting firms.
In 2002, a year after their establishment, the IASB united with the Financial Accounting Standards
Board (FASB) to combine their knowledge and develop a set of high-quality accounting standards that would
be compatible with all countries in order to successfully carry out international business affairs and their
accounting. This set of global accounting standards is referred to as the International Financial Reporting
Standards (IFRS). According to the American Institute of Certified Public Accountants (AICPA), 12,000
companies in 113 countries have already adopted the use of IFRS. The U.S. Securities and Exchange
Commission (SEC), one of the primary supporters of developing a set of standards to act as a guideline for
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financial reporting during transnational offerings, has encouraged the adoption of IFRS in the U.S. On
November 14, 2008, the SEC announced that they anticipate the United States will adopt IFRS beginning in
2014, along with the roadmap and objectives which need to be achieved in order to meet the estimated timeline.
GAAP vs. IFRS
Although GAAP and IFRS still cover the same issues and provide guidance for accountants and their financial
statements, there are many differences that must be adopted during the conversion process. In International
Accounting Reporting Standards (IFRS): An AICPA Backgrounder developed in 2008, the AICPA states that
the FASB and the IASB have been working to converge the topics from IFRS to U.S. GAAP in order to
diminish any issues aroused by the key differences between the two sets of standards. The AICPA also lists
some of the significant differences that still remain during the convergence projects:
• IFRS does not permit Last In First Out (LIFO) as an inventory costing method.
• IFRS uses a single-step method for impairment write-downs rather than the two-step method used in
U.S. GAAP, making write-downs more likely.
• IFRS has a different probability threshold and measurement objective for contingencies.
• IFRS does not permit curing debt covenant violations after year-end.
• IFRS guidance regarding revenue recognition is less extensive than GAAP and contains relatively little
industry-specific instruction (AICPA, 2008).
The IFRS website (http://www.ifrs.com) also mentions these differences along with what they believe is the
leading dissimilarity, “IFRS provides much less overall detail…IFRS fits into one book, about two inches thick.
By contrast, U.S. GAAP contains approximately 17,000 pages of detailed rules and guidance” (“IFRS FAQs,”
2008). The U.S. must discover a way to complete their accounting without all of the extra guidelines given by
U.S. GAAP. The FASB and the IASB both hope to resolve most of the major issues before the SEC permits
publicly traded companies to apply IFRS to their accounting.
SEC Roadmap
Since 1988, the SEC has played a leading role in international efforts to acquire a staple set of accounting
standards. A recurring issue that the SEC has brought up is that “issuers wishing to raise capital in more than
one country are faced with the increased compliance costs and inefficiencies of preparing multiple sets of
financial statements to comply with different jurisdictional accounting requirements” (AICPA, 2008). They
pushed for a set of standards which companies with cross-border affairs could obey. On November 14, 2008,
the SEC made a public statement and proposed a roadmap which included fundamental guidelines that are
required to be completed by U.S. public companies to progress in the adoption of IFRS. On June 17, 2008,
President Obama announced that extensive progress was to be made concerning the development of a global,
premium set of accounting standards by the conclusion of 2009 (“IFRS FAQs,” 2008). According to the
roadmap, between 2011 and 2012, Canadian, Indian, and Mexican companies are scheduled to adopt IFRS and
between 2014 and 2016, large accelerated filers, accelerated filers, and smaller U.S. public companies will be
required to switch to IFRS (AICPA, 2008). Although the timeline is possible, it is going to be difficult for
companies to switch over so quickly and there will be numerous challenges arising during the process. More
people need to be informed about IFRS and accepting of the conversion. The adoption requires educated, open-
minded business people who are willing to learn and undertake these challenges.
Adoption of IFRS: Challenges and Opportunities
No matter how small the conversion process, many challenges are bound to arise. In an article titled “Guide to
International Financial Reporting Standards,” the Center for Audit Quality mentions some of these challenges.
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Primarily, funding and staffing the IASB with experts who are confident and can function as an “independent
standard-setting body” will be an issue. They also bring up the consistent adoption, application, and regulatory
review which is necessary to achieve the “true benefits of a uniform set of accounting standards.” Lastly, the
Center for Audit Quality brings up a well-known issue that it will be difficult to completely discontinue GAAP
while some still believe that U.S. GAAP is the “true gold standard” for financial reporting (2009).
Obviously, there will also be struggles for anyone dealing with financial documents and the accounting
profession. The AICPA stated that all parties involved in financial reporting must undertake comprehensive
training, colleges and universities will need to add IFRS into their curriculum for students, professional
associations and industry groups will need to include IFRS into all of their programs and materials, and lastly,
IFRS will eventually be included in the CPA examination (AICPA, 2008). In an article titled “Using IFRS to
Drive Business Development,” found in the Journal of Accountancy, Jefferey and Stephen mention that people
can become educated about IFRS from conferences held by the AICPA, the IFRS website, a variety of seminars
and books, and from different publications developed by the Big Four accounting firms (Deane & Heilman,
2009).
Aside from the all of the obstacles brought on by IFRS, there will also be a variety of opportunities that arise
after the conversion process is complete. Most importantly, IFRS will put the U.S. on the same page as the rest
of the world when it comes to financial reporting. This will protect U.S. capital markets, make cross-border
investments easier, and encourage U.S. corporations to invest around the world. Financial reporting will also
become less complex because of the decrease in standards given that IFRS is principle-based (Center for Audit
Quality, 2009). Overall, there are a variety of challenges and opportunities developed by the conversion
process; however, without a strong commitment by companies, accountants, and any other person involved in
the accounting process, it will be very difficult to meet the SEC’s estimated adoption by 2014.
http://www.articlesbase.com/accounting-articles/will-ifrs-take-over-the-accounting-world-by-2014-
1775165.html
Posted: Jan 24, 2010
SEC probe into accounting tricks
The US financial regulator has launched an investigation into accounting tricks by Wall Street firms
designed to mask heavy losses.
The Securities and Exchange Commission (SEC) has written to financial firms to see how widespread the use of
accounting tools such as Repo 105 is.
A recent report accused collapsed bank Lehman Brothers of using this device to hide the true extent of its
losses.
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The SEC said the investigation will last a number of weeks.
Shifting assets
Earlier this month, a report by a court-appointed examiner criticised Lehman Brothers for using Repo 105 to
give the impression that the bank was reducing its levels of debt, when in reality it was not.
It accused Lehman's of removing temporarily $50bn (£33bn) of assets from its balance sheet in 2008 alone.
The collapse of the 158-year-old investment bank in September of that year was the world's largest bankruptcy.
Repo 105 is a legal accounting device that involves shifting around assets to reduce the size of a company's
balance sheet, and effectively give the appearance that debts have been cut.
The SEC is concerned that the practice is widely used on Wall Street.
"We'll be getting very detailed reporting information from financial institutions about how they have accounted
for and disclosed their refinancing or their sales under repos," said SEC head Mary Schapiro.
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8594465.stm
Published: 2010/03/30 09:24:25 GMT
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Chrysler shuts down all production
Close of business Friday will be the start of a monthlong closure of 30 U.S. plants. Company cites
'continued lack of consumer credit.'
NEW YORK (CNNMoney.com) -- Chrysler LLC announced late Wednesday that it is stopping all vehicle
production in the United States for at least a month.
All 30 of the carmaker's plants will close after the last shift on Friday, and employees will not be asked to return
to work before Jan. 19.
Chrysler blamed the "continued lack of consumer credit for the American car buyer" for the slow-down in sales
that forced the move.
The company ordinarily shuts down operations between Dec. 24 and Jan. 5. This closure would add roughly
two weeks to that shutdown.
Chrysler is the third of the Big Three automakers to suspend operations for January. Last week, General Motors
announced it was idling 30% of its North American manufacturing capacity during the first quarter of 2009 in
response to deteriorating market conditions. That move will take 250,000 vehicles out of production. On
Wednesday, a Ford spokeswoman confirmed for CNN that the automaker is adding a week to its normal two-
week seasonal shutdown at a number of its plants.
