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Bob,
Hurray for you!! The AAA is still the last remaining Politburo on earth.
Like Russian generals with medal strewn chests, the Notable awards process
is truly a farce. The same applies to the Seminal Contribution award; does
anyone know how that process works? It mustn't work very well because if we
are to believe in the wisdom of the process nothing of any worth was written
before 1968. The two Notable exceptions were the result of selection
committees that were put together by the AAA to create the appearance that
it was taking diversity seriously. For the Notable Contribution why do we
need a Nominating Committee and a Selection Committee? Because the
nominating committee is a way to let the peons participate but deny them any
power to actually decide what is or is not noteworthy (as if within a five
year period that is possible). Here is a study for someone to do. Two
awards, the Horizons and Issues best papers, are by a vote of the
membership. All of the others are by a committee whose members are selected,
I assume, by the "Board. My sense is that there is a dramatic contrast
between who wins by vote and who wins by committee. Tony Tinker and Tony
Puxty published a book a number of years ago titled Policing Accounting
Knowledge, which documents with actual cases of how the review and awards
process at AAA worked in the past. Until the bylaws are changed to allow a
more democratic selection of directors of research and publication nothing
is going to happen. In former AAA president Gregory Waymire's white paper
"Seeds of Innovation" he made the following assessment of the status of the
U.S. academy's premier research: "As a result, I believe our discipline is
evolving towards irrelevance within the academy and the broader society with
the ultimate result being intellectual irrelevance and eventually
extinction." That assessment is spot on, but when a leader of the academy
apparently is powerless to alter the course, it indicates how firmly
entrenched and institutionalized the intellectual mindset of the AAA is.
Until it takes the view that the purpose of research and writing is not to
garner politically correct academic reputations but to address serious and
interesting questions then we will become extinct and no one will even
notice. Our plenary speaker the last time our meeting was in Anaheim was
Diedre McCloskey whose message was the message that Bob has been harping on
for years -- the mindlessness of regressions and obsession with p values.
Did it have any effect? Just look at the content of our so-called U.S. based
premier journals. One huge linear model after another utilizing data
completely ill-suited to the task. Bob: Guess when we get old the Don
Quixote in us comes out. I wish you well.
Bob,
Addenda to my previous rant. Your point about replication is more
significant than some seem to appreciate. No archival study that I know of
has ever been literally replicated. Even worse none of those studies can be
replicated because the people who did them violate one of the fundamental
"ethics" of science. Every laboratory scientist must maintain a log book
which describes in great detail how the result of a particular experiment
was produced, i.e., a complete recipe that permits an independent scientist
to actually replicate the study in its entirety to simply validate the
knowledge claim being made by the scientist. Without that capacity, the
claim being made is merely an anecdote (think of the Jim Hunton affair). It
should be sobering to an academy to realize that the corpus of its knowledge
is simply a collection of anecdotes. "Anecdotal evidence"-- the ultimate
put-down, yet most of our evidence is little more than anecdotes.
Accounting History Corner IFRS History Before and After 2007
A
decade ago, the near-simultaneous adoption of IFRS in over one hundred
countries could fairly have been described as a “brave new world” in
financial reporting. Any systems innovation, and especially an innovation of
such importance and magnitude, thrusts those involved (companies, users and
accountants) into the unknown. There was good reason to expect success,
based largely on widespread enthusiasm for international standards and,
behind that, recognition of the strong forces of globalization.
Nevertheless, there were risks involved and there was limited a priori
evidence to guide the decision makers. A decade later, this is still the
case. Globalization remains a potent economic and political force, and
drives the demand for globalization in accounting. Nevertheless, most
political and commercial activity remains local, so adoption of uniform
rules does not by itself lead to uniform reporting behavior around the
world. For many of the claimed benefits of IFRS adoption to be realized,
uniform implementation would have to occur in a wide range of countries,
which seems unlikely and requires more than simply creating regulatory
enforcement mechanisms. Some evidence of actual outcomes from IFRS adoption
has come to light but, as will be argued below, by and large the evidence to
date is not very useful. So IFRS adoption is an innovation of historical
proportions whose worldwide effects remain somewhat uncertain.
Jensen Comment
For earlier history of IFRS see
Stephen A. Zeff (2012) The Evolution of
the IASC into the IASB, and the Challenges it Faces.
The Accounting Review: May 2012, Vol. 87, No. 3,
pp. 807-837.
Editor's note: This
commentary, based on a lecture at the 2011
American Accounting Association Annual
Meeting in Denver, CO, was invited by Senior
Editor John Harry Evans III, consistent with
the AAA Executive Committee's goal to
promote broad dissemination of the AAA
Presidential Scholar Lecture.
I have drafted this
paper based on my Presidential Scholar
address at the American Accounting
Association Annual Meeting on August 10,
2011 in Denver, Colorado. I gratefully
acknowledge the comments on earlier drafts
by Kees Camfferman, Jim Leisenring, Harry
Evans, Paul Pacter, and Kay Stice. I am
solely responsible for what remains.
ABSTRACT:
In
this article, I undertake to review the
major developments and turning-points in
the evolution of the IASC, followed by
the evolution of the IASB. At the
conclusion, I suggest five challenges
facing the IASB.
Jensen Comment
Also See Financial Reporting and Global Capital Markets:
A History of the International Accounting Standards Committee, 1973-2000
by Kees Camfferman and Stephen A. Zeff
ISBN-13: 978-0199296293
ISBN-10: 0199296294
Oxford University Press; First Edition (May 17, 2007)
The Cult of Statistical
Significance: How Standard Error Costs Us Jobs, Justice, and Lives, by
Stephen T. Ziliak and Deirdre N. McCloskey (Ann Arbor: University of
Michigan Press, ISBN-13: 978-472-05007-9, 2007)
In response to charges that their field is churning
out unreliable science, psychologists this month issued a defense that may
be tough to dispute. At issue was a claim, published
in the journal Science, that only 39 of 100
experiments published in psychology papers could be replicated. The
counterpoint, also
published in Science,
questioned the assumption that the other 61 of the results must have been
wrong.
If two experimental results are in conflict, who’s
to say the original one was wrong and not the second one? Or maybe both are
wrong if, as some argue, there’s a flaw in the way social scientists analyze
data.
This is an important puzzle, given the current
interest in drawing conclusions from huge sets of data. And it's not just a
problem for psychologists. Researchers have also had trouble replicating
experimental results in
medicine and
economics, creating what's been dubbed "the
replication crisis."
Some insights come from a
new paper in the Journal of the American Medical
Association. While previous discussions of the replication crisis have
focused on the way scientists misuse statistical techniques, this latest
paper points to a human fallibility component – a marketing problem, which
boils down to a universal human tendency, shared by scientists, to try to
put their best foot forward.
At the center of both the math and the marketing
problem is the notion of statistical significance – roughly, a measure of
the odds of getting a given result due to chance. Computing statistical
significance is a way to protect scientists from being fooled by randomness.
People’s behavior, performance on tests, cholesterol measures, weight and
the like vary in a random way. Statistical significance tests can prevent
scientists from mistaking such fluctuation for the workings of a drug or the
miracle properties of artichokes.
Statistical significance in medicine and social
science is expressed as a p value, which represents the odds that a result
would occur by chance if there’s no effect from the diet pills or artichokes
being tested. Popular press accounts make much of their potential for
trouble in the hands of scientists. A headline at the website "Retraction
Watch" claimed, "We’re
Using a Common Statistical Test All Wrong," and
Vox ran with "An
Unhealthy Obsession with P-values is Ruining Science."
It'll take more than that to ruin science, though,
since
many fields don’t use p values the way clinical
researchers or social scientists do. The problem, as JAMA author John
Ioannidis sees it, is partly in the way medical researchers use p values as
a marketing tool.
Statistical significance is a continuum – a measure
of probability -- but in medical research it’s been turned into something
black or white. Journals have informally decided that results should be
considered statistically significant only if the p value is 5 percent or
lower. (Since most scientists hope their results are not due to chance,
lower is better.)
Ioannidis worries that researchers are making too
much of this arbitrary cutoff. He sifted through millions of papers and
found that most advertised their statistical significance up high, in the
abstract, while burying important but perhaps less flattering aspects of the
study. A statistically "successful" drug may only reduce the risk of a
disease from 1 percent to 0.9 percent, for example, or raise life expectancy
by 10 seconds.
Just as food manufacturers have advertised all
manner of products as low-cholesterol, all natural, fat- or sugar-free,
hoping to give the impression of health benefits, so scientific papers have
advertised themselves as statistically significant to give the impression of
truth.
The same 5-percent cutoff is used in a lot of
social science and has been a source of trouble there too.
In 2011, the psychologist Uri Simonsohn showed that
it's all too easy to produce bogus results even in experiments that clear
the 5-percent p-value bar.
He set up
an experiment to show that he could use accepted
techniques to obtain a result that was not just ridiculous but impossible.
He divided students into two groups, one hearing the song “Kalimba” and the
other “When I’m 64.” Then he collected data on both groups, looking for
differences between them.
He found something that varied by chance – the ages
of people in the groups -- then, using math tricks that had been common in
his field (but are considered cheating by statisticians), he showed that it
was possible to come up with a statistically significant claim that
listening to “When I’m 64” will make people get 1.5 years younger.
Statistician Ron Wasserstein agrees that there is a
right way and a wrong way to use statistical tools. And that means those
trying to replicate studies can also get it wrong, which was the concern of
those psychologists defending their field.
Getting a different p value in a replication effort
is not enough to discredit an existing study. Imagine, he said, you are
trying to replicate a study that showed that cats gained weight eating Brand
X cat food. The original result shows the cats got fatter, with only a 2
percent chance that this happened by chance. A new study also shows they got
fatter, but with 6 percent odds that it’s by chance.
Is it fair to call the original experiment a
failure because the second result missed the 5-percent p-value cutoff?
Should we assume that Brand X is not fattening? There’s not enough
information to draw a conclusion either way, Wasserstein said. To get an an
answer you’d also want to know the size of the effect. Did the cats gain
pounds or ounces? Did the cats eat more of the food because it tasted good,
or was it more fattening per bowl? Statistical significance has to be
weighed alongside other factors.
David Johnstone from Australia gave me permission to
broadcast his reply to the AECM with respect to the attached paper from the
American Statistical Association.
The ground is shaking beneath the accountics science
foundations upon which all accounting doctoral programs and the prestigious
accounting research journals are built. My guess is, however, that the
accountics scientists are sleeping through the tremors or feigning sleep
because, if they admit to waking up, their nightmares will become real!
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
by Bob Jensen
http://faculty.trinity.edu/rjensen/AccounticsWorkingPaper450.pdf
Dear Sudipta and Bob, thanks for
sending this Sudipta, it was actually written up in the local newspaper
(Sydney Morning Herald) the other day. There has also been a series of
articles on economic modelling that starts with the conclusion and works
back to the argument. People are waking up to rorts slowly but inevitably,
it seems.
There are multi-million dollar
industries (e.g. “accounting research”) that depend on p-levels and would
need a big clean out and recanting/retraining if the tide were to turn. I
think that the funding bodies (e.g. taxpayers) are starting to smell rats,
so life is going to be different for younger researchers in 10 years I
suspect. Much more scepticism about supposed “research”.
I have been toying with writing a book
on the P-level problem. I used to be excited about this stuff, I thought it
was deeply interesting and other people would also find it interesting. I
didn’t realize that most researchers are not intrinsically interested in the
techniques they use, and I also didn’t realize that most will resist
bitterly anything that makes their lives less glamorous and their self-image
less wonderful. This is what I see as the “positive theory of accounting
researchers”.
Great to have a couple of old
fashioned academics to talk to on this.
By the way, all the young
statisticians schooled in Bayesian theory know about the issues with
P-levels, and they are breeding up in computer science and elsewhere.
Tom Dyckman’s paper on P-levels is
coming out in Abacus 2nd issue 2016. In that same issue is an excellent
survey paper by Jeremy Bertomeu on cost of capital etc, which will give that
issue further credibility and hopefully prompt some extra readers to see
Tom’s paper.
David Johnstone
Jensen Comment
Note that the following article has enormous implications for what is taught in
most Ph.D. programs in the social sciences, business, accounting, finance, and
other academic disciplines. Regression analysis has become the key to the
kingdom of academic research, a Ph.D. diploma, journal article publication,
tenure, and performance rewards in the Academy. Now the sky is falling, and soon
researchers skilled mostly at performing regression analysis are faced with the
problem of having to learn how to do real research.
A huge range of science projects are done
with multiple regression analysis. The results are often somewhere between
meaningless and quite damaging. ...
I hope that in the future, if I’m successful in
communicating with people about this, that there’ll be a kind of upfront
warning in New York Times articles: These data are based on multiple
regression analysis. This would be a sign that you probably shouldn’t read
the article because you’re quite likely to get non-information or
misinformation. RICHARD NISBETT is a professor of psychology and co-director
of the Culture and Cognition Program at the University of Michigan. He is
the author of Mindware: Tools for Smart Thinking; and The Geography of
Thought.
Richard Nisbett's Edge Bio Page.
THE CRUSADE AGAINST MULTIPLE REGRESSION ANALYSIS
The thing I’m most interested in right now has become a kind of crusade
against correlational statistical analysis—in particular, what’s called
multiple regression analysis. Say you want to find out whether taking
Vitamin E is associated with lower prostate cancer risk. You look at the
correlational evidence and indeed it turns out that men who take Vitamin E
have lower risk for prostate cancer. Then someone says, "Well, let’s see if
we do the actual experiment, what happens." And what happens when you do the
experiment is that Vitamin E contributes to the likelihood of prostate
cancer. How could there be differences? These happen a lot. The
correlational—the observational—evidence tells you one thing, the
experimental evidence tells you something completely different.
The thing I’m most interested in right now has
become a kind of crusade against correlational statistical analysis—in
particular, what’s called multiple regression analysis. Say you want to find
out whether taking Vitamin E is associated with lower prostate cancer risk.
You look at the correlational evidence and indeed it turns out that men who
take Vitamin E have lower risk for prostate cancer. Then someone says,
"Well, let’s see if we do the actual experiment, what happens." And what
happens when you do the experiment is that Vitamin E contributes to the
likelihood of prostate cancer. How could there be differences? These happen
a lot. The correlational—the observational—evidence tells you one thing, the
experimental evidence tells you something completely different.
In the case of health data, the big problem is
something that’s come to be called the healthy user bias, because the guy
who’s taking Vitamin E is also doing everything else right. A doctor or an
article has told him to take Vitamin E, so he does that, but he’s also the
guy who’s watching his weight and his cholesterol, gets plenty of exercise,
drinks alcohol in moderation, doesn’t smoke, has a high level of education,
and a high income. All of these things are likely to make you live longer,
to make you less subject to morbidity and mortality risks of all kinds. You
pull one thing out of that correlate and it’s going to look like Vitamin E
is terrific because it’s dragging all these other good things along with it.
This is not, by any means, limited to health
issues. A while back, I read a government report in The New York Times on
the safety of automobiles. The measure that they used was the deaths per
million drivers of each of these autos. It turns out that, for example,
there are enormously more deaths per million drivers who drive Ford F150
pickups than for people who drive Volvo station wagons. Most people’s
reaction, and certainly my initial reaction to it was, "Well, it sort of
figures—everybody knows that Volvos are safe."
