response 8

Question 1

The advent of specific types of derivative instruments have been used by many financial institutions to hedge against exchange rate risk and as well to limit exposure to fluctuations of fair value based upon market conditions. Please select a current article on the use of derivatives by a company. Define the type of derivative used and the purpose of it use by the company? As well, do you feel the use of derivative instruments contributed to the financial crisis of 2008?

Respond to this… http://www.foxbusiness.com/politics/2016/11/01/rick-santorum-clinton-is-melting-down.html

This article talks about three pharmaceutical companies selling derivatives. One in particular, PDL BioPharma, is selling $150 million of convertible bonds due in 2021 and another $22.5 million worth of bonds could be purchased by the underwriters of the deal. PDL intended to use the proceeds to pay off some notes that are due in 2018. They also announced that buyers of the notes would make use of the derivatives to help hedge their exposure. The article goes on to talk about how this will have an impact on the company’s share price and investors being unhappy with the news and as a result, stock prices are plunging. (Feroldi, 2016).

I was reading online about derivatives and came across an article that stated: “Derivatives do ensure against risk when used properly, but when the packaged instruments get so complicated that neither the borrower nor the rating agency understands them or their risk, the initial premise fails. Not only did investors, like pension funds, get stuck holding securities that in reality turned out to be equally as risky as holding the underlying loan, banks got stuck as well. Banks held many of these instruments on their books as a means of satisfying fixed-income requirements and using these assets as collateral. However, as write-downs were incurred by financial institutions, it became apparent that they had less assets than what was required. When the average recovery rate for the "high quality" instrument was approximately 32 cents on the dollar and the mezzanine instrument in reality only returned five cents on the dollar, a huge negative surprise was felt by investors and institutions holding these "safe" instruments” (Zucchi, 2010). With this in mind, I do feel that derivatives contributed to the financial crisis.

References

Feroldi, B. (2016). Why Shares of Flexion Therapeutics, Inc., Lantheus Holdings Inc., and PDL BioPharma Inc Are Tanking. Fox Business. Retrieved from http://www.foxbusiness.com/markets/2016/11/16/why-shares-flexion-therapeutics-inc-lantheus-holdings-inc-and-pdl-biopharma-inc.html

Zucchi, K. (2010). Did Derivatives Cause the Recession? Investopedia. Retrieved from http://www.investopedia.com/financial-edge/0210/did-derivatives-cause-the-recession.aspx

Question 2

A "leadership project," is at the top of the agenda for fast-track action by the newly formed International Accounting Standards Board ("IASB"). This agenda was endorsed by the heads of the accounting standards-setting bodies among so-called G-8 nations meeting together in London on May 24, 2001.

The mission of the IASB is to produce common global accounting standards for important business transactions and to encourage their adoption by member nations. It was formed in January with the appointment of 14 members by a commission headed by Paul A. Volcker, former chairman of the Federal Reserve.

The IASB is headed by Sir David Tweedie, former head of the UK's Accounting Standards Board, and includes two former U.S. FASB members, James J. Leisenring and Anthony T. Cope.

Uniform standards for financial reporting are important to companies wishing to raise funds, list their securities in different countries, and to comply with regulatory filing requirements in a cost-effective manner.

They also prevent problems that would occur if one nation wanted to adopt stricter rules for certain transactions, but was prevented from doing so by the concern that it would place that nation's businesses at a comparative disadvantage in global commerce. All nations would be encouraged to adopt the same global standards, thus preventing anyone from being disadvantaged.

Discuss the pros and cons of this unified standards effort. Explain.

Respond to this… International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements. The IASB is an independent accounting standard-setting body, based in London. It consists of 15 members from nine countries, including the United States. The IASB began operations in 2001 when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, national funding regimes, and other international and professional organizations throughout the world (American Institute of Certified Public Accountants., n.d.).

Many accountants prefer IFRS because they see it as easier to use and more intuitive. Some of the pros are:

· IFRS will save money. As more companies go global, they won't have to spend money keeping, preforming, and analyzing two different sets of books.

· Being principles-based, IFRS allows more leeway in how companies can portray their financial performance.

· IFRS will make cross-border investments easier.

And cons:

· Not many business schools here in the U.S. teach IFRS.

· Inconsistencies in IFRS such as how research costs are explained and its tendency to allow higher earnings statements need to be worked out.

· Small and middle-sized firms may be unfairly hit with extra costs just as they are with SOX  (BOLT-LEE & SMITH, 2009).

This article also points out that corporate America is going further into the global economy whether we want it to or not.

 

American Institute of Certified Public Accountants. (Ed.). (n.d.). INTERNATIONAL FINANCIAL REPORTING STANDARDS. Retrieved November 21, 2016, from http://www.ifrs.com/updates/aicpa/ifrs_faq.html#q1

BOLT-LEE, C., & SMITH, L. M. (2009, November 1). Highlights of IFRS Research. Retrieved November 21, 2016, from http://www.journalofaccountancy.com/issues/2009/nov/20091791.html

Question 3

Because the cost of hiring and training employees is so high, many managers argue that this cost should be capitalized and amortized over the expected service period. Do you feel this is an acceptable practice? Why or why not?

Respond to this… I disagree with the statement that cost of hiring and training employees should be capitalized or amortized.  Employees can be considered an asset to the company but not a physical asset.  An asset is a resource that can be controlled by the company (Fazel, 2011).  Employee carry a great deal uncertainly to the company.  For example, how much training will they need?  How long much time do they need for training? And How long will they work for the company?  Since there are so many questions and variables that need to be considered for each employee, I find it best for the company to take the total cost of hiring and training and simply apply it to the current period and expense it. 

Reference: Fazel, Hasaan. June 4, 2011. Why training costs are not capitalized as cost of the asset? Pakaccountants.com. retrieved from: http://pakaccountants.com/why-training-costs-are-not-capitalized-as-cost-of-the-asset/