Chrysler would not say how many fewer vehicles would be produced because of this shutdown. A total of
46,000 employees will be affected. They will be paid during the time off through a combination of state
unemployment benefits and Chrysler contributions, but they will not receive the full amount of their working
pay, a Chrysler spokesman said.
"Chrysler dealers confirmed to the company at a recent meeting at its headquarters, that they have many willing
buyers for Chrysler, Jeep and Dodge vehicles but are unable to close the deals, due to lack of financing," the
carmaker said in an announcement. "The dealers have stated that they have lost an estimated 20% to 25% of
their volume because of this credit situation."
Auto sales have been hit hard by tight credit and the struggling economy. Overall auto sales in the United States
were down 37% last month compared with November 2007. Chrysler's situation was especially bad. Its sales
dropped 47%.
Chrysler's financing arm, Chrysler Financial, has tightened lending terms for buyers and earlier this year, it
announced it would no longer offer leases.
Industry seeking help from Washington
Chrysler, Ford Motor Co. (F, Fortune 500) and General Motors (GM, Fortune 500) have approached Congress
for aid to help them get through the current financial crisis. A congressional effort to establish a stopgap, $14
billion loan program to help Chrysler and General Motors at least until next month collapsed in Congress last
week.
The Bush administration has said it is working on a possible plan to throw the companies a lifeline using money
from the $700 billion bailout approved by Congress in October, the Troubled Asset Relief Program or TARP.
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"It's clear that the automakers are in a very fragile financial condition and they're taking steps to deal with it,"
White House Press Secretary Dana Perino said Wednesday. "We're aware of their financial situation and are
considering possible policy options to provide assistance in an appropriate way. As we've said, a disorderly
collapse of the auto industry should be avoided."
"The speed and severity of the U.S. auto market's decline has been unprecedented in recent weeks as consumers
reel from the collapse of the financial markets and the resulting lack of credit for vehicle financing," GM said in
a Dec. 12 announcement, citing a 41% drop in November sales.
Both GMAC and Chrysler Financial are trying to receive federal assistance under the TARP program. GMAC is
affiliated with General Motors, which owns 49% of the finance company. The other 51% of GMAC is owned
by a consortium of investors led by Cerberus, which owns Chrysler and Chrysler Financial.
December 17, 2008
http://money.cnn.com/2008/12/17/autos/chrysler_shutdown/
Overseas demand lifts HP profits
US computer maker Hewlett-Packard (HP) has reported a rise in profits for the three months to the end
of April, boosted by demand outside the US.
Quarterly net income was $2.1bn (£1.1bn), up 16% on the previous year. HP was helped by strong sales
overseas where it generates two-thirds of its revenue, with fastest revenue growth in emerging economies.
Revenue grew 16% in Europe, the Middle East and Africa to $11.9bn, trumping the 4% growth to $11.1bn in
the US. "HP turned in another strong quarter, supported by improvement across our businesses," said the firm's
chairman and chief executive Mark Hurd.
The company increased its revenue target for the year to be between $114.2bn and $114.4bn, up from previous
guidance of $113.5bn to $114bn - showing that the faltering US economy is not holding HP back. Last week,
HP struck a deal to buy the information technology provider Electronic Data Systems (EDS) for $13.9bn (£7bn)
to better compete with IBM in the technology services market.
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7411789.stm Published: 05/20/2008
Behind the Scenes at WrestleMania 33
By Dolly Faibyshev
April 20, 2017
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In the 32 years since World Wrestling Entertainment Inc. staged the first WrestleMania, the company has seen
its marquee production evolve from a singular early spring spectacle to one of more than a dozen annual feature
events. But Mania remains WWE’s lodestar—the night when it pulls out all the stops to draw in new fans and
wow casual and hardcore ones alike.
Lest you think that, decades in, WWE has run out of ways to top itself, WrestleMania 33 in Orlando featured
the retirement of the Undertaker after 27 years with the company; a tag-team ladder match highlighted by the
surprise return of the Hardy Boyz (the Wright brothers of the form, which involves scaling a ladder to secure
title belts hanging from a hook, mid-ring); a six-motorbike police escort of Triple H and Stephanie McMahon
down a 90-yard ramp to the ring; and staggering aerial feats throughout.
Those tuning in at home could take in the spinebusters and Swanton Bombs for free, part of the growth strategy
for the WWE Network, a multiplatform service that began in February 2014. The enterprise was widely viewed
as risky—programming isn’t cheap, and WWE’s chief financial officer estimated that, at $9.99 per month, the
network would need between 1.3 million and 1.4 million subscribers to break even. The company predicted it
would eventually attract from 2.5 million to 3.8 million worldwide.
After some early struggles, WWE has gradually expanded its free-trial strategy to offer 30 gratis days starting
anytime. Last year’s WrestleMania was the first to be included—a gamble, given the potential loss of pay-per-
view proceeds, but also indicative of how important the network, which returns a greater and more consistent
share of revenue to the company, has become. WWE typically announces its subscriber data the day after
WrestleMania, and this year the number of paid viewers had increased 14.5 percent from last April, to 1.66
million—a sign that the bet is paying off.
https://www.bloomberg.com/news/features/2017-04-20/behind-the-scenes-at-wrestlemania-33
Cost-cutters boost IBM's results
IBM's profits have come in better than expected, helped by cash-strapped companies calling it in to help
cut costs and improve IT infrastructure.
Net profit for the three months to the end of June came in at $2.77bn, which is up 22% on the same period of
2007. IBM also raised its own forecast for earnings for the whole of 2008. The company has also benefited
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from the weakness of the US dollar, as it means that its earnings from outside the US are more valuable. The
news sent shares up $1.90, or 1.5%, to $128.42. The company's sales jumped 13% in the three month period,
but the increase would only have been 6% without the effect of the weaker dollar.
About two-thirds of IBM's revenue comes from non-US sources. "They're focusing outside the US to ride
through the domestic downturn," said Zach Rosenstock from Wayne Hummer Wealth Management. Many
investors see IBM as a safe haven against the US economic slowdown. Its shares have risen about 17% this
year, compared with a 15% fall on the Dow Jones Industrial Average.
IBM said it was still concerned about the economies of some of the biggest industrialised nations, but added
that its concerns were already factored into its forecasts. New service contracts, which are a key indicator of
future growth, grew 12% to $14.7bn in the quarter. IBM's results impressed Wall Street much more than
Google's and Microsoft's figures, which came out at the same time and were below expectations.
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7513208.stm Published: 07/18/2008
STATES WITHOUT SALES TAX COLLECT OTHER TAXES
Believe it or not, there are still Five States Without Sales Tax, each of which retain a type of unique status in the United States. For those of you keeping score at home, that's nearly 10%! That's pretty darned good in a country where State Budget deficits are rising like Mountain climbers climbing that whopper of a Mountain they call Mount Everest! Congrats to those who live in or nearby these States -- or even those who have friends or relatives in these States because they can buy stuff for you in the se States Without Sales Tax and ship it to you for you!
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Alaska To date, Alaska has derived the vast majority of her tax revenue from the production of BLACK COAL, AKA TEXAS TEA -- OIL, that is!!! So other than the uh, (BRRRRRRR) up there, these folks are living pretty darned well! Delaware Instead of a State or Local Sales Tax on purchases in Delaware, the State levies what is called a "Gross Receipts Tax" on busineses that sell goods or provide services. Depending on the type of business activity, this tax rate ranges from 0.1037% to 2.0736%. Montana The State of Montana seems to make due with many of the other types of taxes that are levied throughout the State on income, businesses, property - and fairly high excise taxes on gasoline and tobacco. Montana also receives a lot of Federal spending back in the State too. New Hampshire New Hampshire is also one of the nine States that doesn't have a personal income tax. New Hampshire is able to maintain this unique status because they collect significant tax revenues from businesses and property taxes. Let's see how this evolves. Oregon While lower than average in terms of the overall tax burden in the State, high income tax rates and higher than average business and corporate taxes are likely what enables the State of Oregon to forego a consumer Sales Tax on purchases. Now we know the people who live in these No Sales Tax States are lucky! But if you live in one of the States next to or nearby these States YOU are lucky too because YOU can hop on over the State border and do a little TAX FREE shopping any time you want! http://www.easy-tax-information.com/states-without-sales-tax.html
NO INCOME TAX STATES HOW THEY DO IT
Here is a list of No Income Tax States and reasons they are States With No Income Tax.