Continued in article
Drawing Inferences From Very Large Data-Sets
David Johnstone wrote the following:
Indeed if you hold H0 the same and keep
changing the model, you will eventually (generally soon) get a significant
result, allowing "rejection of H0 at 5%", not because H0 is
necessarily false but because you have built upon a false model (of which
there are zillions, obviously).
Granger (1998;
2003) has
reminded us that if the sample size is sufficiently large, then it's
virtually impossible not to reject almost any hypothesis.
So, if the sample is very large and the p-values associated with
the estimated coefficients in a regression model are of the order of, say,
0.10 or even 0.05, then this really bad news. Much,
much, smaller p-values are needed before we get all excited about
'statistically significant' results when the sample size is in the
thousands, or even bigger. So, the p-values reported above are
mostly pretty marginal, as far as significance is concerned. When you work
out the p-values for the other 6 models I mentioned, they range
from to 0.005 to 0.460. I've been generous in the models I selected.
Here's another set of results taken from a second, really nice, paper by
Ciecieriski et al. (2011) in the same issue of
Health Economics:
Continued in article
Jensen Comment
My research suggest that over 90% of the recent papers published in The
Accounting Review use purchased databases that provide enormous sample sizes
in those papers. Their accountics science authors keep reporting those
meaningless levels of statistical significance.
What is even worse is when meaningless statistical significance tests are
used to support decisions.
With all of this emphasis
on "Big Data", I was pleased to see
this post on the Big Data
Econometrics blog, today.
When you have a sample that runs
to the thousands (billions?), the conventional significance
levels of 10%, 5%, 1% are completely inappropriate. You need to
be thinking in terms of tiny significance levels.
I discussed this in some
detail back in April of 2011, in a post titled, "Drawing
Inferences From Very Large Data-Sets".
If you're of those (many) applied
researchers who uses large cross-sections of data, and then
sprinkles the results tables with asterisks to signal
"significance" at the 5%, 10% levels, etc., then I urge
you read that earlier post.
It's sad to encounter so many
papers and seminar presentations in which the results, in
reality, are totally insignificant!
Page 206 Like scientists today in medical and economic and
other sizeless sciences, Pearson mistook a large sample size for the definite,
substantive significance---evidence s Hayek put it, of "wholes." But it was as
Hayek said "just an illusion." Pearson's columns of sparkling asterisks, though
quantitative in appearance and as appealing a is the simple truth of the sky,
signified nothing.
pp. 250-251 The textbooks are wrong. The teaching is wrong. The
seminar you just attended is wrong. The most prestigious journal in your
scientific field is wrong.
You are searching, we know,
for ways to avoid being wrong. Science, as Jeffreys said, is mainly a series of
approximations to discovering the sources of error. Science is a systematic way
of reducing wrongs or can be. Perhaps you feel frustrated by the random
epistemology of the mainstream and don't know what to do. Perhaps you've been
sedated by significance and lulled into silence. Perhaps you sense that the
power of a Roghamsted test against a plausible Dublin alternative is
statistically speaking low but you feel oppressed by the instrumental variable
one should dare not to wield. Perhaps you feel frazzled by what Morris Altman
(2004) called the "social psychology rhetoric of fear," the deeply embedded path
dependency that keeps the abuse of significance in circulation. You want to come
out of it. But perhaps you are cowed by the prestige of Fisherian dogma. Or,
worse thought, perhaps you are cynically willing to be corrupted if it will keep
a nice job
Bob Jensen's threads on the often way analysts, particularly accountics
scientists, often cheer for statistical significance of large sample outcomes
that praise statistical significance of insignificant results such as R2
values of .0001 ---
The Cult of Statistical Significance: How Standard Error Costs Us Jobs, Justice,
and Lives ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
Those of you interested in tracking The
Accounting Review's trends in submissions, refereeing, and
acceptances'rejections should be interested in current senior editor Mark L.DeFond's
annual report at
http://aaajournals.org/doi/full/10.2308/accr-10477
This has become a huge process involving 18 editors and hundreds of referees.
TAR is still the leading accountics science journal of the American Accounting
Association. However, there are so many new specialty journals readers are apt
to find quality research in other AAA journals. TAR seemingly still does not
publish commentaries and articles without equations and has not yet caught on
the the intitiatives of the Pathways Commission for more diversification in
research in the leading AAA research journal. Virtually all TAR editors still
worship p-values in empirical submissions.
But after
writing about p-values again and again, and recently issuing a correction on
a
nearly year-old story over some erroneous
information regarding a study’s p-value (which I’d taken from the scientists
themselves and
their report), I’ve
come to think that the most fundamental problem with p-values is that no one
can really say what they are.
Last week, I
attended the inaugural
METRICS conference at Stanford, which brought
together some of the world’s leading experts on meta-science, or the study
of studies. I figured that if anyone could explain p-values in plain
English, these folks could. I was wrong.
Continued in article
Jensen Comment
Why all the fuss? Accountics scientists have a perfectly logical explanation.
P-values are numbers that are pumped out of statistical analysis software
(mostly multiple regression software) that accounting research journal editors
think indicate the degree of causality or at least suggest the degree of
causality to readers. But the joke is on the editors, because there aren't any
readers.
November 30, 2015 reply from David
Johnstone
Dear
Bob, thankyou for this interesting stuff.
A big
part of the acceptance of P-values is that they easily give the look of
something having been found. So it’s an agency problem, where the
researchers do what makes their research outcomes easier and better looking.
There
is a lot more to it of course. I note with young staff that they face enough
hurdles in the need to get papers written and published without thinking
that the very techniques that they are trying to emulate might be flawed.
Rightfully, they say, “it’s not my job to question everything that I have
been shown and to get nowhere as a result”, nor can most believe that
something so established and revered can be wrong, that is just too
unthinkable and depressing. So the bandwagon goes on, and, as Bob says, no
one cares outside as no one much reads it.
I do
however get annoyed every time I hear decision makers carry on about
“evidence based” policy, as if no one can have a clue or form a vision or
strategy without first having the backing of some junk science by a
sociologist or educationist or accounting researcher who was just twisting
the world whichever way to get significant p-values and a good “story”. This
kind of cargo-culting, which is everywhere, does great harm to good or
sincere science, as it makes it hard for an outsider to tell the difference.
One
thing that does not get much of a hearing is that the statisticians
themselves must take a lot of blame. They had the chance to vote off P
values decades ago when they had to choose between frequentist and Bayesian
logic. They split into two camps with the frequentists in the great majority
but holding the weakest ground intellectually. The numbers are moving now,
as people that were not born when de Finetti, Savage, Lindley, Kadane and
others first said that p-values were ill-conceived logically. Accounting, of
course, being largely ignorant of there being any issue, and ultimately just
political, will not be leading the battle of ideas.
January 28, 2016 reply from Paul Williams
Bob,
Thank you for this. In accounting the problem is
even worse because at least in other fields it is plausible that one can
have "scientific" concepts and categories. Archival research in accounting
can only deal with interpretive concepts and the "scientific" categories are
often constructed for the one study in question. We make a lot of s... up so
that the results are consistent with the narrative (always a neoclassical
economic one) that informs the study. Measurement? Doesn't exist. How can
one seriously believe they are engaged in scientific research when their
"measurements" are the result of GAAP? Abe Briloff described our most
prestigious research (which Greg Waymire claimed in his AAA presidential
white paper "...threatens the discipline with extinction."). as simply "low
level financial statement analysis." Any research activity that is reduced
to a template (in JAE the table numbers are nearly the same from paper to
paper) you know you are in trouble. What is the scientific value of 50
control variables, two focus independent variables (correlated with the
controls), and one dependent variable that is always different from study to
study? This one variable at a time approach can go on into infinity with the
only result being a huge pile of anecdotes that no one can organize into any
coherent explanation of what is going on. As you have so eloquently and
relentlessly pointed out accountants never replicate anything. In archival
research it is not even possible to replicate since the researcher is unable
to provide (like any good scientist in physics, chemistry, biology, etc.) a
log book providing the detailed recipe it would take to actually replicate
what the researcher has done. Without the ability to independently replicate
the exact study, the status of that study is merely an anecdote. Given the
Hunton affair, perhaps we should not be so sanguine about trusting our
colleagues. This is particularly so since the leading U.S. journals have a
clear ideological bias -- if your results aren't consistent with the
received wisdom they won't be published.
The purpose of this paper is to make a case that
the accountics science monopoly of our doctoral programs and publish ed
research is seriously flawed, especially its lack of concern about
replication and focus on simplified arti ficial worlds that differ too much
from reality to creatively discover findings of greater relevance to
teachers of accounting and practitioners of accounting. Accountics
scientists themselves became a Cargo Cult.
Accounting History Corner
USING A WHITE-COLLAR PROFESSION IN ACCOUNTING COURSES: APPROACHES TO ADDRESSING
DIVERSITY Accounting Historians Journal, 2006, Vol. 33, no. 1
Go
to
http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Then scroll down to 2010 Volume 36 Number 1 and click on the line that
says to View Searchable PDF Text File Then scroll down to the article Page
numbers may not exactly coincide with the table of contents depending upon
the resolution of your browser.
Abstract
Accounting educators no doubt agree that diversity is an important and much
neglected part of accounting education. They further recognize that it is
difficult to incorporate this important topic into the accounting
curriculum. This paper describes the efforts of various professors to expose
business and accounting students to the evolution of diversity issues
related to the accounting profession by using the book A White-Collar
Profession [Hammond, 2002]. A White- Collar Profession: African-American
CPAs Since 1921 is a seminal work which presents a history of the profession
as it relates to African- American CPAs and documents the individual
struggles of many of the first one hundred blacks to become certified. This
paper describes efforts of faculty at four different colleges to utilize
this book in their teaching of accounting. Instructors found that students
not only de - veloped an enhanced awareness about the history of the
accounting profession, but that other educational objectives were advanced,
such as improved communication and critical thinking skills, increased
social awareness, and empathy for others. African-American students, in
particular, embraced the people in the book as role models, while most every
student saw the characters as heroic in a day when the ac - counting
profession is badly in need of role models and heroes. This is encouraging
given the profession’s concern with diversity and the attention and
resources directed at increasing the number of minori - ties entering the
profession.
INTRODUCTION
Throughout its history, America has struggled with the issues of
discrimination despite its renown as a cultural melting pot. A number of
groups have received treatment ranging from less than fair to
extraordinarily harsh with regard to justice, economic opportunity, social
acceptance, and equality based on race, religion, sexual preference, and
gender. The accounting profession has contributed to this shameful history
as minorities have encountered obstacles blocking their way to licensure as
CPAs [Hammond, 2002]. A White-Collar Profession documents the struggles of
many of the first one hundred African-American CPAs to enter the accounting
profession by recounting their efforts to achieve licensure. It comes at a
time when the profession is at a lowpoint, in desperate need of attracting
qualified minorities. The nation is re-examining issues of race and
opportunity in areas such as college admission criteria and the role of
affirmative action and preference [Euben, 2001; Gudeman, 2001; Downing et
al., 2002].
This paper describes the experience of the authors
in using A White-Collar Profession at various colleges and in various ways.
The objective of this paper is to share these experiences with instructors
who might be reluctant to incorporate such an assignment into their
accounting courses. A range of institutions of higher education is
represented in this article: 1) a predominately white, large, public
university in the deep south; 2) an historically black, public college; 3)
an historically black, private college; and 4) a small, private, urban,
Catholic, northern university. The instructors’ approaches differed at each
institution as did the courses and the level of students. While the impact
the book has had upon students varied somewhat, the authors have all found A
White-Collar Profession valuable as a supplementary text for their courses
and its overall impact as consciousness raising.
In the next section of the paper, the objectives of
incorporating the book into an accounting course are described. This is
followed by a discussion of alternatives for using A White-Collar Profession
in accounting courses. In the succeeding sections, the four instructors
describe their experiences: what took place, the approaches used, and the
student reactions observed. The final section of the paper considers the
concerns reluctant readers may still have in adopting this book.
SUMMARY OF THE BOOK
A White-Collar Profession has as its focal point the under- representation
of African Americans in the public accounting profession. Currently, fewer
than one percent of certified public accountants are African American, a
marked contrast to other large professions in the U.S., including those with
more rigorous educational requirements (see Table 1)
Continued in article
Rubrics in Academia --- https://en.wikipedia.org/wiki/Rubric_(academic)
Jensen Comment
Testing becomes more effective for grading and licensing purposes as class sizes
increase. It's less effective when hands on experience is a larger part of
competency evaluation. For example, in the final stages of competency evaluation
in neurosurgery testing becomes less important than expert evaluation of
surgeries being performed in operating rooms. I want my brain surgeon to be much
more than a good test taker. Testing is more cost effective when assigning
academic credit for a MOOC mathematics course taken by over 5,000 students.
One thing to keep in mind is that testing serves a much larger purpose than
grading the amount of learning. Testing is a huge motivator as evidenced
by how students work so much harder to learn just prior to being tested.
Some types of testing are also great integrators of multiple facets of
a course. This is one justification of having comprehensive final examinations.
Testing also can overcome racial, ethnic, and cultural biases. This is the
justification, for example, for having licensing examinations like CPA exam
examinations, BAR examinations, nursing examinations, etc. be color blind in
terms of race, ethnic, and cultural bias. This is also one of the
justifications (good or bad) of taking grading out of the jurisdiction of
teachers. Competency examinations also serve a purpose of giving credit for
learning no matter of how or where the subject matter is learned. Years ago
people could take final examinations at the University of Chicago without ever
having attended classes in a course ---
http://faculty.trinity.edu/rjensen/assess.htm#ConceptKnowledge
"Using Rubrics to Assess Accounting Learning Goal Achievement," by
Thomas F. Schaefer and Jennifer Sustersic Stevens, Issues in Accounting
Education, Volume 31, Issue 1 (February 2016) ---
http://aaajournals.org/doi/full/10.2308/iace-51261
Free only to subscribers (including users of campus libraries)
This paper illustrates the development and use of
rubrics to improve the learning assessment process and enhance the
teaching-learning relationship. We highlight the multidimensional benefits
of rubrics as valuable tools for student assessment (grading), course
assessment (at the instructor level), and program assessment (at the
administrator/curriculum committee/accreditation level). Moreover, rubrics
may improve qualitative feedback on learning to students and instructors.
Development of effective rubrics is framed in terms of learning goals,
measurable learning outcomes, choice of assessment vehicle/assignment, and
use of data collected from rubrics for feedback and/or improvement. The
paper then offers an example set of rubrics designed to assess student
achievement of three learning goals common to many undergraduate accounting
programs: accounting measurement, research, and critical thinking. This
paper may prove useful for instructors looking to use rubrics to improve the
teaching-learning process and concurrently evaluate learning goal
achievement for course or program assessment. As an auxiliary benefit, the
use of scoring rubrics may simplify grading, as well as data collection in
documenting assurance of learning for accreditation purposes.
In higher-education institutions, faculty members
often are tasked with measuring individual student performance, assuring
their students meet established course learning goals, as well as evaluating
overall student progress toward a particular program's learning goals.
However, instructors often struggle with assessing student learning in an
effective and efficient manner. Scoring rubrics represent a valuable tool to
enhance the teaching-learning process by providing a systematic approach to
measuring learning outcomes, yet very few studies in the accounting
literature highlight the benefits of using rubrics or provide guidance in
their application.1
Rubrics—detailed lists of competencies for
designated learning outcomes accompanied by levels of performance
criteria—can guide assessments at both the student and course level, as well
as contribute to a program-level assessment. Moreover, rubrics enhance
feedback to students and promote learning (Brookhart 2013; Stevens and Levi
2013). The purpose of this paper is to offer guidance on the development and
use of scoring rubrics for classroom and assessment purposes. The paper also
provides an example set of scoring rubrics designed to assess student
achievement for accounting measurement, research, and critical thinking
learning goals.
Rubrics enrich the teaching-learning process at the
student level by enabling a discussion of quality for complex work products.
Unlike a traditional assessment system in which the instructor judges
quality and assigns a grade, a rubric conveys descriptions of quality and
connects how a student's performance falls within those guidelines (Brookhart
2013). This facilitates a more objective, productive conversation regarding
a student's progress compared to learning expectations and allows the
student to identify his or her own strengths and weaknesses (Suskie 2010).
If shared with students when distributing the assignment, then scoring
rubrics may also help communicate performance expectations and lead to
improved student submissions (McTighe and O'Connor 2005). Moreover, scoring
rubrics can help standardize the grading process and provide more reliable,
fair, and valid feedback to instructors and students (McTighe and Ferrara
1994).
At the course level, instructors should consider
their educational program's learning goals when developing student
assignments. A carefully designed scoring rubric may complement this process
by helping the instructor to clarify the purpose of the assignment, as well
as to focus on its most important learning objectives (Ammons and Mills
2005). Feedback from the process may persuade instructors to modify
instruction, course content, or assignments to improve teaching and enrich
learning within the course. In addition, rubrics may facilitate coordination
with other course instructors or teaching assistants by creating a more
objective, consistent guide for scoring student submissions (Stevens and
Levi 2013).
At the program level, accounting undergraduate and
graduate programs routinely assess and document progress toward the
achievement of established educational learning goals. In addition,
accrediting agencies typically require evidence of student achievement for
institution-specific learning goals (Kimmell, Marquette, and Olsen 1998;
Stivers, Campbell, and Hermanson 2000; J. Shaftel and T. Shaftel 2007). The
development of scoring rubrics may prove useful in constructing assignments
to assess specific program learning goals, evaluating progress in meeting
learning goals, and facilitating ease of data collection for accreditation
or other program evaluations. Scoring rubrics may also help decrease
subjectivity in determining when assessments fail to provide evidence of
sufficient student learning, so that curricular efforts can be targeted to
remedy the deficiency.
A review of the literature on the role of the
Volunteer Income Tax Assistance (VITA) program in accounting education
"VITA: A Comprehensive Review of the Literature and an Analysis of the
Program in Accounting Education in the U.S.," by Cynthia Blanthorne and Stu
Westin, Issues in Accounting Education, Volume 31, Issue 1
(February 2016) --- http://aaajournals.org/doi/full/10.2308/iace-51243
Free only to subscribers (including users of campus libraries)
This paper provides a review of the literature on
the role of the Volunteer Income Tax Assistance (VITA) program in accounting
education. The consensus is that the VITA program affords students an
experiential learning opportunity to enhance their academic experience with
real-life work exposure. However, there also seems to be a sense of
underutilization of VITA as a service learning activity. Underlying that
sentiment, somewhat, is the lack of an ongoing, constructive discourse on
current practices. These observations provided us the impetus to develop and
administer a cross-sectional survey investigating the structure of VITA
programs in accounting education in the U.S. We utilize a non-sampling
research design in that we reach out to the entire population of accounting
programs in the U.S. The study includes an analysis of active VITA programs,
an investigation into the demise of discontinued programs, and descriptive
information on institutions that have never offered a program. Our goal is
to energize VITA program activity in accounting education and promote future
discussion and research about the program. We contribute to the literature
by providing the first comprehensive literature review of VITA programs in
accounting education coupled with a data-driven description of the current
status of VITA.
The drug company hopes you will focus on how its
revenues were booked, not how they were generated.
Valeant’s fall from grace did not begin with
discovery of accounting shenanigans. It began with congressional subpoenas
looking into Valeant’s successful exploitation of the price-insensitivity
programmed into our health-care markets by government policies.
The accounting accusations did not precede
revelations of its dealings with Philidor, a mail-order pharmacy that
Valeant controlled in order to maximize the price insurers and hospitals
paid for Valeant’s drugs.
Valeant’s Philidor dealings were first exposed by
an investigative blogger, Roddy Boyd, who unearthed a lawsuit against
Valeant by a California pharmacist; only then did an independent short
seller start questioning whether Valeant properly accounted for sales
through Philidor. By then, Valeant’s stock had already lost one-third of its
towering value in a matter of a couple months.
Mr. Schiller had been CFO in 2014, when Valeant
changed its relationship with Philidor, which required no longer recognizing
sales when drugs were delivered to Philidor but only after Philidor
delivered the drugs to customers. The now-surfaced accounting snafu concerns
not just the timing of this change; a small portion of the revenue appears
to have been doubled-counted during the transition.
Mr. Schiller stepped down as CFO last year but
remained a member of the board. This week, the company asked him to resign
his board seat, alleging something vague about “the tone at the top” and
seeming to blame the accounting mistake on a “performance-based environment
at the company, where challenging targets were set and achieving those
targets was a key performance expectation.”
Huh? If setting “challenging targets” is tantamount
to authorizing employees to cheat, then every company—as well as all
business schools, all motivational speakers, all writers of business how-to
books—are accessories to crime.
Mr. Schiller, in a moment of anarchy, refused this
week to resign his board seat, saying he did nothing wrong. His refusal,
naturally, has set the financial media a-clucking.
One likely reason for these weird events is that
both the Securities and Exchange Commission and Justice Department claim to
look more favorably on companies that quickly identify and hold accountable
miscreant executives.
Mr. Schiller is an obvious candidate to hold
accountable because Valeant fervently hopes federal inquisitors will focus
on the Philidor accounting, not how the Philidor revenues were actually
generated and their role in supporting Valeant’s once highflying valuation
as a new kind of drug company that hiked prices rather than engaged in drug
research.
Not that there is anything illegal about raising
prices. But the means Philidor allegedly used to flimflam payers into
actually paying its high prices appear highly suspect. Ultimately, what
unraveled Valeant’s share price wasn’t flaky accounting but pushback from
private payers and politicians (who, after all, oversee half the nation’s
health-care spending) over Valeant’s profiteering methods.
One commentator has already compared Valeant to
Enron, an analogy fair only in this limited sense: Enron’s troubles began
when the Internet bubble lofted the former gas-pipeline company’s stock into
the stratosphere. Much of what followed amounted to a corruptible management
trying to defend an implausible stock price. At least part of the blame lies
with investors who confused Enron with some kind of miracle company that was
about to corner every business-to-business opportunity created by the
Internet.
As I described in a
previous
post the
FASB has two related proposals on the table related to materiality and
financial statement notes:
An amendment toConcepts Statement No. 8to
replace its ersatz definition of “materiality” — nothing but a re-phrasing
of its description of “relevant” information — with a reference to the
Supreme Court’s “definition” — itself a fluid collection of decisions in
specific cases. Many of these cases have little or nothing to do with
financial statements or note disclosures. Proposed ASU No. 2015-310 would
amend the Accounting Standards Codification to provide as follows: An entity
may omit disclosure requirements if they are “immaterial” individually or in
the aggregate. (This is already self-evident.) Omitting a disclosure of
immaterial information would not be an accounting “error.” (See below for
how “error” has been added to the FASB’s lexicon of doublespeak.) Without
referring to CON 8, due to its lack of authoritativeness, a material
omission of a disclosure would be nothing more or less than a question of
applying the law of the land.
My objective in this
latest post is to report that my concerns expressed earlier have been
validated by numerous comment letters to the FASB by or on behalf of
investors.
I
[Read More...]
March 17, 2016 reply from Bob Jensen
Hi Tom,
I think what the FASB is troubled by is the legal definition of
materiality that takes into "context" into context.
The problem with "context" is that its virtually impossible in auditing
to anticipate all "contexts." Of course this is also a problem when writing
laws. Security laws use the criterion:
"a reasonable shareholder would consider it important in deciding how to
vote their shares or invest their money."
https://en.wikipedia.org/wiki/Materiality_(law)
This backflushes the definition to what is a "reasonable shareholder?"
But that is not enough. Auditors and juries must sometimes make
cost-benefit decisions regarding materiality without knowing particular
contexts. Clearly, preparers of financial statements are seeking to avoid
having to incur immense expenses on what they consider data that is
expensive to generate, validate, and present relative ot benefits to
"reasonable shareholders."
An example with the FASB versus the IASB diasgree in in the realm of
embedded derivatives.
Some of the corporate executives that I invited to present modules in my
former FAS 133 executives contended that it was extremely expensive to pour
over thousands or tens of thousands of financing contracts searching for
embedded derivatives. This was especially the case for contracts of with
Asian customers where it's considered bad manners to put too much in writing
into contracts.
The IASB made a command decision that it would not be necessary to
discover embedded derivatives. The FASB disagrees in FAS 133 and its
amendments. In most contexts the embedded derivatives are not material due
having underlyings that are "ckearly and closely related" to the underlying
in the host contracts. However, the FASB did not ipso facto declare embedded
derivatives to be immaterial in all contexts unlike what was decided by the
IASB in IFRS 9 regarding embedded derivatives.
My point here is that materiality depends upon context, and accounting
standard setters do not always agree on the definition of materiality apart
from context. I'm not certain a definition can ever be agreeable to
everybody, including yourself, apart from context that is impossible to know
ahead of time in most instances. There are obvious exceptions such as the
IRS decision to round all tax return items to the nearest dollar. But not
all contexts are so easy to anticipate.
The comment letters sent to standard setters often take different sides.
It becomes the task of standard setters to take positions such as when the
IASB decided embedded derivatives need not be detected and the FASB decision
that they most be detected, thereby giving rise to many financial statements
prepared under US GAAP versus IFRS. I've not yet seen any research on the
magnitude of such differences in practice.
One of the serious differences,
in my viewpoint, between IFRS and US GAAP is the accounting for embedded
derivatives. The IASB in IFRS 9 simply lets firms off the hook from having to
search and account for embedded derivatives. I view this as a cop out!
The guidance in Accounting Standards Update
2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call
Options in Debt Instruments, is intended to resolve accounting practices
that have diverged. The new standard is the result of a project undertaken
by FASB’s Emerging Issues Task Force.
U.S. GAAP requires embedded derivatives to be
separated from the host contract and accounted for separately as derivatives
if certain criteria are met. One of those criteria is that the economic
characteristics and risks of the embedded derivatives are not clearly and
closely related to the economic characteristics and risks of the host
contract. This is called the “clearly and closely related” criterion.
GAAP states that call or put options that can
accelerate the repayment of principal on a debt instrument meet the clearly
and closely related criterion if they can be indexed only to interest rates
or credit risk. The standard issued Monday clarifies that an entity is
required to assess the embedded call or put options solely in accordance
with a four-step decision sequence that was created by FASB’s Derivatives
Implementation Group.
The four-step sequence requires an entity to
consider whether:
The payoff is adjusted based on changes in an
index.
The payoff is indexed to an underlying other
than interest rates or credit risk.
The debt involves a substantial premium or
discount.
The call or put option is contingently
exercisable.
The new standard clarifies that when a call or put
option is contingently exercisable, an entity does not have to assess
whether the event that triggers the ability to exercise a call or put option
is related to interest rates or credit risks. Through this clarification,
FASB intends to eliminate diversity in practice in which some entities were
assessing whether the event that triggers the ability to exercise the call
or put option is indexed only to interest rates or credit risk in addition
to the four-step decision sequence. -
• The FASB issued final guidance clarifying that an assessment of
whether an embedded contingent put or call option is clearly and
closely related to the debt host requires only an analysis of the
four-step decision sequence in ASC 815-15-25-42.
• Entities are required to apply the guidance to existing debt
instruments (or hybrid financial instruments that are determined to
have a debt host) using a modified retrospective transition method
as of the period of adoption.
• The guidance is effective for public business entities for fiscal
years beginning after 15 December 2016, and interim periods within
those years. For other entities, the guidance is effective for
fiscal years beginning after 15 December 2017, and interim periods
within fiscal years beginning after 15 December 2018. Early adoption
is permitted.
Overview
The Financial Accounting Standards Board (FASB or Board) issued final
guidance clarifying that the assessment of whether an embedded
contingent put or call option is clearly and closely related to the debt
host only requires an analysis of the four-step decision sequence
outlined in Accounting Standards Codification (ASC) 815-15-25-42. That
is, an entity does not have to separately assess whether the contingency
itself is indexed only to interest rates or the credit risk of the
entity.
. . .
Background
Under ASC 815, instruments that contain embedded derivatives must be
assessed to determine whether those derivatives should be accounted for
separately from the host contracts. An
embedded derivative must be separated
(i.e., bifurcated) from the host contract when (1) its economic
characteristics and risks are not clearly and closely related to the
economic characteristics of the host contract, (2) the hybrid instrument
that embodies both the embedded derivative and the host contract is not
measured at fair value with changes in fair value reported in earnings
and (3) a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative.
Debt instruments often contain put and call
options, and in certain cases, those
options are contingently exercisable.
ASC 815 requires that for contingent put or call options to be
considered clearly and closely related to a debt host, they can only be
indexed to interest rates or credit risk of the entity. This guidance
raised interpretive questions that the FASB’s Derivatives Implementation
Group (DIG) tried to clarify by providing a four-step decision sequence
to be used to determine whether puts and calls are clearly and closely
related to the host contract (codified in ASC 815-15-25-42). The
four-step decision sequence requires an entity to consider whether (1)
the amount paid upon settlement is adjusted based on changes in an
index, (2) the amount paid upon settlement is indexed to an underlying
other than interest rates or credit risk, (3) the debt involves a
substantial premium or discount and (4) the put or call option is
contingently exercisable.
However, entities have developed two different
approaches to the assessment. Many entities assess whether contingent
put or call options are clearly and closely related to the debt host
using only the four-step decision sequence. Others also assess whether
the event that triggers the ability to exercise the put or call is
indexed only to interest rates or credit risk of the entity, and not to
what the guidance calls some extraneous event or factor.2 This type of
assessment could result in the bifurcation of more options than just
applying the four-step decision sequence.
•
The FASB issued final guidance clarifying that the novation of a
derivative contract in a hedge accounting relationship does not, in and
of itself, require dedesignation of that hedge accounting relationship.
•
Hedge accounting relationships could continue as long as all of the
other hedge accounting criteria are met, including the expectation that
the hedge will be highly effective when the creditworthiness of the new
counterparty to the derivative contract is considered.
•
For public business entities, the guidance is effective for fiscal years
beginning after 15 December 2016, and interim periods within those
years. For all other entities, it is effective for fiscal years
beginning after 15 December 2017, and interim periods within fiscal
years beginning after 15 December 2018. Early adoption is permitted.