There are NINE* STATES With No Income Tax for individuals (and we are talking about personal income tax here). Alaska According to the Alaska Department of Revenue, Alaska gets the lion's share (approximately 90%) of it's revenue from oil production. These revenues stem primarily from taxes on corporate income, property, oil production, and the State's oil production royalty share. Florida There's no shortage of license fees, taxes, surcharges, surtaxes, and assessments in Florida! We counted over 70 different types of revenue collection instruments in the Florida Tax Handbook. This State brings in huge revenues from millions of tourists who travel there every year! Nevada If you guessed most of Nevada's tax revenues come from gaming, you were close. According to the State of Nevada's Executive Budget, Sales and Use Taxes bring in about a third of all the State's revenues and Gaming Taxes run a close second at over 25% of total revenues. New Hampshire* The State of New Hampshire doesn't have a personal income tax or a sales tax. How cool is that??? Although they do collect plenty of revenue from at least 14 other primary taxes, The Tax Foundation indicates they rely very heavily on State and Local Property taxes.
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*Interest and dividend income is taxed at 5% in New Hampshire. South Dakota The South Dakota Department of Revenue and Regulation shows on their website that they derive revenue from four areas, Business Taxes, Property Taxes, Special Taxes and Motor Vehicles. There are no individual or corporate income taxes levied in the State of South Dakota. Tennessee* In addition to 20 other types of taxes the Tennessee Department of Revenue collects, Tennessee has a a severence tax on things like coal, certain minerals, crude oil and natural gas, which is imposed on all of these products, sold inside or outside the State of Tennessee. *Interest and dividend income is taxed at 6% in Tennessee. Texas*Similar to Florida, there's lots of taxes in Texas! The State of Texas Comptrollers Office says they collect over 60 different types of taxes for the State. Taxes are collected on all kinds of things from Automotive Oil Sales to Fireworks and even Sexually Oriented Business Fees. Washington As in South Dakota, there is no personal or corporate income tax levied in the State of Washington. However, Washington State does collect a good deal of tax revenue from Businesses in the form of what they call a Public Utility Tax and/or a Business and Occupation tax. Wyoming As one of the No Income Tax States, Wyoming is pretty cool because, like South Dakota and Washington State, they too do not levy a corporate income tax either. Even cooler, they also don't tax bank accounts, bonds or stocks -- or even retirement income from out of State. Now that you know all of the States Without Income Tax, maybe you can move to one of them and save a buck here and there. We certainly hope you at least feel much more knowledgeable about which of the 50 States That Have No Income Taxes! http://www.easy-tax-information.com/no-income-tax-states.html
IRS differs with ABC By Tonia Moxley Thursday, May 11, 2006 As a result of her participation in "Extreme Makeover: Home Edition," Carol Crawford Smith might owe taxes on an additional $122,400 in income. Her tax liability could increase by $20,000 or more.
BLACKSBURG -- A Blacksburg family and dozens of others across the country who have received new homes
from the ABC television show "Extreme Makeover: Home Edition" could face hefty tax bills if audited,
according to a nonbinding ruling issued by the Internal Revenue Service. The IRS released what it calls an
"information letter" on March 31 that contradicts the advice ABC representatives and producers of "Extreme
Makeover" give to winners on how to avoid paying federal income taxes on their new homes.
The show, now in its third season, chooses needy families from across the country to receive new homes. The
episodes feature volunteers demolishing the old houses and building customized replacements in fewer than
seven days. Participants lease their homes to the show for the duration of the shooting, which ABC says will
help the families avoid taxes.
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Carol Crawford Smith and her sons, Hunter and Garland, were featured in February. A former soloist with the
Dance Theatre of Harlem, Smith was diagnosed with multiple sclerosis five years ago and now uses a
wheelchair. She won in part because her old house, with its many stairs, had become unsafe for her. Local
contractors, architects and building suppliers donated skilled labor and building materials estimated to be worth
more than $750,000 to build her new home. None of the local donations are tax-deductible.
Smith said Tuesday that she had not heard about the IRS letter and could not comment on it until consulting
with her accountant and attorney, and talking with ABC. The show's producers responded with a written
statement Wednesday: "We consulted with tax experts and learned that a property owner could lease a home to
a production company for the purposes of shooting a television show for up to 14 days, and that lease and any
home improvements were exempt from state and federal taxes."
Under the exemption, owners also avoid paying taxes on the rent they collect. The IRS letter disputes ABC's
use of the loophole, saying the houses are prizes similar to lottery winnings and other game show awards. As
such, the difference in value between the old home and the new one should be claimed as income on federal tax
returns, University of Cincinnati tax law professor Paul Coran said. If they "don't report the income, they would
run the risk of the IRS coming after them," Coran said.
Smith's old house was worth $144,000, according to Montgomery County records. The new house was recently
valued at $266,400, meaning she could be required to claim the $122,400 difference on her income tax.
According to IRS tax tables, on a hypothetical return with standard deductions for a head of household and two
dependents, income of $122,400 could result in a tax liability of $21,953.
Montgomery County is scheduled to reassess property next year. IRS public relations officials repeatedly
declined to comment on the implications of the ruling. The letter is not binding and there will likely be no
immediate consequences for families. But it does suggest that the IRS would strictly interpret the code, Coran
said. If a "Makeover" case goes to court, as Richmond certified public accountant and tax preparer Chuck
Overbey believes will soon happen, the loophole would be tested.
It's not necessarily illegal or immoral for "Makeover" families to claim the exemption, Overbey said. After all, a
court could rule that it applies in these cases. But if the court rules against them, the families, many of whom are
already cash-strapped, could end up owing significant taxes and penalties.
Overbey also pointed out that historically the IRS has targeted groups of people it suspects of dodging tax bills.
In fact, the IRS has recently been working to get customer records from online payment service PayPal. The
agency suspects some people of using it to deposit money into foreign banks, Overbey said.
But some believe it would be unwise for the IRS to challenge the "Makeover" families in court. "Judging as a
casual viewer, it seems these families do need these renovations and it wouldn't be fair" to sock them with big
tax bills, said Brian Hirsch. Hirsch is a third-year law student who recently published an article about ABC's tax
strategy in the University of Cincinnati Law Review. He also believes the IRS might face public backlash if it
tries to collect from "Makeover" winners.
In his article, he recounts what happened in 1998 when the agency signaled it might collect a gift tax from a
groundskeeper who tried to return a home run ball to former St. Louis Cardinals first baseman Mark McGwire.
The response from fans was swift and harsh and the IRS quickly backpedaled, Hirsch wrote.
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Swiss to Reveal UBS Accounts to Settle U.S. tax Battle
By Jason Rhodes and Kim Dixon Wed Aug 19, 2009 5:19pm EDT (Reuters) - Switzerland has agreed to reveal the names of about 4,450 wealthy American clients of UBS AG to U.S. authorities in a tax dispute settlement that pierces Swiss banking secrecy and now threatens to spill over to other banks.
The deal promises to end years of investigation and uncertainty for UBS, which announced later on Wednesday that the Swiss government was exiting the stake it had taken to aid the bank during the financial crisis. With Switzerland's famed banking secrecy under fire, the Swiss have also agreed to process requests by the United States seeking information from banks besides UBS about account holders suspected of evading U.S. taxes.
"This announcement today should send a signal, no matter what institution you're with, the IRS is willing to pursue both the institution and the individual," Internal Revenue Service Commissioner Doug Shulman told reporters on Wednesday. The accounts were at one time worth $18 billion, Shulman said, though he could not provide a current figure.
U.S. authorities would not name any other foreign banks being probed, but the IRS is expected to use the Swiss deal as a template to pursue further prosecutions. "The IRS is now gaining institutional skill and knowledge in how to pursue these types of cases and they're going to use that. This is, I believe, the beginning and not the end," said Peter Hardy, a former federal prosecutor and specialist in white- collar crime at Post & Schell in Philadelphia.
The UBS dispute had strained relations between the United States and Switzerland and challenged the latter's jealously guarded bank secrecy laws. The deal may add steam to a global effort among cash-strapped governments to crack down on tax-evading jurisdictions. But the settlement could help UBS, the world's second-largest wealth manager, restore an image that has been battered by the financial crisis.
UBS said the Swiss government was exiting its 6 billion Swiss franc ($5.6 billion) stake, with the shares to be placed with institutional investors. UBS shares fell 2.9 percent on the New York Stock Exchange, ahead of the news of the government exiting its stake, after closing one percent lower in Europe. Among Swiss rivals, Credit Suisse was down 0.2 percent on the NYSE, while Julius Baer closed down 0.8 percent in Europe.
UBS RELIEF
UBS Chairman Kaspar Villiger said the tax agreement helps resolve one of UBS' most pressing issues. "I am confident that the agreement will allow the bank to continue moving forward to rebuild its reputation through solid performance and client service."
In February, UBS agreed to pay $780 million and disclose about 250 client names to settle a criminal probe by U.S. authorities. One former UBS banker testified that he smuggled a client's diamonds into the United States in a tube of toothpaste.
Wednesday's deal effectively ends a separate civil lawsuit by U.S. authorities that sought up to 52,000 account names. There was no further monetary penalty.
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"It's good to get this out of the way but the confidence of a lot of clients has been compromised so I'm not sure we will see inflows return in Q3. It will take time to recover reputation from this," said Jaap Meijer, an analyst at Evolution Securities in London.
Other Swiss banks are fretting that the U.S. taxman's spotlight may now fall on them. The Wall Street Journal reported on Wednesday that more European banks have been identified in the U.S. tax probe, including Switzerland's Credit Suisse, Julius Baer, Zuercher Kantonalbank and Union Banque Privee (UBP).
TAXPAYERS URGED TO COME FORWARD
Switzerland may claim its banking secrecy remains intact, but some private bankers say it is no longer a selling point for its banks, which will need to offer other skills like wealth management and legacy planning to attract clients. "The majority of assets in Swiss private banks are from European Union citizens," said David Williams, an analyst at Fox-Pitt Kelton in London. "I think it won't be long before we see action from the European Union along similar lines."
The revised treaty between the United States and Switzerland would allow action in the case of "tax fraud and the like" in the UBS case, the Swiss government said. Precise details will be published 90 days after the agreement comes into force. The U.S. government retains the right to go back and use a summons to collect the names, which roughly equal the number of accounts, if the settlement process fails, said IRS chief Shulman.
Shulman said notices from UBS to clients would go out in stages, but warned U.S. citizens to come forward now. "Once the Swiss government turns over names, all bets are off," Shulman said, noting these clients could face civil and criminal prosecution. Under a temporary amnesty program in effect until September 23, U.S. citizens can come forward and declare accounts, pay fines and in general avoid criminal prosecutions.
Taxpayers who turn themselves in voluntarily pay all unpaid taxes plus interest, pay 20 percent of the amount of tax that was underpaid over the past six years, and a penalty of 20 percent of the highest value of that account over six years. Officials said taxpayers face much harsher punishment if they are discovered by the IRS. "You can end owing more than is in the account, when you add up all the liabilities," said an IRS official who was not authorized to be named. The UBS case has boosted the amnesty program. The agency saw about 400 people come forward during one week in July compared to about 100 during all of 2008 alone.
http://www.reuters.com/article/2009/08/19/us-ubs-idUSLJ59987220090819
Audit reveals city's poor inventory tracking
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By Gene Gleeson May 3, 2010
LOS ANGELES (KABC) -- Los Angeles City Controller Wendy Greuel released an audit Monday showing that
various city departments could not immediately locate nearly $1 million in items purchased with taxpayer
funds, and that hundreds of other items had been sitting unopened or unused for up to seven years.
Hundreds of items belonging to the city of Los Angeles have apparently done a disappearing act. The city's
controller discovered the items were missing during an audit. But some of the missing items may not be missing
after all.
Los Angeles City Controller Wendy Greuel audited three city departments. Monday she said her auditors
discovered that hundreds of items that the city purchased for almost $1 million either were misplaced or
couldn't be located at all.
"Our findings, we felt, were very troubling," said Greuel. "Overall we found that oversight of equipment
location and use to be severely lacking."
Greuel's office audited the Department of Sanitation, Parks and Recreation and the Information Technology
Agency. Of 254 items investigators attempted to locate, 115 were not where they were supposed to be. They
later tracked down 56, but 59 are still missing. Included in that list: a $60,000 video recorder ordered by the
Information Technology Agency.
"During these difficult economic times, it is easy to cut back on oversight, which makes fraud and abuse more
likely," said Greuel.
At this point though, Greuel's office has not reported any theft to police. Some equipment that she thought was
missing wasn't. Her press release lists two Sanitation Department gas analyzers as missing. But department head
Enrique Zaldivar said the analyzers were found at the Hyperion Water Treatment Plant, right where they were
supposed to be.
"I want to say that those two pieces of equipment, gas analyzers, these are sophisticated, expensive pieces of
equipment. They're at our laboratory being utilized right now, and they had been there, it's just that the report
didn't reflect that," said Zaldivar.
One reason for the confusion, say department heads, is that many have tracking systems that are independent of
the auditor's, so it takes some time to reconcile inventories.
Greuel says she also found a lot of equipment that was purchased but not used. At Parks and Rec, the audit
found microwave ovens, TV sets and a deep-fryer purchased seven years ago still sitting on the shelf. The
department's general manager said he'll clean that up.
"We will fix this," said Jon Mukri, city of Los Angeles general manager.
Groupon’s return policy evidences weak internal controls
By Luke Heaney April 12, 2012
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Imagine a product where you could get something at a huge discount, have an insane amount of time to decide
whether or not to use it, and once you do use it, you can still get your money back if you did not like it. Sound
familiar? No, this is not some salesman’s empty promise. It’s called the Groupon Promise. This deeply
discounted deal actually does exist, and the unlimited ‘get your money back’ guarantee is available to all of
Groupon’s consumers. However, for a public company with shareholders to answer to, is this a viable business
model? Maybe not, as evidenced by Groupon’s tripping start as a public company.
Shortly after Groupon issued their first quarter results their independent auditor Ernst and Young cited weak
internal controls and has requested a restatement. The revenue had to be lowered by over $14 million for the
quarter, and the stock plummeted on the news by more than 12 percent. Wall Street analysts expected the newly
IPO’d firm to book a profit for the quarter, but they failed to, and after the restatement, their quarterly loss
totaled an eye-popping $37 million.
So what’s wrong with this Groupon picture? One major issue is that the firm has such a lenient return policy
that it is nearly impossible for the firm to implement adequate control measures. How do you control a blanket
return policy with very little protection for the company? They really have no way of judging what items and
what size and quantity will be returned and the ultimate size of the refunds. The company has reaffirmed its
guidance for the current quarter but given their initial falter, how can anyone believe them going forward?
As students at Bentley who have taken GB 112/212, it is hard not to think déjà vu on this story. Sunbeam under
CEO Chainsaw Al used the channel stuffing measure of booking profits with extremely lenient return policies.
Sunbeam was focused on getting the revenue recognized with little concern over the product’s actual use.
Similarly, Groupon makes their money off the high volume of deals they promote, but is not adequately
managing their exposure when the customer demands their money back. They have been recognizing revenue
before the transaction is completed, in many cases, before the consumption of services. And, with the right of
return of Groupon’s money back guarantee, this was a perfect set-up for misstating their financials. At the end
of the day, I agree with E&Y’s statement that this really is based on a lack of internal control. Groupon is still
an infant of a public company. Their management team does not actually understand the basics of what revenue
recognition means. In addition, offering an unlimited return policy can impede the growth of their business. It
will only provide a short term pop that may backfire and cause a long term black mark on your record. This
company now sits with their stock at new lows, a full 30 percent below its IPO price; a fresh shareholder
lawsuit on their hands; and the company has only been public for 5 months. What a way to start your marriage
to investors.