•
Entities may adopt the guidance prospectively or use a modified
retrospective approach to apply it to derivatives outstanding during all
or a portion of the periods presented in the period of adoption.
From EY on March 11, 2016
2016 XBRL US GAAP Taxonomy available for use
The
SEC staff hasupdatedthe
EDGAR system to allow companies to use the 2016 XBRL US GAAP taxonomy, which
adds tags for accounting standards updates and makes certain
industry-related changes and other revisions. The SEC staff strongly
encourages companies to transition to the 2016 taxonomy for their first
reporting period ending after 7 March 2016 (e.g., the first quarter Form
10-Q for calendar-year registrants). Companies also may continue to use the
2015 or 2014 taxonomies. The staff does not expect to remove the 2014
taxonomy before June 2016.
The FASB issued final guidance that will require entities to measure equity
investments (except those accounted for under the equity method, those that
result in consolidation of the investee and certain other investments) at
fair value and recognize any changes in fair value in net income. Entities
will have to record changes in instrument-specific credit risk for financial
liabilities measured under the fair value option in other comprehensive
income. The new guidance also changes certain disclosure requirements and
other aspects of current US GAAP. It does not change the guidance for
classifying and measuring investments in debt securities or loans.
The Emerging
Issues Task Force (EITF) reached a consensus-for-exposure on the following
issue:
Issue 16-A: Restricted Cash (previously included in EITF Issue No. 15-F,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash
Payments)
In our comment letter, we support both the FASB’s objective to improve the
effectiveness of disclosures and the proposed elimination of certain fair
value disclosure requirements, including the relief that would be provided
to private companies. However, we highlight the cost of implementing some of
the additional requirements the FASB proposed, including the disclosures of
the amount of changes in unrealized gains and losses for recurring Level 1
and Level 2 measurements disaggregated by class.
Jensen Comment
When planning courses I suspect that most accounting faculty overlook textbook
alternatives from the AICPA. These are probably not what you want for
introductory and intermediate accounting. However, they should be considered for
specialty topics like tangible and intangible asset valuation, goodwill
impairment, XBRL, COSO tools, internal control, forensic accounting, audit
committee guides, etc. Positives in these textbooks include their wealth of
illustrations. Negatives include the lack of supplements that accounting
instructors often look for such as test banks and multimedia supplements.
My point is that learning material should be at least
evaluated by our Academy when choosing course content.
In most cases complimentary review copies are available. Go
for it!
NORMALLY, it is Simon Taylor’s job to persuade
sceptical colleagues at Barclays that rapid technological change will
disrupt the bank’s business. So it comes as something of a surprise to have
to dampen the excitement about the blockchain. “It’s quite silly. I get ten
invitations to speak at a conference every day,” he says. “The technology
will have real impact, but it will take time.”
The blockchain is the technology underpinning
bitcoin, a digital currency with a chequered history. It is an example of a
“distributed ledger”: in essence, a database that is maintained not by a
single actor, such as a bank, but collaboratively by a number of
participants. Their respective computers regularly agree on how to update
the database using a “consensus mechanism”, after which the modifications
they have settled on are rendered unchangeable with the help of complex
cryptography. Once information has been immortalised in this way, it can be
used as proof of ownership. The blockchain can also serve as the
underpinning for “smart contracts”—programs that automatically execute the
promises embedded in a bond, for instance.
t is easy to see why bankers get excited about
distributed ledgers.
Instead of having to keep track of their assets in separate databases, as
financial firms do now, they can share just one. Trades can be settled
almost instantly, without the need for lots of intermediaries. As a result,
less capital is tied up during a transaction, reducing risk. Such ledgers
also make it easier to comply with anti-money-laundering and other
regulations, since they provide a record of all past transactions (which is
why regulators are so keen on them—see article).
Besides, embracing the technology
allows big banks to appear innovative. For the most breathless evangelists,
it holds out the prospect of liberation from all the dross that
has accumulated in the
financial system, from incompatible IT systems to expensive intermediaries.
“For many, the blockchain is the Messiah,” says Gideon Greenspan, the
founder of Coin Sciences, a blockchain startup based in Israel.
The accountancy department is the oldest department
at Bentley University, and has a long tradition of providing a high-quality
accounting education. Classes in cost accounting, auditing, financial
accounting and information technology help to provide a core understanding
of the business world and the role accounting plays in it. Accounting is one
of the most popular majors in the school, and it is no wonder as graduates
are often highly successful in their careers, earning an average starting
salary of $51,000 and mid-career salary of $99,000.
2. University of Notre Dame
The Mendoza College of Business at the University
of Notre Dame is a top-tier business school, combining a liberal arts
education with advanced knowledge and research in accounting to provide
students with a strong understanding of the field.
Students take specialized classes in strategic cost
management, audit and assurance services and federal taxation among others
to help develop critical thinking and leadership skills. Graduates of the
accountancy program have a solid grasp of the field and find careers within
the accounting industry earning an average mid-career salary of $119,000.
3.
Bryant University
Founded in
1863, Bryant University has a strong
history of producing professionals who
are leaders in the field. Its accounting
program is no exception.
Classes in
leadership, financial reporting,
taxation, auditing and management
introduce students to the business
world, while improving communication and
analytical skills. Graduates of this
program have a dynamic understanding of
accounting and are prepared for a career
in a challenging field. They typically
earn an average
starting salary of $52,000
and mid-career salaries of $80,000.
4. New York
University
The
Leonard N. Stern School of Business
at New York
University offers two different
undergraduate degrees in accounting, one
with an emphasis in C.P.A., and the
other less technical in nature. The
second option allows students to blend
liberal arts classes with core business
and accounting classes to give them a
broad education in the field.
A B.S in
accounting from Stern leads to a high
average starting salary of $65,000.
Graduates of this
program often progress to positions of
leadership, earning an average
mid-career salary of $114,000.
5.
University of Illinois at
Urbana-Champaign
Accounting is a
global field that plays a core role in
all business functions. A degree from
the University of Illinois at
Urbana-Champaign will prepare you for a
successful career at any organization.
The
undergraduate program
is centered on
preparing graduates for a career in a
variety of accounting fields, ranging
from corporate to governmental.
Students are
exposed to the fundamental principles of
accounting, while learning how to apply
current best business practices. The
curriculum integrates liberal arts
classes with core business classes in
management, finance and analytics to
create an environment that enhances
critical thinking skills. Graduates of
this program have been highly successful
in the business world, earning an
average mid-career salary of $100,000.
6.
University of Southern California
The Marshall
School of Business at the University of
Southern California houses the
distinguished Leventhal School of
Accounting. This undergraduate
accounting program is one of the best in
the country due to the exclusivity of
the program. Students study the art of
accounting, while understanding the role
it plays in business. They have the
ability to customize their major, so
they are taking classes that prepare
them for quick advancement in the
business world.
Classes in
finance, economics and management help
promote discussions about accounting
practices, while supplementing classes
on accounting principles.
USC graduates of the accounting program
earn an average starting salary of
$55,000, but typically advance quickly,
to an average mid-career salary of
$110,000.
7. The
University of Texas-Austin
In addition to
offering a Bachelor of Business
Administration (BBA) in accounting, the
McCombs School of Business at the
University of Texas also has an
integrated Master
in Professional Accounting (iMPA)
program
that allows strong students to earn both
an BBA and MPA in five years.
Students can
choose a corporate track or a financial
institutions track, depending on their
desired career plans. Upon graduation,
accounting majors typically accept jobs
in industry or government with an
average starting
salary of $51,000.
8. CUNY
Bernard M. Baruch College
The Zicklin
School of Business at CUNY Bernard M
Baruch College is a highly-ranked
business school with a reputation of
providing a quality accounting
education. The school attracts top
faculty that have developed a curriculum
that exposes the relationship between
accounting and other crucial business
practices.
Students take
core classes in cost accounting,
financial accounting, auditing and
taxation along with electives in areas
such as corporate finance and business
law. A degree from Baruch leads to
well-paying jobs, with graduates earning
an average mid-career salary of $89,000.
9. Boston
College
Boston College
is a top school known for its strong
curriculum and the success of its
graduates. The accounting department
holds the same reputation due to its
world-class faculty and collaborative
classes.
Accounting
majors take their core business classes
in finance, taxation, economics,
analysis and auditing at the Carroll
School of Management. They are given the
option to specialize in Accounting,
Accounting Information Systems or
Corporate Reporting. Each of these
concentrations is challenging and
prepares graduates for rewarding careers
in a variety of accounting services,
earning an average mid-career salary of
$109,000.
10.
Villanova University
The Villanova
University School of Business offers an
accountancy program that prepares
students for careers at business firms,
corporations and governmental
organizations. The school has a dynamic
curriculum that incorporates theory and
principles with exposure to current
business practices. This gives students
the opportunity to gain a well-rounded
business education and secure jobs after
graduation.
Classes in
accounting, auditing and taxation are
supplemented by electives in areas such
as fraud, international accounting and
accounting for real estate.
Villanova graduates
are well-equipped
for an accounting career, earning an
average starting salary of $55,000 and
mid-career salaries averaging $107,000.
$34,015 per year (in-state,
full-time); $52,470 per year
(out-of-state, full-time)
Jensen Comment
The USA rankings lean toward universities in big cities where starting salaries
are somewhat higher but living costs are much higher than than say living costs
in Utah and surrounding mountain states. Exceptions include Bryant, Illinois and
Notre Dame, but these universities feed nearby urban centers.
I favor the US News report that is influenced more heavily by opinions of
administrators that, in turn, are more influenced by reputations of accounting
faculty. The US News anointed universities have more stars.
It may have taken a while, but things are finally
starting to unravel.
The US government is intensely scrutinizing
for-profit colleges, many of which stand accused of stealing federal
dollars, preying on low-income students, and falsely reporting job
placements, among other deceptive practices. Big names like ITT Tech, DeVry
University, and the University of Phoenix are all being called to account.
The 107-campus Corinthian Colleges
stumbled to its end last year.
Corruption in for-profit education is hardly new,
and the recently retired US education secretary Arne Duncan says the biggest
regret of his tenure is not cracking down on its “bad actors” sooner.
The question is: Why didn’t he—or anyone?
“There’s been a serious gap in our understanding
about where these institutions came from and how they’ve developed over
time,” says Winthrop University history professor A.J. Angulo, who
calculates the size of the industry, based on
government documents, to be over $35 billion.
Angulo traces the surprisingly long legacy of
for-profits in his new book, Diploma Mills:
How For-Profit Colleges Stifled Students,
Taxpayers, and the American Dream. Schools
that operate around profit have indulged in
unscrupulous practices since as far back as the
18th century, Angulo argues. Diploma Mills
calls out all those practices, as well as the
institutions that’ve let them slide for so long.
Quartz spoke with the author for a look at the
myriad of tensions involved.
QZ: Why’s it important to look back at the
history of for-profits?
Angulo: Right now, we have a great deal of
literature from economists and political scientists and sociologists who
offer case studies from the 1990s onward. But there’s been very little on
the historical evolution of how these institutions came about. When I was
looking through the 2012 Senate investigations, I saw these startling
documents—four-volume, multi-thousand-page studies on for-profits in recent
history—and I got to thinking I’d like to put it in historical context.
"It is
easier to move a cemetery," said President Woodrow Wilson,
"than to effect a change in curriculum.")
In addition to being President of the United States Wilson was a former
President of Princeton University.
In the context of Woodrow
Wilson many of us are hoping that the Pathways Commission can move the academic
accounting cemetery in terms of teaching, research, and service
Amid concerns that requirements may not
mean much to students or professors, Harvard and Duke Universities both look
to curricular changes to improve undergraduate education.
Jensen Comment
Amidst the turf wars where some academic disciplines low on numbers of majors
depend upon including their basic courses in the Gen Ed core. Harvard led the way
by making the Gen Ed core a smorgasbord of courses from nearly all academic
disciplines. This, in turn, led to gamesmanship on the part of students to
choose the easiest courses rather than traditional courses that traditionally
part of gen ed. The closest that students may ever get to Shakespeare and
calculus or civics may now be in high school.
What is sadly lacking in most core
requirements or even alternatives in the gen ed core is financial literacy even
though financial ignorance is probably the leading cause of too much consumer
debt and divorce in the USA.
Jim Vander Putten suspected that some education
conferences accepted any study pitched by someone willing to pay a
registration fee. He worried that the gatherings enabled scholars to pad
their publishing records while tainting research in the field.
To test his hypothesis, he sent fake research-paper
summaries larded with unforgivable methodological errors to the organizers
of 15 conferences he believed to have lax standards. All responded by
offering to let him present his findings and to publish his papers as part
of their proceedings.
But instead of exposing the dissemination of bad
research, Mr. Vander Putten now stands accused of research misconduct
himself.
Administrators at the University of Arkansas at
Little Rock, where he is an associate professor of higher education, have
told him he violated policy by undertaking a study of human subjects without
the approval of the campus’s institutional review board. They have rejected
his defense that an outside, commercial review board signed off on his plans
— after Little Rock’s board failed to do so. A research-integrity officer on
his campus has called on him to relinquish the data that he gathered.
University officials took such actions after conference organizers he had
duped threatened to sue.
Mr. Vander Putten’s unusual case highlights
inconsistencies in the judgments that review boards make. It also raises
questions of how much commercial boards, which account for a growing share
of such reviews, can be trusted to safeguard colleges’ interests.
Continued in article
Jensen Comment
I innocently ended up in one of these phony conferences in a historic
village in Germany before I realized it was an expensive, albeit phony,
conference for accounting, finance, and business presenters. The first clue
that it was phony was that there were no plenary sessions or any sessions
with attendees met as a group. There were no dinners, receptions, or vendors
selling books.
Here are some other features of phony academic conferences.
These conferences represent no associations. Declarations that the
papers accepted for the conference are first refereed are false.
Virtually all papers submitted are accepted. Some are even published
afterwards if the authors pay publishing fees.
The location is in a popular tourist location on a beach, in the
mountains, or situated near casinos. Sometimes they are even on a ship.
I'm told that they're modeled after some phony medical conferences
attended by physicians on vacations paid for by pharmaceutical and
medical equipment vendors.
Faculty submit expense reimbursement requests to their universities
for what turns out often to be family vacations. At the German
conference mentioned above I met a friend of mine who said his main
purpose of attending was to buy a new Mercedes, drive his family around
Europe, and then ship the Mercedes back to the USA.
Nothing new or exciting is presented at these conferences. Mostly
they old papers rejected by journals are dusted off and presented
without enthusiasm.
Only the persons assigned to present a paper in a program time slot
attend the session. If there are four presenters there will be one
rotating speaker and three in the audience. Sometimes the presenter will
leave the session before it's over, thus making it possible that the
last speaker has no audience.
Speakers show up only for part of one day fore their assigned
presentations. Most arrive late to the conference and leave before the
conference ends.
Sometimes the conference is organized by an academic who learns that
organizing such fees for such conferences and fees for published
proceedings are are better ways of making money than earning a salary at
college.
Allow me to offer a few quotes (emphasis added)
from one prominent economist, at the time a professor at an elite
university, who was lamenting the poor understanding of international trade
in the United States:
“Most of what a student is likely to hear or
read about international economics is nonsense.”
“International trade is not about
competition, it is about mutually beneficial exchange.”