A key take away from this story is that the basic concepts of accounting and revenue recognition are not only
for students of accounting or your local CPAs. They are necessities for all members of the business world. The
real culprit here was not a management team trying to game the system. They simply had no idea that what they
were doing was wrong. But, when people’s money is on the line, ignorance is not an excuse, and in the blink of
an eye, your reputation is totaled. It took an independent auditor to tell them “No”. Maybe if they had read their
GB 112 book a little more closely, this never would have happened.
http://bentleyvanguard.com/2012/04/12/groupon%E2%80%99s-return-policy-evidences-weak-internal-controls/
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Brazil to break Aids drug patent Brazil's president has authorized the country to bypass the patent on an Aids
drug manufactured by Merck, a US pharmaceutical giant.
The country will import a cheaper, generic Indian-made version of the patented Efavirenz drug. The decision
came after talks between Brazil and the US company broke down. Merck had offered Brazil a 30% discount on
the cost of the drugs but the country wanted to pay the same price as Thailand, which gets a larger discount.
Small royalty
Merck offered Brazil almost a third off the cost - pricing the pills at $1.10 (£0.55) instead of $1.59. But Brazil
wanted its discount pegged at same level as Thailand, which pays just $0.65 per pill. Now, though, it will
source Indian-made versions of Efavirenz for just $0.45 each. "From an ethical point of view the price
difference is grotesque," said President Luiz Inacio Lula da Silva. "And from a political point of view, it
represents a lack of respect, as though a sick Brazilian is inferior," he added.
He said that the compulsory licensing of Efavirenz was a legitimate and necessary measure to guarantee that all
patients had access to the drug.
Brazil's decision means that Merck, which holds the patent for the drugs, will only get a small royalty for the
generic versions of the drugs purchased. Under Brazilian law and rules established by the World Health
Organization, such a license can be granted in a health emergency or if the pharmaceutical industry abuses its
pricing.
'Advancing access'
Some 75,000 Brazilians use Efavirenz, out of a total of 180,000 people who receive free antiretroviral drugs
from the government. Aids activists in the country welcomed the decision.
"This is certainly an important advance in terms of widening access. We are very happy that Brazil is moving in
the right direction," said Michel Lotrowska of NGO Medecins Sans Frontieres. Thailand's decision to break
Merck's Efavirenz patent, as well as drugs produced by two other firms, led to the country being placed on a US
list of copyright violators.
The company said that Brazil's decision could discourage pharmaceutical firms from investing in treatments for
illnesses prevalent in the developing world.
Brazil's move, Merck said, sent "a chilling signal to research-based companies about the attractiveness of
undertaking risky research on diseases that affect the developing world."
http://news.bbc.co.uk/go/pr/fr/-/2/hi/americas/6626073.stm Published: 05/04/2007
Supreme Court protects US copyrights Congress ruled 7-2 in favour of protecting copyright
The threat of cartoon characters such as Mickey Mouse losing their copyright has been lifted by a
Supreme Court ruling in the United States. The decision is a victory for Hollywood and companies such
as Disney and AOL Time Warner who stood to lose millions of dollars worth of archives to the public
domain.
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Internet publisher Eric Eldred had argued that a recent change to the law - extending the copyright
ownership of old songs, books and cartoon characters - was unconstitutional. But the court's 7-2 ruling
gives Congress permission to repeatedly extend copyright protection. It means internet publishers and
others will not be able to make old books available online and use the likenesses of Mickey Mouse and
other old creations without paying royalties.
Justice Ruth Bader Ginsburg said: "History reveals an unbroken congressional practice of granting to
authors of works with existing copyrights the benefit of term extensions so that all under copyright
protection will be governed evenhandedly under the same regime."
Public harm Justices said the copyright extension, named after the late Congressman Sonny Bono of
California, was neither unconstitutional overreaching by Congress nor a violation of free-speech rights.
In 1998, Congress extended by 20 years copyright protection, which until then had been granted for 70
years after the death of the author.
For anonymous works or those owned by companies, the law made the new limit 95 years. Justices John
Paul Stevens and Stephen Breyer opposed the ruling, saying the court was making a mistake. Justice
Breyer said: "The serious public harm and the virtually non existent public benefit could not be more
clear. "Copyright holders stand to collect about $400m more a year from older creations under the
extension."
Good incentive Justice Stevens said the court was "failing to protect the public interest in free access to
the products of inventive and artistic genius". Had the ruling gone the other way copyrights for movies
such as Casablanca, The Wizard of Oz and Gone With the Wind could have been threatened. Protection
for the version of Mickey Mouse portrayed in Disney's earliest films, such as 1928's Steamboat Willie was
also due to expire.
The ruling affect small music publishers, orchestras and church choirs who must pay royalties to
perform some pieces. A Disney spokeswoman Michele Bergman said the ruling "ensures copyright
owners the proper incentive to originate creative works for the public to enjoy".
http://news.bbc.co.uk/2/hi/business/2665559.stm January 16, 2003
Some Top Lawyers Bill More than $1,000 an Hour
for Bankruptcy Work
Dec 16, 2009
A few lawyers are billing more than $1,000 an hour for bankruptcy work in Manhattan and Delaware courts.
The top billers for the year ending in August 2009 were Pleasantville, N.Y., solo Alan Harris and tax partner
Bernie Pistillo of Shearman & Sterling and, the American Lawyer reports. Harris charged $1,200 an hour for
work as special real estate litigation counsel on the bankruptcy of Digital Printing Systems, the story says.
Pistillo charged $1,065 an hour for work in the bankruptcy of a building products supplier, Stock Building
Supply Holdings.
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Billing rates for 11 other partners in top law firms also broke the $1,000 an hour mark, while some associate
rates topped $700 an hour. The publication gleaned the information from its own database of more than 13,000
billing rate entries submitted in bankruptcy cases in Delaware and the Southern District of New York, the
nation's two busiest bankruptcy courts
Harvey Miller of Weil, Gotshal & Manges billed $950 an hour for work on the Lehman Brothers bankruptcy,
while Corinne Ball of Jones Day billed $900 an hour for work on the Chrysler case.
The law firm with the top median rate for partners in bankruptcy cases was Simpson Thacher & Bartlett, with a
median hourly rate of $980.
Your Ultimate Cheat Sheet to the 10 Biggest Bankruptcies in History
By Derek Hoffman April 7, 2010
It may be a distant memory now, but only a few years ago the financial world was awash with debt financing.
Then along came a little thing called the ‘credit crunch’. Unsurprisingly, many organizations couldn’t meet their
creditors and the rest is, well, history – just like several of the companies involved. Now they can take their
place in the pantheon of great business bankruptcies, alongside those other infamous failures…
10. Pacific Gas and Electric Co. – $36.1b
PG&E is an old, distinguished firm that supplied gas, hydroelectric and steam power to the nation. Following
the deregulation of the electricity market somebody decided it would be a good idea to sell off their gas power
plants, retaining only their hydroelectric resources. Big mistake. Over the next few years the company was
forced to purchase gas from its competitors, buying at fluctuating market price and selling at a fixed rate to
clients. Unsurprisingly, this just wasn’t sustainable and led to massive losses and, ultimately, bankruptcy in
2001. Unusually for this list though, PG&E has since emerged from the depths and established itself has a
leading light again, being named one of the most profitable companies for 2005 on the Fortune 500 list.
9. Thornburg Mortgage – $36.5
In August 2007 Thornburg were riding the mortgage-backed security wave, with a high rating from most
investment banks. Then, amid fears of increased margin calls, a trader at Deutsche Bank downgraded
Thornburg to ‘sell’. There followed a dramatic decline in the value of these securities and, despite attempts to
raise equity through shared offerings, the company found itself on the slippery slope down into the abyss of
bankruptcy. Filing in early 2009, Thornburg had become a textbook victim of mid-2000s, asset-backed security
delusion. And they paid for it.
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8. Chrysler -$39.3b
Increased demand for smaller, more fuel-efficient vehicles had Chrysler – one of America’s motor powerhouses
– on the back foot for much of the previous decade. The credit crunch ultimately finished the company off
when, resisting pleas from President Obama himself, several creditors refused to forgive Chrysler’s debts. On
April 30, 2009, Obama forced Chrysler into federal bankruptcy protection and the company announced a plan
for a partnership with Italian automaker Fiat. After an asset sale and the formation of a new company, Chrysler
Group LLC, Fiat will now hold a 20% stake in Chrysler, with an option to increase this to 35%, and eventually
to 51% if it meets its goals in the future.
7. Conseco – $61.4b
Originally known as Security Life of Indiana, Conseco is a financial services organization based in Carmel,
Indiana, providing life insurance, annuity and supplemental health insurance products to more than 4 million
people in the US. Following a spate of ill-thought out acquisitions in the 1990s, Conseco collapsed in 2002
under a huge debt load that included the $6 billion purchase of Green Tree, the nation’s largest mobile-home
lender. Under the terms of a tentative bankruptcy agreement, Conseco Finance Corp. was sold to CFN
Holdings, whilst Conseco Finance became insolvent after it failed to make a $4.7 million payment.
6. Enron – $65.5b
In 2001 Enron became a byword for corporate failure and scandal when it collapsed following an elaborate
cover-up of its failures. In just 15 years, Enron grew from nowhere to be America’s 7th largest company,
employing 21,000 staff in more than 40 countries. But the firm’s success turned out to have involved an
elaborate scam. Through the use of accounting loopholes, special purpose entities and poor financial reporting,
senior executives were able to hide billions in debt from failed deals and projects. Among the firm’s crimes
were: manipulating the Texas power market, bribing foreign governments to win contracts abroad and
manipulating the California energy market. Enron filed in 2001 for a whopping $65.5b.
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5. CIT – $71b
CIT is a leading participant in vendor financing, factoring, equipment and transportation financing, Small
Business Administration loans, and asset-based lending. Like many others, CIT spent years on a debt-fuelled
growth spree, but when Lehman Brothers’ failure drained the Wall Street liquidity pool, CIT was left exposed.
Despite TARP funds, CIT’s plea for a second federal bailout was refused, and it was forced to take a $3 billion
loan, later expanded to $4.5 billion, from bondholders. All this was to no avail, however, and in November 2009
it filed for Chapter 11 bankruptcy, and had all its prior stock written off – now a long, uncertain recovery faces
CIT.
4. General Motors – $91b
General Motors was for years the biggest company in the automotive industry, a sector that was regarded for
much of the twentieth-century as the most important market in the world. At its peak in 1962, one out of every
two vehicles sold in the US was a General Motors vehicle. GM narrowly avoided bankruptcy in 1991, as falling
sales hit profits, but it managed to recover through a process of cost-cutting and management changes. But
second time around – the automotive industry crisis of 2008/9 – GM was unable to stay afloat. Years of losses
were pushed over the balance and GM declared to the world it would run out of cash in mid-2009, and
following a controversial and drawn-out saga, President Obama refused to rescue the once mighty firm. GM
entered administration on June 8th, 2009 – analysts subsequently blamed the collapse on General Motors’
strategy of cutting prices in order to improve sales, instead of cutting its product line, manufacturing capacity
and dealer network.
3. WorldCom – $103.9b
WorldCom CEO, Bernard Ebbers, became astronomically wealthy from the rising price of his holdings in the
WorldCom’s stock. Yet when the telecommunications industry entered a downturn in 2000, WorldCom’s
aggressive growth strategy suffered a serious setback when it was forced to abandon a proposed merger with
Sprint by the US Justice Department. To cover up the mess, senior executives began used fraudulent accounting
methods to mask WorldCom’s declining earnings by painting a false picture of financial growth, and therefore
keeping the price of its stock artificially high. After a secret investigation by a team of internal auditors in 2002,
WorldCom was found to have added $1b on to its balance sheet fraudulently and was forced to file for
bankruptcy – becoming the largest such filing in US history at the time.
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2. Washington Mutual – $327.9b
Washington Mutual, or WaMu as it was called by many of its clients, is a lesson in what not to do for lenders in
today’s market. The Seattle based bank grew at a a frightening pace, pumping out loans at a furious pace to
virtually anyone who asked – a textbook case of the lax lending practices that so contributed to the global
recession. By 2007 WaMu had accumulated bad loans valuing $11.5b, and it didn’t stop there. The company’s
top executives were rewarded for swift expansion and often disregarded borrower’s income and assets in order
to approve loans. Unsurprisingly this debt-ridden company imploded when the credit crunch hit, filing on
September 26, 2008 for Chapter 11 bankruptcy. Subsequently, all WaMu’s assets and most of its liabilities
(including deposits, covered bonds, and other secured debt) were assumed by JPMorgan Chase.
1. Lehman Brothers – $691b
The behemoth, the monster… Lehman. Recent books dealing with the collapse of Lehman have borne titles
such as ‘Inside the Doomsday Machine’, ‘Colossal Failure of Common Sense’ and ‘Devil’s Casino’. Says it all
really. You know the story by now and are probably very sick of it – anyway, here goes one more time.
A loosening of underwriting standards, coupled with a greedy search for yield by financial organizations, meant
that an increasing proportion of the US mortgage market was subprime – in other words, could never hope to
repay. Several banks, notably Lehman, built up huge exposure to these mortgage-backed securities, and to make
matters worse complicated everything by slicing up these bad debts and selling them on to each other. One
thing led to another, the crap hit the fan and boom. Lehman was left high and dry – no thanks to the US
government and other banks, who declined to save them. When it filed on September 15th, 2008, it had an asset
holding of $691b, the largest bankruptcy in history.
http://wallstcheatsheet.com/economy/10-biggest-bankruptcies-in-history.html/
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Portland woman sues McDonald's over spilled hot
coffee
February 04, 2010 A McDonald's drive-thru customer who suffered burns on her thigh from hot coffee she ordered is suing the restaurant,
claiming the coffee was too hot and the cup's lid too loose.
An attorney for Aurora Hill filed suit in Multnomah County Circuit Court Wednesday afternoon -- stirring memories of a
controversial 1994 suit in which a jury awarded $2.86 million to an Albuquerque, New Mexico woman who spilled scalding-hot coffee on herself, suffering severe burns that required hospitalization. Upon appeal, the parties settled for an
undisclosed amount.
In Hill's case, the suit claims that McDonald's coffee is still too hot, or "extremely hot in the extreme," as the suit puts it. Hill was in the drive thru at the McDonald's at Northwest 19th Avenue and Burnside Street last March 15 when she'd
ordered a large coffee.
According to the suit, "as it was being handed to her by an employee of the defendant, the plaintiff took the cup of coffee
and the plastic top fell off and spilled very hot coffee on plaintiff's upper right leg..."
She went into "nervous shock," endured pain and has scarring. She seeks $7,182 for her pain and suffering, plus another
$318 for lost wages and medical expenses.
The suit lists JWM Enterprises, Inc., as the defendant, and describes it as the Oregon corporation doing business as McDonald's. A McDonald's spokeswoman, based in Illinois, could not immediately say how hot restaurants are supposed
to keep their coffee
. -- Aimee Green
Judge: Cleaner owes me $65 million for pants
2 years of litigation x 1 pair of trousers = headaches for family
business
5/3/2007
WASHINGTON — The Chungs, immigrants from South Korea, realized their American dream when they
opened their dry-cleaning business seven years ago in the nation's capital.
For the past two years, however, they've been dealing with the nightmare of litigation: a $65 million lawsuit
over a pair of missing pants.Jin Nam Chung, Ki Chung and their son, Soo Chung, are so disheartened that
they're considering moving back to Seoul, said their attorney, Chris Manning, who spoke on their
behalf."They're out a lot of money, but more importantly, incredibly disenchanted with the system," Manning
said. "This has destroyed their lives."
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The lawsuit was filed by a District of Columbia administrative hearings judge, Roy Pearson, who has been
representing himself in the case.Pearson said he could not comment on the case.
According to court documents, the problem began in May 2005 when Pearson became a judge and brought
several suits for alteration to Custom Cleaners in Northeast Washington, a place he patronized regularly despite
previous disagreements with the Chungs. A pair of pants from one suit was not ready when he requested it two
days later, and was deemed to be missing.