“Imports, not exports, are the purpose
of trade. That is, what a country gains from trade is the
ability to import things it wants. Exports are not an objective in and
of themselves: the need to export is a burden that a country must bear
because its import suppliers are crass enough to demand payment.”
“The level of employment is a macroeconomic
issue, depending in the short run on aggregate demand and depending in
the long run on the natural rate of unemployment, with microeconomic
policies like tariffs having little net effect.”
“Trade should be debated in terms of
its impact on efficiency, not in terms of phony numbers about jobs
created or lost.”
So who is this paragon of capitalist dogma, this
right-wing hater of the Rust Belt, this heartless fiend in the pocket of the
Koch Brothers? Is it Steve Moore? Larry Kudlow? Ben Stein? Is it a
deep-thinking conservative from the American Enterprise Institute or a Cato
Institute libertarian?
No, these words are from a
1993 paper published by one Paul Krugman
(H/T
Don Boudreaux), at the time a professor in the
economics department at MIT, who later won the Sveriges Riksbank Prize in
Economic Sciences in Memory of Alfred Nobel (the official name of the
world’s most famous non-athletic prize) for
innovative explanations of free trade
including that similar countries may trade with each
other, including importing and exporting similar products, to satisfy
consumer demand for a wider variety of products.
Again, although there is debate at the margins, the
very large net benefit of free trade to a nation that engages in it is
largely uncontroversial among economists, at least among honest ones — a
group that sadly no longer includes Dr. Krugman. This includes the fact that
free trade benefits the importing country even if the exporting country does
not equally reciprocate with reduced tariffs. As the aforementioned Don
Boudreaux puts it, just because the other guys are filling their ports with
boulders doesn’t mean we should.
Continued in article
Jensen Comment
The fact of the matter is that candidates for public office like Bernie Sanders
are appealing for votes from workers who are either unemployed or, like Michael
Moore of Roger and Me fame, believe in their hearts that selected high
tariffs will lead to high wages for them personally. At a personal level they
may even be correct for particular trades. But what these voters don't take into
account or don't care about is the adverse effect on millions of other workers
and consumers who benefit greatly by free trade.
And the hourly worker advocating a high tariff for
strictly personal reasons may find that the higher tariffs backfire on him or
her personally. The guy on a GM assembly line may think this wage will quadruple
with a tariff only to discover that the tariff puts him out of a job or lowers
his wage. The current unemployed person may discover that tariffs further reduce
the chances of finding work.
And the guy on the GM assembly line anticipating a
quadruple increase in wages in Detroit may discover that, if a USA tariff puts
10 million skilled assembly line workers in Mexico out of work, most of those 10
million workers will find their way to Detroit in a matter of weeks and compete
for the high wage jobs.
The bottom line is that protectionism is great for getting
votes but lousy for the economy except in very rare instances where national
defense and economic well being becomes a serious concern. I say "well being"
because when the USA entirely stops producing a very strategic ingredient the
nation is at risk of being extorted by foreign producers. Our current dependency
on China for lithium, for example, is a serious concern. But there are ways
other than tariffs when strategic supplies are of concern.
Until recently, relatively little attention had
been paid to one source of Rubenstein’s wealth,
which he has quietly fought to protect: the
so-called carried-interest tax loophole. The tax
break has helped private equity become one of
the most lucrative sectors of the financial
industry. Since the end of the recession,
private equity has reported record profits, and
at least eighteen private-equity executives are
estimated to be worth two billion dollars or
more each. And during the current Presidential
campaign, with its populist themes, the loophole
has become a target among Democrats and
Republicans alike. ...
Private-equity partners argue that their tax
treatment is justified under the tradition of
encouraging risky business partnerships and is
necessary for their industry to flourish. So
far, the partners have won out: despite the rise
of anti-Wall Street sentiment after the 2008
financial collapse, the loophole has withstood
every effort at reform. ...
The person most responsible for inspiring the
movement against the carried-interest tax
loophole is Victor Fleischer, a tax-law
professor at the University of San Diego School
of Law. Fleischer, the son of two college
professors in Buffalo, became aware of the
loophole in the late nineteen-nineties, when he
was working as a tax attorney at Davis Polk, in
New York. Fleischer does not consider himself
particularly liberal. He is motivated, he told
me, by a basic idea. “It’s important to think
about how the tax system treats people. The tax
system has to fund the government and the
government has to do things for everyone.”
For more than a decade, Fleischer has argued
that the loophole contributes significantly to
income inequality, by inflating what he calls
the “alpha income” of financiers in the top one
per cent of the one per cent. In legislative
circles, he is among the foremost authorities on
the issue. The other side has acknowledged his
expertise in its own way: early in his research,
he declined a consulting gig for a
private-equity lobbyist. ...
In 2006, Fleischer, then an untenured professor
at U.C.L.A., circulated a research paper, his
first on the carried-interest loophole, called
“Two and Twenty.” (It was published two years
later, in the New York University Law Review.)
He argued that the compensation scheme in
private-equity firms meant that partners were
not taking the kind of risk for which the
capital-gains tax was designed. “If the fund
does well, the managers share in the treasure,”
he wrote. “If the fund does badly, however, the
manager can walk away.” He noted that some
partners were even taking a portion of their
management fees in the form of carried interest,
to increase the tax advantage. “This quirk in
the tax law allows some of the richest workers
in the country to pay tax on their labor income
at a low rate.”
Members of Congress aren’t known to scrutinize
academic articles about tax law. But Fleischer’s
report had been picked up by several economics
blogs, and in 2007, as Democrats assumed control
of both Houses of Congress, it circulated among
tax staffers on the Senate Finance Committee.
Fleischer was asked to come in and brief
committee aides. Soon afterward, the chairman,
Max Baucus, of Montana, and the top Republican,
Chuck Grassley, of Iowa, produced a bill to
close one part of the loophole, which covered
the corporate taxes of publicly traded
companies. It was nicknamed the “Blackstone
bill,” because that firm was then preparing a
$4.7-billion public offering. Senator Barack
Obama was one of the bill’s four co-sponsors.
...
Obama has continued to invoke carried-interest
reform as a way to raise revenue. Rubenstein,
who no longer has to contend with any real
attempts to close the loophole, has little to
gain by insisting that it be retained. Instead,
he characterizes reform efforts as a
distraction. He told Charlie Rose in 2012, “Our
bigger problem isn’t carried interest. Our
bigger problem is the one-trillion-dollar annual
deficit and the sixteen trillion dollars of debt
we have.” At the Credit Suisse forum in 2013,
Rubenstein said of the potential savings from
closing the loophole, “It’s a very modest amount
of money.”
Continued in article
Unbooked Intantible Assets:
brand value, customer
data, even algorithms
From the CFO Journal's
Morning Ledger on March 22, 2016
Some of companies’ most valuable assets cannot be
listed on their books under current U.S. accounting rules. Intangible
assets—brand value, customer data, even algorithms—are of great interest to
investors, as businesses these days tend to invest more in their nonphysical
assets than they do in building new factories,
CFO Journal’s Vipal Monga reports.
But the problem of how to value such intangible assets
has vexed accountants for decades.
The absence of
abstractions like brand value on corporate balance sheets prevents investors
from properly gauging their risks, said Baruch Lev, an accounting and
finance professor at New York University’s Stern School of Business. “It’s
an incredibly important issue,” he said. “Investment in intangibles is
almost completely obscured from investors.”
Altogether, companies in the U.S. could have more than $8 trillion in
intangible assets, according to Leonard Nakamura, an economist at the
Federal Reserve Bank of Philadelphia. That’s nearly half of the combined
$17.9 trillion market capitalization of the S&P 500 index
Abstract
Accounting standards require disclosure of estimable losses from contingent
liabilities such as litigation expenses. However, revelation of the firm’s
private estimates of the probability of loss and possible legal damages can
be detrimental to the firm by encouraging litigation and increasing the
costs of settlement. In this paper, I propose a model (the US-patented TMTM)
that uses publicly-available data to provide accurate and unbiased estimates
of litigation damages without requiring firms to publicly disclose their
private assessments or litigation reserves. This provides valuable
information to the users of financial statements without undermining the
firm’s right to preserve sensitive internal information.
From the CFO Journal's
Morning Ledger on March 16, 2016
Who stole $100 million from Bangladesh at the New York Fed?
Someone using official codes stole $100 million from
Bangladesh’s account at the New York Fed over a recent weekend. Now,
officials in four countries are trying to figure out what happened. The
breach funneled $81 million from the country’s account at the New York
Federal Reserve to personal bank accounts in the Philippines. Another $20
million was directed to a bank in Sri Lanka.
From the CFO Journal's
Morning Ledger on March 15, 2016
SEC clears accounting watchdog’s (PCAOB) budget but flags spending
The Public Company Accounting Oversight Board, which
polices the biggest U.S. accounting firms, won begrudging approval of its
$257 million budget. Two members of the Securities and Exchange Commission
voiced persistent concerns about spending at an agency that pays each of its
five board members more than $540,000 a year
From the CFO Journal's
Morning Ledger on March 10, 2016
Moody’s to pay Calpers $130 million to settle lawsuit
Moody’s Investors Service has agreed to pay $130
million to end a prominent lawsuit alleging crisis-era misconduct, a record
settlement for the world’s second-largest ratings firm. The California
Public Employees’ Retirement System alleged in a 2009 lawsuit that Moody’s
and two other ratings firms made “negligent misrepresentations” when they
awarded rosy grades to residential mortgage bonds that later soured.
America’s financial system is sturdier today thanks
to some rare good news from a Washington regulator. Seven years after the
financial crisis, the Securities and Exchange Commission has taken a big
step toward ending a policy that helped cause the mess.
For decades before the crisis, SEC staff had
recognized a small group of private credit-rating agencies—including
Standard & Poor’s, Moody’s and Fitch—as official judges of risk. Federal
regulators referred to these favored companies in their rules and even
forced financial institutions to invest in paper rated highly by this
anointed cartel.
When the members of the cartel turned out to be
wrong about the risks in mortgage-backed securities, the result was
catastrophic because the government had forced so many other firms to follow
their advice.
The new rule enacted by the commission this week
says that instead of simply holding assets rated highly by the cartel, the
operators of money-market mutual funds must instead rely on their own
analysis to select securities presenting minimal credit risk. Investors
probably assume that’s what mutual fund companies do already, and many of
them do. All of them should.
Kudos to SEC Commissioner Daniel Gallagher, who has
the welcome habit of breaking Beltway decorum. In various public fora, Mr.
Gallagher kept reminding his colleagues that this needed reform was being
ignored while they went about drafting rules that had nothing to do with
addressing the causes of the last crisis or preventing the next one.
This week’s reform leaves one SEC rule that still
carries an endorsement of the ratings cartel—so-called Regulation M for
securities offerings. SEC Chair Mary Jo White should now get her agency all
the way out of the business of deciding whose opinions about credit risk
ought to be followed. Let markets decide whose opinions have value. It will
make financial crises less likely.
There’s also need for reform outside Washington.
Too many state pension systems still show too much deference to the cartel.
A rating expresses a point of view, not a guarantee.
Continued in article
Credit Rating Firms Were Rotten
to the Core: At last the DOJ is
taking some action (Bailout,
Credit Rating Agendies,
Agencies, Banks, CDO, Bond
Ratings, CDO. Auditing, Fraud)
citation:
"DOJ vs. Rating Firms,"
by David Hall, CFO.com
Morning Ledger, February 5,
2013
There are two superpowers in
the world today in my opinion.
There’s the United States and
there’s Moody’s Bond Rating
Service. The United States can
destroy you by dropping bombs,
and Moody’s can destroy you by
down grading your bonds. And
believe me, it’s not clear
sometimes who’s more powerful.
The most that we can safely
assert about the evolutionary
process underlying market
equilibrium is that harmful
heuristics, like harmful
mutations in nature, will die
out.
Martin Miller, Debt and Taxes as
quoted by Frank Partnoy, "The
Siskel and Ebert of Financial
Matters: Two Thumbs Down for
Credit Reporting Agencies,"
Washington University Law
Quarterly, Volume 77, No.
3, 1999 ---
http://faculty.trinity.edu/rjensen/FraudCongressPartnoyWULawReview.htm
Credit rating agencies gave AAA
ratings to mortgage-backed
securities that didn't deserve
them. "These ratings not only
gave false comfort to investors,
but also skewed the computer
risk models and regulatory
capital computations," Cox said
in written testimony. SEC Chairman Christopher
Cox as quoted on
October 23, 2008 at
http://www.nytimes.com/external/idg/2008/10/23/23idg-Greenspan-Bad.html
In 2008 it became evident
that credit rating firms were
giving AAA ratings to bonds that
they knew were worthless,
especially CDO bonds of their
big Wall Street clients like
Bear Stearns, Merrill Lynch,
Lehman Bros., JP Morgan,
Goldman, etc. ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm#Sleaze
From the CFO Journal's
Morning Ledger on March 8, 2016
The intelligence
required to complete a sound audit is increasingly of the artificial
variety. The Big Four auditing firms are enlisting cutting-edge technology
to help them review their clients’ finances, reports Michael Rapoport for CFO Journal.
AI has come a long way from competing with humans in
chess competitions or on game shows. Under an agreement expected to be
announced
Tuesday,
KPMG LLP and International Business Machines Corp. would
deploy IBM’s Watson artificial-intelligence unit to develop high-tech tools
for auditing and other businesses.
The new tools automate critical but rote tasks, letting auditors focus on
more substantive issues. Deloitte & Touche LLP has its Argus and
Optix. And Ernst & Young LLP and PricewaterhouseCoopers LLP
have their own smart tools. They can examine all of a client’s transactions,
instead of just a sample, reducing the chances of missing a problem, the
firms say. They also make auditors better able to detect patterns in a
client’s finances worth investigating for errors or fraud.
The technology could also benefit the firms by making accounting more appealing as a
career
to young people who have grown up with high tech as an everyday part of
life. Still, some say the technology could be a double-edged sword in
attracting young employees. Using the technology will require auditors to
master new skills. And if they have to do important, substantive work almost
as soon as they start their jobs, they’ll have less time for on-the-job
training
From the CFO Journal's
Morning Ledger on March 8, 2016
More street gangs turn to financial crimes Gangs
traditionally associated with drugs and violent crimes are increasingly
committing financial frauds that can be more lucrative and harder to detect,
law-enforcement officials say. The issue is posing a new challenge for
police departments that typically have separate silos for their gang and
financial-crimes units.
From the CFO Journal's
Morning Ledger on February 29, 2016
American companies are watching for the outcome of
Intel Corp.’s tax dispute with the Internal Revenue Service over
cost-sharing arrangements with its foreign subsidiaries. The firms stand to
gain billions in new tax benefits if an earlier court ruling is upheld, the
WSJ’s Richard Rubin reports. At least 20 companies, including Microsoft
Corp. and eBay Inc., have disclosed they’re monitoring the case. However,
the case’s uncertainty has kept them from quantifying the potential
benefits.
http://www.wsj.com/articles/googles-parent-could-be-big-winner-in-intel-tax-dispute-1456698129?mod=djemCFO_h
Cost-sharing arrangements typically are agreements
between the U.S. parent and a subsidiary in a low-tax country that manages
and profits from foreign sales. That foreign subsidiary, funded by the
parent company, must pay back the parent for its share of corporate costs,
such as salaries of employees at the U.S. headquarters who develop the
product they are selling abroad. The more that costs stay with the U.S.
parent, the more deductions it can pile up in the U.S. and less income gets
taxed at the 35% U.S. rate. Accordingly, if the foreign subsidiary has fewer
deductions, it can pile up profits that get lower tax rates.