Pearson asked the cleaners for the full price of the suit: more than $1,000.But a week later, the Chungs said the
pants had been found and refused to pay. That's when Pearson decided to sue.
Three settlement offers
Manning said the cleaners made three settlement offers to Pearson. First they offered $3,000, then $4,600, then
$12,000. But Pearson wasn't satisfied and expanded his calculations beyond one pair of pants.
Because Pearson no longer wanted to use his neighborhood dry cleaner, part of his lawsuit calls for $15,000 —
the price to rent a car every weekend for 10 years to go to another business."He's somehow purporting that he
has a constitutional right to a dry cleaner within four blocks of his apartment," Manning said.
But the bulk of the $65 million comes from Pearson's strict interpretation of D.C.'s consumer protection law,
which fines violators $1,500 per violation, per day. According to court papers, Pearson added up 12 violations
over 1,200 days, and then multiplied that by three defendants.
Much of Pearson's case rests on two signs that Custom Cleaners once had on its walls: "Satisfaction
Guaranteed" and "Same Day Service."
Judge alleges fraud
Based on Pearson's dissatisfaction and the delay in getting back the pants, he claims the signs amount to fraud.
Pearson has appointed himself to represent all customers affected by such signs, though D.C. Superior Court
Judge Neal Kravitz, who will hear the June 11 trial, has said that this is a case about one plaintiff, and one pair
of pants.
Sherman Joyce, president of the American Tort Association, has written a letter to the group of men who will
decide this week whether to renew Pearson's 10-year appointment. Joyce is asking them to reconsider. Chief
Administrative Judge Tyrone Butler had no comment regarding Pearson's reappointment. The association,
which tries to police the kind of abusive lawsuits that hurt small businesses, also has offered to buy Pearson the
suit of his choice.
Support for the defendants
And former National Labor Relations Board chief administrative law judge Melvin Welles wrote to The
Washington Post to urge "any bar to which Mr. Pearson belongs to immediately disbar him and the District to
remove him from his position as an administrative law judge." "There has been a significant groundswell of
support for the Chungs," said Manning, adding that plans for a defense fund Web site are in the works.
To the Chungs and their attorney, one of the most frustrating aspects of the case is their claim that Pearson's
gray pants were found a week after Pearson dropped them off in 2005. They've been hanging in Manning's
office for more than a year. Pearson claims in court documents that his pants had blue and red pinstripes. "They
match his inseam measurements. The ticket on the pants match his receipt," Manning said.
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http://www.msnbc.msn.com/id/18471265/ns/us_news-weird_news/
Single trader behind oil record The man behind the record rise in oil prices to $100 a barrel was a lone trader, seeking bragging rights
and a minute of fame, market watchers say.
A single trader bid up the price by buying a modest lot and then sold it immediately at a loss, they claim. The
New York Mercantile Exchange said that US crude oil futures traded just once in triple figures on Wednesday.
Some analysts questioned the validity of the trade, though their concerns faded as oil set a record on Thursday.
New York light sweet crude climbed to a new high of $100.05 a barrel on Thursday.
Vanity trade On Wednesday, one floor trader bought 1,000 barrels, the smallest amount permitted, and sold it
immediately for $99.40 at a $600 loss, said Stephen Schork, a former floor trader on the New York Mercantile
Exchange (Nymex) and the editor of an oil market newsletter. "They absolutely overpaid," he told Radio Four's
Today Programme. "He paid $600 for the right to tell his grandchildren that he was the first in the world to buy
$100 oil."
Most trading in energy futures has shifted away from the trading floor and takes place on electronic platforms.
The Nymex, along with the Chicago Mercantile Exchange is one of the last bastions of "open outcry", where
traders use frantic hand signals to trade securities. In London, open outcry trading still takes place on the
London Metal Exchange, where aluminium, copper and zinc are traded. Electronic trading has replaced open
outcry in most financial markets because it is seen as being faster and more efficient. Supporters also claim that
it is harder to manipulate the market when trades are executed electronically. The dwindling liquidity on the
Nymex trading floor has led to considerable speculation that the exchange will soon shut down the trading floor
to cut costs.
Expensing Stock Options Can Spur A Cash-Flow Disappearing Act By MICHAEL RAPOPORT May 23, 2006; Page C3
The new rule that requires stock options to be booked as expenses is lowering some companies'
earnings, as expected. Here's a consequence not widely expected: making some companies' operations appear to
be bringing in less cash.
It seems counterintuitive: How does an expense that has nothing to do with the cash a company earns
from its main businesses -- making computers or selling them, for example -- affect so-called operating cash
flow? That measure is closely watched by professional investors who see it as the purest measure of a
company's performance in selling its wares or services, independent of financial factors that can clutter an
income statement.
But it turns out that a provision in the new rule for options expensing is slashing millions of dollars off
operating cash flow at some companies.
Cisco Systems Inc., for example, saw its operating cash flow cut by $260 million in the latest quarter
because of the move. Google Inc.'s dropped by $77.3 million. Some smaller companies are also seeing
operating cash flow cut by big chunks on a percentage basis.
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Unlike the reductions in earnings the new expensing rule is causing, the cash-flow changes are
happening mostly under the radar. "I think investors are well-aware of the impact it's going to have on the
income statement, but there isn't as high a level of awareness among investors about the cash-flow impact," says
Dane Mott, an accounting analyst at Bear Stearns & Co.
The provision at issue affects the cash-flow statement by requiring companies to shift certain options-
related tax benefits from operating cash flow to financing cash flow, a less-important part of the cash-flow
statement that measures cash flowing in and out of the company from things like stock and debt offerings,
dividend payments and share repurchases.
It's important to note that total cash flowing into or out of the company is unchanged. Operating cash
flow goes down, but financing cash flow goes up by the same amount. But even sophisticated investors will
need to retrain themselves to understand what the cash-flow figure they are looking at entails. And ways of
valuing a company that entail looking at operating cash flow will be affected.
Here's the background on how the bookkeeping has changed: When employees cash in stock options,
that's a compensation cost the company can deduct on its taxes. That reduces the cash companies pay in taxes,
so these deductions are recognized as tax benefits on the cash-flow statement. Until now, they've been
categorized there as operating cash flow, as tax-related items typically are.
But when the Financial Accounting Standards Board decided stock options should be expensed, the
accounting-industry rule-setter also decided only part of those tax benefits belong in operating cash flow. After
all, the thinking went, what typically makes an option worth exercising -- and thus creates a lot of those tax
benefits -- is a rise in the company's stock price. And that, FASB decided, isn't an operating development.
So these "excess tax benefits" -- the tax benefits the company realizes from the options over and above those it
expected to realize when they were first issued -- belong in financing cash flow, not operating cash flow, the
board decided.
The effect can be substantial, especially for companies with lots of options outstanding, big rallies in
their stocks, or both. Cisco's $260 million in excess tax benefits in its fiscal third quarter ended in April, for
instance, would have raised the computer-networking company's $2.3 billion cash from operations by about
11% if it was still part of the operating figure.
A Cisco spokeswoman said the company was "in full compliance" with the options-expensing rule and
declined to comment further. Google's $77.3 million in excess tax benefits in the first quarter would have
increased operating cash flow at the Internet search-engine company by more than 9%. A Google spokesman
declined comment. Moving the accounting impact of stock options can also reduce companies' free cash flow,
another important measure most companies define as operating cash flow minus capital spending.
Expensing Stock Options: The Controversy
8:35 AM Friday August 28, 2009
by Karen Berman and Joe Knight
The highly controversial practice of expensing stock options comes up frequently when we are training
managers. Understanding options and how they impact financial statements is part of becoming financially
intelligent.
Some believe that expensing stock options helps to more truly represent a company's financial standing; thus it's
appropriate. Others believe that expensing options hinders the ability of small growth companies to succeed.
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Recently Joe attended a national conference where a keynote speaker, a former CEO of one of the most
successful retail chains, said that had he been forced to expense options during the growing years of the
business, the company would never have succeeded. First, because they would have used fewer options to
recruit, thus limiting the talent they could attract. Second, they would have taken much longer to get to
profitability because of the added expense of options. The law changed in 2006, and people are still debating it.
So go accounting controversies! Here is a primer on the subject.
Stock options are often used as a way to entice employees to join a small start-up company at lower than market
salaries. Often, these employees are betting that the stock options will be worth millions when the company's
shares grow above the option's strike price, or its price when the option was issued.
The strike price of an option is usually issued to new employees at or above the fair market value of the stock
on the date of issue. For example, the strike price may be $3.00 a share, but at the time of issue the company's
stock is trading at $2.50 a share. That is when the option is considered underwater there is no taxable gain to the
employee who is issued this option.
Until 2006, these options were simply reported in the notes section of the financial statements in accordance
with the Generally Accepted Accounting Principles (GAAP), but did not impact the financial statements
themselves. In 2006 FAS 123 of the GAAP code was modified to require companies to show options as an
expense on the income statement. This means that the costs of these options would be shown as employee
compensation along with salaries and other expenses. The controversy began.
The argument for expensing options was simple. First, investors like Warren Buffet argued for years that many
companies enticed executives and managers with lower-than-market salaries because they also offered options.
This inflated the companies' profits because of the lower salaries — hence lower expenses on the income
statement.
In addition, if the company did well and the stock options appreciated, then the shares outstanding were diluted
by these options that were now "in the money."
The other side of the argument is based on the fact that it is very difficult to value options that are under water
at the time of issue. Many accounting purists would say that there is no tangible value at the time of issue
because the option is priced at or below the current market price.
There was a corporate uproar when GAAP changed. Congress was lobbied to reverse the decision of the
Financial Accounting Standards Board (FASB). It is quite rare for Congress to get involved in accounting
policy and in the end the changes stood and companies now expense options.
We like to say that accounting is primarily adding and subtracting, and when it gets complicated, we multiply
and divide. Now, with the expensing of options, differential calculus became part of the equation. The value of
an option involves the volatility of a stock, its current price, terms of the option, and its vesting period. The two
most frequently used models to value options are the Black-Scholes and the binomial models.
So how have companies handled the accounting change? Some have stopped using options or limited their use.
Others provide pro-forma statements for investors that show profit before the expensing of options.
We believe that the market has adjusted to this new accounting rule and it has not adversely impacted small
growing companies. Furthermore, it does give a more accurate picture of a company's expenses.
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Pros and Cons of Expensing Stock Options Thinking twice about FASB's proposed standard By Charles J. McPeak, MBA, CPA
The popular position of “expensing stock options” may not be a panacea to corporate governance.
In the following issue of GBR (Vol 6, No. 1) Professor Steve Ferraro argues for the opposing view that options
should be expensed. To read that side of the argument go to “Recognize the True Cost of Compensation:
Expensing options increases transparency in financial reporting.“
In the post-Enron era it has become very popular to propose the requirement that companies record an expense
at the time a stock option is awarded. The author has closely followed the Financial Accounting Standards
Board’s actions related to this subject since 1991 and has consistently taken the minority position that holds that
expensing is NOT appropriate.
There are two issues surrounding the recording of an expense when an option is awarded:
• Does the expensing provide a level playing field in accounting for management compensation?
• Would the recording of an expense when an option is awarded improve corporate governance?
Background
In 1991 the Financial Accounting Standards Board (FASB) floated a draft of a proposed new accounting
standard. FASB indicated that a level playing field did not exist in the reporting of management incentive
compensation. Companies that rewarded management with cash bonuses were required to report a
compensation expense for the amount of the bonus paid, thereby reducing net income. In contrast, FASB stated,
companies that rewarded management with stock options did not have a comparable reduction in net income.
FASB’s proposal was that, at the time a company awarded a stock option to an employee, it record an expense
for the “fair value of the option”.
The method of calculation was not to be mandated. However, the method most often suggested since 1991 has
been the Black-Scholes Option Pricing Model. This Model was developed in 1973 and consists of a set of
algebraic equations. It has been used by many option traders. In essence, FASB was saying that, if the company
sold the option in the public market, it would receive a cash payment from the buyer. By giving the option to
the employee, the company was foregoing the cash it would receive if it sold the option. The “fair value” of the
option, as determined by the Black-Scholes Model, or some other valuation model, should therefore be recorded
as an expense.
Subsequent to the floating of the draft proposal by FASB in 1991, many hi-tech companies voiced strong
objection. These companies argued that employee stock options were the primary incentive they had to recruit
technology professionals and to motivate various levels of employees. The opposition by technology companies
did not immediately influence FASB, and the development of a proposed standard requiring expensing
continued. At that point hi-tech companies began contacting their Congressional representatives. Many
members of Congress sided with the hi-tech companies and moved to have FASB back off on FASB Statement
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123. When FASB failed to bend, members of Congress took an extremely aggressive posture on this matter —
to the point that the existence of FASB as an independent standard setter was threatened. In repose to this threat,
FASB Statement 123 was revised to require only footnote disclosure of the pro forma effect on net income and
earnings per share if an expense had been recorded.
Recent Events
In the post-Enron era, FASB’s early 1990′s posture on the “expensing of stock options” has been resurrected.
The concept of a level playing field has been supplemented with a new rationale for recording the expense. This
rationale starts with the premise that companies such as Enron, Global Crossing, and WorldCom used
accounting treatments that were improper and unethical in order to inflate net income and earnings per share.
These company executives were motivated to increase the stock price because it would be financially rewarding
to the management since they held substantial options on the stock. If the companies had been required to
record an expense at the time the option was granted, they would not have been so generous with the options.
By curtailing the options, the incentive to inflate net income and earning per share would have been reduced.
Pros and Cons Oof “Expensing Stock Options”
Several arguments have been made, both pro and con, regarding this issue. Following is a summary of the key
arguments on both sides.
Pros
• Expensing options will provide a level playing field so that companies that use cash bonuses and
companies that use stock options each have an expense on the income statement.
• It will improve corporate governance by reducing or eliminating incentives to inflate income and
earnings per share.
Cons
• The playing field is already level. A company using cash bonuses as management incentive
compensation has a reduction in net income and a resultant reduction in earnings per share. When a
stock option has been awarded and the strike price is in the money, the additional shares become
outstanding for purposes of calculating earnings per share. Since earnings per share is calculated by
dividing net income by weighted average shares outstanding, as the shares outstanding increase, the
earnings per share decrease. To require a company to record an expense for the option, and subsequently
increase the shares outstanding is a double hit to earnings per share.
• Regarding improved corporate governance, it is difficult to believe that the management or the Board of
Directors of Enron would have limited the number of options simply because of the requirement to
record an expense. Management that is truly unscrupulous is concerned strictly about personal gain and
not about the company’s income statement.
• During recent years, each time that earnings management is scrutinized, analysts regularly state, “follow
the cash.” Ignore entries that are purely accounting and have no cash impact. Such is the nature of
recording an expense when an option is awarded. This is an accounting entry with no cash impact. It is
very likely that analysts will remove the option expense from the income statement to obtain a clear
view of the company’s performance. This would likely lead to companies including a pro forma income
statement which excluded the option expense.
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As a footnote to the “follow the cash” guideline, it is interesting to note that, not only is there no cash
impact from the expense option, there is positive cash flow to the company. At the time the option is
exercised, the employee must pay for the shares received.
• Hi-tech companies have traditionally issued options to multiple levels of employees with two purposes
in mind: attract high quality employees to the company; and motivate workers at all levels. If hi-tech
companies were required to record an expense at the time options are granted, many employees at all
levels would most likely lose the options.
Conclusion
With regard to FASB’s original position, there appears to be no reason to make the proposed change in order to
provide a level playing field.
As to the improved corporate governance argument for the change, the Securities and Exchange Commission
certainly has just cause to seek improvements in corporate governance. However, there are ways of
accomplishing this without creating controversial accounting requirements and penalizing employees below the
top level of management. There are more effective ways to accomplish this than the FASB proposal on
expensing options.
Two suggested methods of dealing with options that could improve corporate governance are:
• The SEC could place a limit on the percentage of a company’s options that could be issued to the top
three people in the company.
• The SEC could require that the top three people in the company be issued options on restricted stock
(often called “letter stock” or Rule 141 stock). This stock must be held for two years before it can be
sold.