Broad fears over reproducibility were stoked by a
2005 article in PLOS Medicine by John
P.A. Ioannidis, a professor of health research and policy at Stanford
University, contending that most published research findings are false. Last
year a team of hundreds of researchers
raised
further alarm. After working over three years to
faithfully repeat 100 studies that had been published in psychology
journals, the team reported that it
could not replicate
most of the original results.
Now, two new studies, published on
Thursday in Science magazine, are pushing back.
One, a Harvard-led critique of the
project that repeated 100 psychology studies, suggests that
that ambitious effort overlooked some critical factors. The
other,
an
attempt to repeat 18 studies
in leading economics journals, found that 61 percent of them
replicated successfully.
"Our results were pretty
encouraging," said the lead author of the economics study,
Colin F. Camerer, a professor of behavioral economics at the
California Institute of Technology.
Together, the two papers this week
should help calm the widespread worries about the
reliability of science fanned by Mr. Ioannidis, said the
lead author of the psychology critique, Daniel T. Gilbert, a
professor of psychology at Harvard.
"It’s very easy to come to the
wrong conclusion when you try to replicate other people’s
research," Mr. Gilbert said.
Continued in article
Jensen Comment
In accounting research replication efforts are rare. There's almost no incentive
to conduct exacting replication studies since there's no outlet for publication
of replication efforts or even commentaries on research published in the six
leading academic accounting research journals. It is not so much that the
journals will not publish commentaries. A leading former editor (Steve
Kachelmeir) of The Accounting Review writes that his 574 referees had
zero interest in accepting commentaries for publication.
http://faculty.trinity.edu/rjensen/TheoryTar.htm
We might argue that argue that accountants simply trust each other to only
publish truth in accounting. But more to the point is that in terms of the
leading top six academic accounting journals (that only publish articles with
equations) there is virtually zero interest among accountants in the findings of
the esoteric "accountics" articles published in those journals.
“An Analysis of the Evolution of Research
Contributions by The Accounting Review: 1926-2005,” (with Jean Heck),
Accounting Historians Journal, Volume 34, No. 2, December 2007, pp. 109-142.
. . .
Practitioner membership in the AAA faded along with
their interest in journals published by the AAA [Bricker and Previts, 1990].
The exodus of practitioners became even more pronounced in the 1990s when
leadership in the large accounting firms was changing toward professional
managers overseeing global operations. Rayburn [2006, p. 4] notes that
practitioner membership is now less than 10 percent of AAA members, and many
practitioner members join more for public relations and student recruitment
reasons rather than interest in AAA research. Practitioner authorship in TAR
plunged to nearly zero over recent decades, as reflected in Figure 2.
To my knowledge there has only been one noteworthy cheating scandal causing
retraction of research papers in the leading academic journals. Those papers had
cheater James Hunton as a co-author, but none of Professor Hunton's research
cheating was detected by replication efforts. Hence it's safe to say that in
accounting research there's been no cheating or serious error detection
revelations except where the authors themselves later detected their own errors
and apologized in public. You can read about Professor Hunton's cheating at
http://faculty.trinity.edu/rjensen/plagiarism.htm#ProfessorsWhoPlagiarize
There have been instances where cheating, usually plagiarism, was detected
that did not lead to formal retractions in
the accounting research journals. I mention one such case at where a friend of
mine at a Big 10 university plagiarized parts of a student's Ph.D. dissertation
and was embarrassed when the cheating was detected after the student, also a
close friend of mine, was recalled to testify at that university ---
http://faculty.trinity.edu/rjensen/plagiarism.htm
But professorial cheating never, to my knowledge, was detected in replication
efforts in the discipline of accounting. There are instances in the physical and
social sciences where replication efforts led to the detection of cheating
and/or serious unintended research mistakes ---
http://faculty.trinity.edu/rjensen/plagiarism.htm
The biggest reason for encouraging replication research is to either detect
research error or to detect intentional fabrication of data. In the leading
accounting research journals fabrication of data is less likely because most
accounting researchers, at least those in financial accounting, reply on
purchased databases like Compustat. Those researchers seldom collect their own
data, and hence data fabrication is less likely. But in the case of James Hunton
there was allegedly data fabrication.
Jensen Comment
Students in cost accounting courses may be assigned tasks of contacting local
restaurants to analyze in terms of cost incentives for automation.
Jensen Comment
When it comes to salary data I prefer medians to means. Means in this case are
pulled down greatly by low-paying AACSB universities that are chosen for reasons
other than salary such as geographic location, spouse employment opportunities,
etc. For example, there are quite few NYC universities that are not known for
high salaries. But opportunities for spouses are hign in NYC. Also there are
some financial incentives for outside consulting unique to the NYC metroplex.
Small religious universities have attractions other than salary.
Also mean salaries are not good for comparing the top R1 research
universities in accounting. For example, some universities provide only small
research slush funds for researchers, including new accounting faculty. Others
purportedly go well above $20,000 for research slush funds controlled by
accounting researchers. Also some universities like Harvard provide many more
opportunities for lucrative consulting supplemental incomes.
"Exploring Accounting Doctoral Program Decline:
Variation and the Search for Antecedents," by Timothy J. Fogarty and Anthony
D. Holder, Issues in Accounting Education, May 2012 ---
Not yet posted on June 18, 2012
ABSTRACT
The inadequate supply of new terminally qualified accounting faculty poses a
great concern for many accounting faculty and administrators. Although the
general downward trajectory has been well observed, more specific
information would offer potential insights about causes and continuation.
This paper examines change in accounting doctoral student production in the
U.S. since 1989 through the use of five-year moving verges. Aggregated on
this basis, the downward movement predominates, notwithstanding the schools
that began new programs or increased doctoral student production during this
time. The results show that larger declines occurred for middle prestige
schools, for larger universities, and for public schools. Schools that
periodically successfully compete in M.B.A.. program rankings also more
likely have diminished in size. of their accounting Ph.D. programs. Despite
a recent increase in graduations, data on the population of current doctoral
students suggest the continuation of the problems associated with the supply
and demand imbalance that exists in this sector of the U.S. academy
This shortage has made new accounting Ph.D. graduates among the highest paid
in new hires in top research universities in North America. But the result is
that most business schools have shortages of accounting Ph.D.s and have had to
supplement teaching staff with adjuncts and in the case of tax accounting
lawyers are put in tenure track positions. Whereas Purdue will struggle for
graduate assistants in the English Department Purdue will struggle with having
more adjuncts in the business school, especially in accounting. Some
universities like the University of Houston now has over a dozen "clinical"
accounting faculty but an adjunct by any other name is still an adjunct.
Raj Aggarwal University of Akron; Federal Reserve Banks - Federal Reserve
Bank of Cleveland
John W. Goodell University of Akron - Department of Finance, College of
Business Administration
Abstract
There have been relatively few studies in finance
and accounting that include the use of cultural dimensions. We conclude that
both the accounting and finance fields make sparse use of cultural
dimensions in scholarship. However, the field of accounting has made greater
use of cultural dimensions than the field of finance. We note that this is
in part due to particular seminal theories regarding the connection of
national culture with the behavior of individuals in accounting. Finance, on
the other hand, has been more focused on effects of larger market
aggregates. Finance just recently seems to have discovered the impact of
national culture, particularly via the impact of individualism on market
momentum and the impact of uncertainty avoidance on transactions costs. We
conclude that the field of finance is being well served by the Journal of
Behavioral and Experimental Finance championing research on cultural finance.
Jensen Comment
The authors note some of the leading studies of culture impacts on accounting,
notably those of Geert Hoffstede that are cited by the authors.
Hofstede, Geert, (1980), Culture's Consequences: International
Differences in Work-Related Values (Sage Publications, Newbury Park,
California).
Hofstede, Geert, (2003), "What is culture? A reply to Baskerville",
Accounting, Organizations and Society 28 (No. 7, November) pp. 811-813.
Hofstede, Geert, Gert Jan Hofstede, and Michael Minkov, (2010), Cultures and
Organizations: Software of the Mind (McGraw-Hill, New York).
However, I'm inclined to think there are many more indirectly related history
studies that just may not have used the terms culture or cultural in the titles.
It may overstate the case a bit to state that accounting researchers have been
remiss in looking at cultural dimensions
The recent surge in popularity of ‘accountability’
in public administration and international development seems in part
divorced from centuries of conceptual and empirical work done in related
disciplines of finance and accounting, and in political science. This
article brings together the core meaning of accountability as used in
hundreds of previous works, and seeks to bring order to the litany of
subtypes in this literature. An organizing scheme with three dimensions
(source of control, strength of control, and direction of relationship)
captures all the existing varying types of accountability. The resulting
typology also clarifies that varying subtypes have not only different actors
and characteristics, but also seek to uphold varying values and are facing
different challenges. These have important implications both for research
and the im-possibility of translating findings from one subtype field to
another; as well as practical implications for the policy world.
Points for practitioners Accountability has several
different forms depending on the actors (e.g. citizens-politicians;
politicians-bureaucrats; or judges-citizens). These types of accountability
seek to protect different values, and are accompanied by varying challenges.
Yet, everything is not accountability: it is but one of many possible ways
to constrain the (mis-)use of power. This article clarifies the core idea of
accountability. It then depicts the full range of subtypes with their
different characteristics and problems. This can function as a guide for
policy makers and practitioners when seeking to address weaknesses in
accountability of varying actors based on acknowledging their differences.
Fundamental to governance is how power and
authority are allocated and applied in a variety of public realms: selection
of leaders, provision of basic public goods and services (e.g., health,
education, transportation and communications infrastructure), maintenance of
law and order, revenue generation and allocation, economic and social
policy-making, and so on. In all of these realms, public officials, by
virtue of the authority accorded the roles and positions they occupy,
exercise varying degrees of power as they carry out their functions. What,
however, assures that public officials will use their power and authority
properly and responsibly? The answer lies with systems, procedures, and
mechanisms that impose restraints on power and authority and that create
incentives for appropriate behaviors and actions. These all fall within the
conceptual and operational boundaries of the term, accountability, which is
the topic of this paper. Concerns with limiting power, subjecting authority
to a set of rules, and curbing abuses have preoccupied societies for
centuries. In today’s world, accountability has taken on a high degree of
importance for two main reasons. First, the size and scope of the
administrative state in modern economies is large, according governments
broad and significant power to intervene in people’s lives. Second,
democracy has emerged as the pre-eminent and most aspired-to form of
governance system. Thus, the sense that government’s power is dominant,
coupled with the desire to see that power exercised according to the will of
the citizenry, puts accountability front and center on the stage of current
governance issues. In fact, along with transparency and responsiveness,
accountability constitutes one of the core components of the definition of
democratic governance. Yet despite its centrality to notions of democratic
governance and the surface simplicity of the idea of checks and restraints
on power, accountability is a “complex and chameleon-like term” (Mulgan,
2000: 555). “Accountability represents an under explored concept whose
meaning remains evasive, whose boundaries are fuzzy, and whose internal
structure is confusing.” This paper seeks to clarify the meaning of
accountability, to elaborate its basic elements, and to offer options for
increasing accountability. The focus of the discussion is on countries that
are transitioning to, or consolidating, democratic governance systems. The
audience consists of democracy/governance officers in the U.S. Agency for
International Development (USAID) and in other donor organizations, and host
country policy-makers and public managers. Civil society organizations may
also find the paper useful. The first section of the paper defines the
essential features of accountability and develops a typology. The second
section examines accountability in relation to democratic governance, and
looks at the different dimensions of accountability, which answers the
question, accountable for what? The interconnections among the different
dimensions of accountability are discussed. The third section specifies the
various categories of actors involved in accountability by asking two
questions. Who is accountable? And, accountable to whom? The fourth section
discusses issues and options for increasing accountability. It looks at
facilitating conditions, and offers targets and strategies for strengthening
accountability. The emphasis is on feasibility and fit with politico
bureaucratic realities. Throughout the paper, examples are cited.
Overall, Illinois has the highest tax rates,
followed by Nebraska, Wisconsin, Connecticut, Rhode Island, and New York,
according to an analysis by WalletHub. Notably, tax rates are about 10.56%
higher in blue states than in red states.
New York has the highest cigarette excise tax at
$4.35 per pack, while Missouri has the lowest at $0.17. Pennsylvania has the
highest gas tax at $0.5040 per gallon, while Alaska has the lowest at
$0.1225.
Jensen Comment
Some of those most taxing states were also subject to state-worker pension
frauds and enormous pension underfunding, notably Illinois, Connecticut, and
Rhode Island.
Note the far right column that provides an adjusted cost of living index.
California, Oregon, and Washington DC, for example, do fairly well on tax rates
but come out horribly on the adjusted cost of living index. There are not many
surprises on the high cost of living where the worst states are New York,
Connecticut, Hawaii, Rhode Island, and New Jersey.
The Concise Encyclopedia of
Economics ---
http://www.econlib.org/library/CEE.html
Don't forget that most of the terminology can be found in greater detail in
Wikipedia
Cancellations of solar thermal projects likely mean
the technology’s future is dim in the U.S., so companies are looking
overseas.
When it first came online in late 2013, the massive
Ivanpah concentrated solar power plant in the
California desert looked like the possible future of renewable energy. Now
the problems it faces underline the challenges facing concentrated solar
power, which uses mirrors to focus the sun’s rays to make steam and produce
electricity.
Last week the California
Public Utilities Commission gave the beleaguered Ivanpah project, the
world’s largest concentrated solar facility, one year to increase its
electricity production to fulfill its electricity supply commitments to
two of the state’s largest utilities (see
“One of the World’s Largest Solar Facilities Is in Trouble”). The
$2.2 billion plant is designed to have 377 megawatts of capacity. But it
has been plagued by charges of numerous bird deaths (zapped by the
fierce beams between the mirrors and the collecting tower) and
accusations of production shortfalls.
Saying that over the
last 12 months the facility has reached 97.5 percent of its annual
contracted production, BrightSource officials dismissed the supply
issues as a normal part of the plant’s startup phase. But the troubles
at Ivanpah have joined the delay or cancellation of several high-profile
projects as evidence that concentrated solar power could be a dying
technology.
Continued in article
Jensen Comment
This does not of course doom solar power in general as an alternative energy
source, nor is it even spelling the end of concentrated solar thermal energy in
other parts of the world.
Massive solar power generators must be combined with sound financing.
Nearly all all alternative power financings are now troubled by significantly
lower pricing of gas and oil on world markets. This is also troubling
alternative sourcing of gas such as from shale and tar sands.
One advantage of solar is that it can generate power on a small scale such as
from the roof of a house or barn. This allows for financing to be dispersed to
homeowners who in the USA are, however, still depending upon government
subsidies. Especially troubling is the costly technology for storing solar power
for when it may be needed the most at night for lighting, heating, and cooling.
Solar is rapidly increasing in many countries, notably in Asia and Africa.
These are boom times for solar in China. One of the neat things about solar is
that it can provide power to remote (think jungle) homes and businesses without
having a tremendous investment in power line infrastructure.
Coal appears doomed earlier than expected since it's becoming one of the
costlier alternatives for energy.
There are high hopes that experimental nuclear fusion plants in Germany and
France will become cost effective.
Many of us, however, have higher hopes for the cheapening of hydrogen
electrolysis of water ---
https://en.wikipedia.org/wiki/Electrolysis_of_water
Hydrogen can fill fuel cells that, in turn, eliminate the need for costly
infrastructure of enormous power plants and power lines. It would be terrific to
eliminate the ugliness of power lines as well as the fear of power outages due
to wind and ice storms.
From the CFO Journal's
Morning Ledger on February 29, 2016
As disclosures balloon, it is getting easier to bury information
Regulations requiring companies to divulge more
financial information to investors have contributed to lengthy filings that
can make it harder for investors to identify important information, CFO
Journal’s Tatyana Shumsky reports. “If the old way of hiding information or
making it less prominent was to put it in the footnotes, the new way is to
leave it in the text,” said Ron Schneider, director of governance services
for R.R. Donnelley & Sons Co.
The story referred to "tax expense", not taxes
paid, but that's not the main point here.
The first two - Level 3 and United - had large
negative tax expense due to the reversal of valuation allowances on large
deferred tax assets arising from loss carryforwards. Unfortunately people
look at summaries such as this and assume there's some sort of nefarious
give-away or special tax break being taken advantage of.
Tom A.
Question
As anybody in academe discovered block chain accounting?
Champions of blockchain, the technology
that underpins the Bitcoin currency, claim it will have as big an impact on
the world as the Internet, promising to radically reshape finance,
entertainment and pubic policy. A less glamorous, but more immediate,
application may be in accounting.
A blockchain essentially works as a global
and public ledger. Information is stored on a distributed network of
computers, there’s no central database that can be tampered with or hacked.
Every 10 minutes, all transactions are recorded in a virtual block, and a
new block is created, linked to all the previous blocks in the chain. The
blocks are visible to both parties involved in the transaction. All of which
makes it a system well-suited for storing and sharing accounts.
Accounting, auditing and compliance are a massive
cost for business globally. (Fines alone have cost banking $200 billion
since 2009.) Blockchain accounting could help cut those costs. For example,
instead of a company employing its own auditors to examine the books of its
various units, all transactions could be logged on an internal blockchain,
and recorded centrally. Likewise, external auditors or even regulators could
inspect a corporation’s books in real time. Even the accounting firms that
make their money from auditing see the value in the technology: “This
solution could significantly reduce the reliance on auditors for testing
financial transactions,” Matt Spoke, an consultant at Deloitte Canada,
wrote.
Other firms are jumping in, too. In January, PwCannouncedit formed a team of 15 blockchain experts to
advise clients. It expects the group to grow to 40 by the end of the year.
Regulators are also exploring blockchain as way to
stress-test firms and identify questionable practices. By charting the flows
of funds, unusual events could be flagged as they happen, said Joseph Lubin,
the founder of ConsenSys,
a blockchain consultancy and developer that works with financial
institutions and regulators.
“Putting all this stuff on blockchain changes
the nature of fraud,” Lubin told Quartz. “If data is locked in, the
opportunities for fraud are greatly reduced.”
For years the conventional wisdom in finance
has been that bitcoins are a silly technological game, a bubble, and a
fad.
Today: Not so much.
Bitcoins have just gotten serious, and people
are going to have to start paying attention to this digital currency.
That means investors, governments, and those trying to fight crime as
well.
This was already true even before the news out
of California that criminals just used bitcoins to extort $17,000 in
blackmail from a hospital and make, so far, a clean getaway.
Bitcoins are booming. They have doubled in
price in the last six months. Indeed bitcoins were actually the best
performing currency in the world last year. I ran an exhaustive screen
on FactSet, making sure to include everything from the Afghanistan
afghani (down 16% against the U.S. dollar DXY, -0.17% ) to the Zambian
kwacha (down 42%). Bitcoin trounced them all. The dollar value of each
bitcoin jumped 40% during 2015, from $310 to $434. (The currency in
second place, the Gambian dalasi of all things, was nowhere near: It
rose just 9% against the U.S. dollar.).
At current prices, the total value of bitcoins
in the world now tops $6 billion. That’s quite some “fad.”
The total value of the digital currency Bitcoin is
over $5 billion, reflecting how some people think it will one day become
widely useful. But a new analysis of the software that powers the currency
concludes that Bitcoin needs a complete redesign if it is to support more
than the paltry number of transactions that take place today.
That suggests that the people, companies, and
investors who are banking on the currency becoming widely used must overcome
fundamental technical challenges that currently have no known solutions, not
just the economic and cultural issues associated with a currency independent
of any government.
The findings, from a large group of researchers
mostly affiliated with Cornell University, also offer new perspective on an
acrimonious debate that has recently riven the world of Bitcoin (see
“The
Looming Problem That Could Kill Bitcoin”).
"There is no
generally accepted accounting principles (GAAP) that specifically
addresses financial reporting for bit coins, which means this would
fall under other comprehensive basis of accounting (OCBOA), FASB
members who weighed in said."
I don't know if I agree
with that assessment — assuming that it is accurately reported. Bit
coins are clearly not a currency (yet), since they are not universally
(or near universally) accepted as a medium of exchange. Thus, it seems
to me that the portion of the ASC dealing with barter credits (starting
at ASC 845-10-30-17) covers bit coins. Basically, a sale in exchange for
a barter credit can be counted as revenue if the entity has a practice
of converting the barter credit into cash in the "near term."
Am I missing something?
I realize that the sponsors (if that's the right word) aspire that bit
coins should become a new currency, but right now, they seem to be the
functional equivalent of some forms of barter credits.
Best,
Tom
Jensen Reply
Hi Tom,
You made a very good point since both
bitcoins (and other virtual currencies) and barter credits are sometimes
traded on exchanges that set values apart from the fair values of the
items traded initially. In the exchange markets values can be
complicated by speculators in the virtual currencies and the varying
willingness of businesses to accept them.
The question is whether barter credits
meet the definitions of virtual currencies. I'm not familiar enough with
barter credits to know that they have the "block chain central bodies"
doing the mathematical calculations that, among other things, prevent
double spending ---
http://en.wikipedia.org/wiki/Bitcoin
Virtual currencies differ from private
currencies, and I tend to view barer credits private currencies
rather than virtual currencies ---
http://en.wikipedia.org/wiki/Private_currency
One key difference is that private currencies tend to trade in terms of
specified commodities (such as gold) or regions (such as BerkShares in
the Berkshire region of Massachusetts) whereas virtual currencies tend
to take on a life of their own. apart from commodities or spending
regions.
It seems like accounting for bitcoins
may become less complicated than accounting for private currencies in
that bitcoins and other virtual currencies are more like international
legal tender than private currencies subject to possible thinner markets
such as the market for BerkShares. Of course bitcoins are not yet legal
tender per se.
Barter credit accounting is also
complicated by other revenue recognition rules. For example, if barter
credits apply to discount coupons then all the complications of revenue
accounting for discount coupons enter the picture.
I don't think the IRS, the FASB, and the
IASB have yet dealt with all the complications of private currencies or
virtual currencies traded on exchanges and the liquidity risks and
speculation risks inherent in such transaction valuations. One
complication is that the markets may be very thin such as the BerkShares
trading market restricted to vendors in the Berkshires region.
Commercial barter
transactions have been increasing in recent years, and there are
currently a number of commercial barter websites. A barter transaction
can involve an exchange of goods or services for other goods or
services, or barter credits. In a transaction involving barter credits,
a company exchanges an asset such as inventory for barter credits. The
transaction might be done directly with another entity that will provide
goods or services, or it might be done through a barter broker or
network. In a barter network, goods or services are exchanged for barter
credits or "trade dollars" that can be used to purchase goods or
services from either the barter broker or members of the network. The
goods and services to be purchased may be specified in a barter contract
or may be limited to items made available by members of the network.
Credits for advertising are the most common items received in barter
transactions. This is because advertisers can often run additional spots
with little additional overhead and are therefore willing to exchange
such services for nonmonetary consideration.
When a company enters
into a barter transaction, two things need to be addressed from an
accounting standpoint. First, the exchange transaction needs to be
accounted for properly. Second, the recorded amount of unused barter
credits has to be evaluated at each financial statement reporting date.
Recording the
Exchange Transaction
Guidance on accounting
for the exchange transaction is provided in FASB Emerging Issues Task
Force (EITF) Issue No. 93-11, Accounting for Barter Transactions
Involving Barter Credits. The task force reached a consensus that APB
No. 29, Accounting for Nonmonetary Transactions, should be applied to an
exchange of a nonmonetary asset for barter credits. The basic principle
of APB No. 29 is that accounting for nonmonetary transactions should be
based on the fair values of the assets or services involved. (This
excludes situations where the exchange is not the culmination of an
earning process, in which case the recorded amount of the asset
surrendered should be used.) The transaction is generally measured based
on the fair value of the asset surrendered. The fair value of the asset
surrendered becomes the cost basis of the asset acquired. A gain or loss
should be recognized based on the difference between the fair value of
the asset surrendered and its carrying amount.
The fair value of the
asset received in an exchange should be used to record the transaction
only if it is more clearly evident than the fair value of the asset
surrendered. In the case of barter credits, it should be presumed that
the fair value of the asset exchanged is more clearly evident than the
fair value of the barter credits received. Accordingly, the barter
credits received should be recorded at the fair value of the asset
exchanged. That presumption might be overcome if the barter credits can
be converted into cash in the near term, or if independent quoted market
prices exist for items to be received in exchange for the barter
credits.
When determining the
fair value of the asset surrendered, it should be presumed that the fair
value of the asset does not exceed its carrying amount, unless there is
persuasive evidence supporting a higher value. When determining the
value of inventory or other assets exchanged in a barter transaction,
skepticism should be used. The reality is that the company would prefer
to sell the inventory for cash rather than barter credits. The fact that
the company is bartering with inventory could indicate that the
company's normal selling price may not be an accurate measure of fair
value. This could also raise lower-of-cost-or-market valuation questions
about any items remaining in inventory.
The EITF also concluded
that if the fair value of the asset exchanged is less than its carrying
amount, an impairment should be recognized prior to recording the
exchange. For example, inventory exchanged in a barter transaction
should be adjusted to the lower of cost or market prior to recording the
barter transaction. In the case of long-lived assets, impairment should
be measured and recognized in accordance with SFAS No. 121, Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to Be
Disposed Of.
Evaluating the
Recorded Amount of Barter Credits
At each balance sheet
date, the recorded amount of barter credits should be evaluated for
impairment. An impairment loss should be recognized if the fair value of
any remaining barter credits is less than the carrying amount, or if it
is probable that the company will not use all of the remaining barter
credits.
The first step in
evaluating the realizability of barter credits is to evaluate the
likelihood that the counterparty will perform. If the credits are
directly with another entity that will provide the goods or services,
that entity should be evaluated. This can be done by investigating the
credit rating of that entity and obtaining references from other
companies that have been involved in similar transactions with the
entity. If the credits are with a barter broker or network, the
credibility and history of the broker or network should be evaluated.
This can be done by contacting the International Reciprocal Trade
Association (www.irta.net) or similar organizations.
The next step is to
evaluate, based on current and future operations, whether the company is
expected to fully utilize the recorded amount of the credits. For
example, if a company has available $100,000 of advertising credits, but
typically spends only $5,000 on advertising each year, it might take 20
years to fully utilize the credits. Similarly, credits may allow the
company to purchase whatever goods or services happen to be available
from members of the network, and it may be uncertain whether the company
will ever need any of them. Barter credits may also have a contractual
expiration date, at which time they become worthless. Finally, some
arrangements may require the payment of cash in addition to barter
credits, in which case the ability of the company to use the credits may
be limited. *
What kind of cookie person are you? Specifically,
what type of Girl Scout cookie person—thin mints, caramel delights, peanut
butter patties, or, like Leonardo DiCaprio, are you a trefoil fan? Whichever
cookie you prefer, Idaho legislators are considering making Girl Scout
cookie purchases a little more fun. A bill that would exempt Girl Scout
cookies from the Idaho sales and use tax recently squeaked through the Idaho
House of representatives and is now headed to the Idaho Senate. According to
local Spokane newspaper the Spokesman-Review, Idaho and Hawaii are currently
the only two states to tax Girl Scout cookies.
This recent move in Idaho to exempt Girl Scout
cookies from sales tax reflects a nationwide trend of generally taxing sales
to and by charitable organizations while exempting only specific charities
or specific types of charitable sales from sales and use taxes. In fact,
while a majority of states, including Florida, New York, Texas, and
Virginia, provide a general sales tax exemption for purchases by all
nonprofits or charitable organizations, a large minority of states exempt
only specific charities from the sales and use taxes.
For example, while Alabama has no general exemption
for sales or purchases by charitable or nonprofit organizations, the state
exempts several specific charities from paying sales and use taxes. Exempt
charities include the Diabetes Trust Fund, the headquarters of the American
Legion, the Grand Chapter of all Orders of the Eastern Star, the Alabama
Goodwill Industries, and several others. Oh, and the Girl Scouts are also
exempt.
Additionally, in Oklahoma, while sales to
charitable organizations are generally taxable, sales to 4-H clubs, Boys and
Girls Clubs, and YMCA’s are exempt from sales and use taxes. In Washington,
instead of exempting sales to specific charities, the state provides
exemptions for sales of certain types of property or services to certain
types of charities and nonprofits. For example, in Washington, sales of
trail grooming services to nonprofit corporations and sales of clay targets
used during clay target shooting to a nonprofit gun club are exempt from
tax. Also, neither state imposes sales tax on Girl Scout cookies.
According to the Spokesman-Review, some Idaho
lawmakers have questioned the fairness and the wisdom of passing exemptions
for specific charitable organizations instead of a general, more broad-based
exemption for all charitable or nonprofit organizations. One lawmaker stated
that the singling out of organizations is “a horrible precedent to be
setting in our tax policy.” However, concerns over preferential treatment
for some charities apparently haven’t hindered Idaho from passing specific
sales and use tax exemptions for the Idaho Ronald McDonald House, the Blind
Services Foundation, and the Idaho Foodbank Warehouse. Indeed, imagine what
the Girl Scouts’ reactions would be if popcorn sales by Boy Scouts were
exempt while their cookie sales weren’t!
Continued in article
Jensen Comment
There must be some limits to curb abuse of sales tax exemption in those states
the majority that exempt business transactions of all charities. For example,
what about big ticket items like used cars. Municipalities in many instances
commenced to also clamp down of property tax exemptions for charity-owned
businesses.
A Film Soon to Be Released
The Accountant
A forensic accountant un-cooks the books for illicit clients
From the CFO Journal's
Morning Ledger on February 29, 2016
Valeant isn’t what the doctor ordered
Valeant Pharmaceuticals International Inc.’s
fundamental risks are too severe to suggest the stock is poised for a
lasting rebound, writes Steven Russolillo for Ahead of the Tape. The
Canadian drugmaker late
Sunday
said it would postpone its fourth-quarter results and conference call,
originally scheduled for
Monday.
The move came as Valeant confirmed
Michael Pearson would return as chief executive
after being on leave since December due to a severe case of pneumonia and
other complications.
From the CFO Journal's
Morning Ledger on March 2, 2016
Olympus unit to pay $646 million to settle kickback charges
The U.S. unit of Olympus Corp.
admitted it paid bribes to U.S. doctors and hospitals to promote sales of
its medical devices, and agreed to pay criminal penalties as part of what
prosecutors called the largest-ever settlement under federal anti-kickback
laws.
Jensen Comment
This does not say much good for the U.S. doctors and hospitals that accepted
those bribes, which also explains in part why Medicaid, Medicare, and Obamacare
fraud is rampant in the USA.
34 charged with multi-million tax fraud conspiracy in Battle Creek Battle
Creek Veterans Affairs Medical Center and inmates of the Michigan Department of
Corrections ---
More than 30 people from Battle
Creek have been indicted in federal court and accused of committing a
conspiracy to defraud the IRS of $22 million through false tax forms.
United States Attorney Patrick
Miles Jr. announced the indictments in Grand Rapids for 34 people on
Tuesday.
During raids that began early
Monday, 24 people were arrested by officers from several federal, state and
local law enforcement agencies.
An investigation officials said
began in 2008 showed the defendants allegedly used information obtained in
part from patients and employees of the Battle Creek Veterans Affairs
Medical Center and from inmates of the Michigan Department of Corrections to
file 4,668 federal income tax returns claiming "false, fictitious and
fraudulent refunds totaling over $22 million" between the 2007 and 2014 tax
years.
Derrick J. Gibson, 52, of Battle
Creek, was named the lead defendant.
Officials said the defendants used
obtained names, social security numbers, and dates of birth to file
fradulent returns.
According to the indictment:
• MDOC inmates including Bobby
Crabtree, David Haymer and Joseph J. Johnson provided personal information
of fellow inmates and expected money or personal items in exchange.
• Inmate Shawn McKnight attempted
to recruit others outside the prison to provide personal information.
• VA employees including Alvin
Stephenson II provided personal information of veterans who were patients.
• Several others filed the false
returns, often using the personal information to claim dependents or earned
income credits and obtain tax refunds.
• Several of the defendants opened
and maintained bank accounts to deposit the tax refunds.
The indictment outlined several
cases of people filing false tax forms and receiving several thousands of
dollars in refunds.
Each defendant faces up to 10 years
imprisonment and a fine of $250,000 if convicted.
Law360, New York (March 23, 2016, 7:09 PM ET) -- A
Manhattan federal judge on Wednesday hit a Long Island accountant who helped
a Florida-based beauty products wholesaler overstate its financial position
with a 27-month prison sentence after the fraud cost a bank lender $4.9
million.
U.S. District Judge Lewis A. Kaplan also hit Marc
Wieselthier, 57, with $161,000 in forfeiture and $4.9 million in restitution
for the fraud, which was revealed when the company, DIT Inc., fell into
bankruptcy.
The judge said prison was the only way to send the
message to CPAs and lawyers...
Auditors and others that deal with a company’s financial statement will
experience new challenges as a result of implementation of new financial
reporting standards requiring reporting of expected credit losses related to
financial instruments.
IFRS
9, Financial Instruments, which will take effect Jan. 1, 2018, contains a
new expected credit loss (ECL) model. FASB also is working on a financial
instruments standard that has not yet been issued but is expected to include
requirements to report expected credit losses.
The
International Auditing and Assurance Standards Board (IAASB) has issued a
new publication to highlight the challenges IFRS 9 will create for auditors,
management, governance bodies such as audit committees, and users. -
The company has also delayed its 2015 earnings report while it conducts an
internal investigation into the accuracy of its financial disclosures. In a
statement, the company said that inquiry could cause the company to
“reassess its liquidity position.” In other words, SunEdison, once the
world’s largest developer of renewable energy projects (and No. 6 on MIT
Technology Review’s 2015 list of 50 smartest companies), could file for
bankruptcy very soon.
Jensen Comment
Smart technology is frequently not equated with smart finance. Exhibit A is
SunEdison. Exhibit B currently is China where debt is now out of control.
Exhibit C is the USA government entitlements financing that burdens future
generations with over $100 trillion in unfunded financial obligations for things
like Public Pension and Medicaid and Medicare obligations of the future.
Teaching Case from The Wall
Street Journal on February 26, 201
SUMMARY: Mexico's
financial watchdog fined the local member firm of Deloitte Touche Tohmatsu
Ltd. over what it said were improper auditing practices related to its work
for toll-road operator OHL de Mexico SAB, which is also under investigation
by the agency over accounting practices that boosted its income and asset
valuations. It marks the country´s first fine against a provider of global
auditing services.
CLASSROOM
APPLICATION: This
article could be used in an auditing class as a basis for discussion the
international accounting firms, as well as discussing auditing of companies
in other countries.
QUESTIONS:
1. (Introductory) What are the facts of the fine discussed in the
article? Who was involved in the fine? Who was fined?
2. (Advanced) What is meant by Big Four accounting firms? Please name
the Big Four firms. What are the differences between these firms and
regional or local firms? What are the career opportunities in each? What are
the strengths and weaknesses of working at each type of firm?
3. (Advanced) The article mentions a Deloitte affiliate. What is
that? Why does Deloitte have affiliates? How much control does Deloitte have
over affiliates? How is Deloitte affected by the actions and activities of
its affiliates?
Reviewed By: Linda Christiansen, Indiana University Southeast
MEXICO CITY—Mexico’s financial watchdog fined the
local member firm of Deloitte Touche Tohmatsu Ltd. over what it said were
improper auditing practices related to its work for toll-road operator OHL
de Mexico SAB, which is also under investigation by the agency over
accounting practices that boosted its income and asset valuations.
It marks the country´s first fine against a
provider of global auditing services.
Mexico´s Banking and Securities Commission said the
auditing firm paid a penalty of more than 4.2 million pesos (some $233,000),
or about 65% of the maximum penalty set in Mexican regulations, over
auditing irregularities in financial statements of the local unit of Spanish
construction giant Obrascón Huarte Laín SA.
Authorities also issued a formal warning against
four auditors at Deloitte Mexico.
“We think external auditors must do a better job,”
Mexico´s financial watchdog Jaime González told local radio late on
Thursday. “We imposed a sanction against the firm and they accepted it, we
also issued warnings against four of their auditors and they also accepted
them.”
Deloitte Mexico executives didn´t respond to
requests for comment.
Teaching Case from The Wall
Street Journal on February 26, 2016
TOPICS: Financial
Accounting, GAAP, Program Accounting, SEC
SUMMARY: Boeing
uses program accounting to spread its high early costs over a large block of
deliveries. The method, which is compliant with Generally Accepted
Accounting Principles, lets the company book future profits and cost-cutting
expectations in current earnings, allowing Boeing to consider the 787
Dreamliner program profitable, despite its cost to build each jet still
being higher than its sale price. Boeing expects to break even on those unit
costs later in 2016. There were no plans to change its program accounting
system, which has so far tallied more than $28.5 billion in deferred costs
building the Dreamliner.
CLASSROOM
APPLICATION: This
article is a follow-up and fuller explanation to a previous article on
program accounting, and is appropriate for financial accounting classes.
QUESTIONS:
1. (Introductory) What is GAAP? Who determines GAAP? What is included
in GAAP?
2. (Advanced) What is program accounting? Why does Boeing choose to
use it?
3. (Advanced) What are the benefits of program accounting? How is it
beneficial for financial reporting purposes? Are there any issues or
problems associated with using it?
4. (Advanced) Why is program accounting allowed under GAAP? Why is
program accounting not widely used? What are the other options? Should
Boeing change? Why or why not?
5. (Advanced) How were Boeing's share prices affected by concerns
about its accounting methods? Why did the market react that way?
Reviewed By: Linda Christiansen, Indiana University Southeast
Boeing Co. Chief Executive Dennis Muilenburg on
Wednesday defended the aerospace company’s accounting practices and
corporate strategy in the wake of weeks of volatile stock movements.
The company’s shares have slumped almost 20% this
year on concerns about its cash generation and competitive position, and
took another hit last week following a media report that the Securities and
Exchange Commission was probing its financial projections.
Mr. Muilenburg defended the company’s longtime use
of a system called program accounting and reaffirmed the expectation that it
would deliver the profitability and cash flow that it has promised investors
on its flagship 787 Dreamliner. He neither confirmed nor denied the
existence of any investigation—the SEC has also declined to comment—but
sought to calm investor concerns.
“We are very confident in our financials,” Mr.
Muilenburg said at an investor event. “I personally signed off on [our
filings] last week.”
Boeing uses program accounting to spread its high
early costs over a large block of deliveries. The method, which is compliant
with Generally Accepted Accounting Principles, lets the company book future
profits and cost-cutting expectations in current earnings, allowing Boeing
to consider the 787 Dreamliner program profitable, despite its cost to build
each jet still being higher than its sale price. Boeing expects to break
even on those unit costs later in 2016.
Continued in article
Teaching Case from The Wall
Street Journal on February 26, 2016
SUMMARY: The
worst tax form is Form 1099-B. It is used by brokerage firms to report a
taxpayer's investment transactions to both the taxpayer and the Internal
Revenue Service. Later the agency compares the broker's filings to
individual returns, looking for discrepancies that may signal unreported
income. It also frequently keeps taxpayers from filing their returns early.
Brokers are supposed to send these forms to taxpayers by Feb. 15 and to the
IRS by March 31 in most cases. But the
firms sometimes get extensions of the deadline, or issue one or more
revisions to the forms. Some advice offered in the article include: avoid
amending a return, beware of cost-basis issues, double-check "wash" sales,
and correct errors carefully.
CLASSROOM
APPLICATION: This
article offers good information about the 1099-B for individual tax return
preparation. It includes common challenges and errors, along with advice
regarding handling those issues.
QUESTIONS:
1. (Introductory) What is a 1099-B? What is its function? When is it
due to taxpayers and to the IRS?
2. (Advanced) What are some of the problems and challenges caused by
1099-Bs?
3. (Advanced) How could the 1099-B issues be relieved or solved? What
could the issuers do? What could the IRS do to minimize these problems?
4. (Advanced) How can a 1099-B cause taxpayers to have to amend their
returns? What can taxpayers do to avoid that?
5. (Advanced) What is cost basis? What cost-basis problems can be
related to 1099-Bs? What can taxpayers do to address that problem?
6. (Advanced) What is a wash sale? What is the tax law regarding wash
sales? Are wash sales reported on 1099-Bs? If so, how? Is not, should they
be?
7. (Advanced) What should taxpayers do if they find an error on a
1099-B? What actions should they avoid?
Reviewed By: Linda Christiansen, Indiana University Southeast
In the battle for worst tax form, it appears we
have a winner.
That dubious distinction goes to Form 1099-B,
according to an informal survey of tax preparers. It is used by brokerage
firms to report a taxpayer’s investment transactions to both the taxpayer
and the Internal Revenue Service. Later the agency compares the broker’s
filings to individual returns, looking for discrepancies that may signal
unreported income.
It also frequently keeps taxpayers from filing
their returns early.
“Unquestionably, the 1099-B is my least favorite
form,” says Jeffrey Porter, a CPA who practices in Huntington, W.Va.
“They’re maddening when I’m trying to be efficient,” he adds, because they
are often late, incomplete or subject to revision.
Tax preparers say the 1099-B is worse than other
vexing forms, such as those for partnership income and foreign income,
because far more people have brokerage accounts.
Continued in argument
Teaching Case from The Wall
Street Journal on February 26, 2016
SUMMARY: The
Securities and Exchange Commission has decided not to decide on the
leadership of the government's audit regulator now. Meanwhile, James Doty,
the current PCAOB chairman whose term officially expired last October, can
remain at the agency indefinitely until he's either reappointed or the SEC
taps a successor.
CLASSROOM
APPLICATION: This
article offers updates on the SEC and the PCAOB, which are useful in
auditing and financial accounting classes.
QUESTIONS:
1. (Introductory) What is the SEC? What are its duties and its
authority? How is it involved with financial accounting and auditing?
2. (Introductory) What is the PCAOB? What are its duties and its
authority? When and why was it started? How is it involved with financial
accounting and auditing?
3. (Advanced) What is the status of the composition of the SEC
commissioners? What positions are open? How could this affect the SEC's
work?
4. (Advanced) What is the status of the PCAOB chairman position? What
are the duties of the chairman? What has the current chairman focused on
during his term?
Reviewed By: Linda Christiansen, Indiana University Southeast
WASHINGTON—The Securities and Exchange Commission
has decided not to decide on the leadership of the government’s audit
regulator, at least for now.
SEC Chairwoman Mary Jo White on Friday said her
agency is waiting until it has a full complement of five commissioners
before picking a head for the Public Company Accounting Oversight Board. The
commission is currently down to just three members.
Meanwhile, James Doty, the current PCAOB chairman
whose term officially expired last October, can remain at the agency
indefinitely until he’s either reappointed or the SEC taps a successor.
“It’s a decision I think should be left to the full
commission, as in the past,” Ms. White told reporters, after remarks at a
securities conference here. She added that Mr. Doty and the current PCAOB
board were doing “quite well, without missing a beat.”
It’s unclear when the SEC will be back to its full
strength. President Barack Obama nominated two individuals to fill the
agency’s vacancies in November—former Republican Senate aide Hester Pierce
and law professor Lisa Fairfax, a Democrat—but the Senate Banking Committee
has yet to take up the nominations. Sen. Richard Shelby (R., Ala.), the
panel’s chairman, has said he is focused on his March 1 primary election and
hasn’t yet scheduled a nominations hearing.
The PCAOB declined to comment.
Mr. Doty, who has headed the PCAOB since 2011, has
said he would like to remain as PCAOB chairman if the SEC wishes to keep him
in the post. “I’ve made it clear that if the SEC thinks I should be there, I
want to be there,” he said last fall, adding there is ”more work we need to
do.”
During his tenure, Mr. Doty has focused on
initiatives such as requiring audit firms to name the partner in charge of
each client’s audit and expanding the audit report to have auditors tell
investors more about what they discover. He says those disclosures will
improve audit quality and make auditors more accountable.
But, Mr. Doty has faced pushback at times from the
accounting industry and questioning from SEC officials about the audit
panel’s approach. Last September, Ms. White indicated the SEC was looking at
other potential candidates to head the PCAOB in addition to Mr. Doty.
Teaching Case from The Wall
Street Journal on February 26, 2016
TOPICS: Financial
Reporting, GAAP, IFRS, International Business, SEC
SUMMARY: The
Securities and Exchange Commission is trying to strike a delicate balance:
advancing its plans to simplify financial-reporting requirements without
making them any less stringent. The SEC is looking to free multinational
companies from what some consider a particularly onerous requirement. Such
companies now must report financial data to the SEC using U.S. generally
accepted accounting principles and reconcile all non-GAAP financial data
with that standard, detailing how they did so. The efforts include making it
easier for public companies with operations abroad to report pertinent
financial information, beefing up disclosure requirements, and clearing the
way for progress toward a single global financial-reporting standard.
CLASSROOM
APPLICATION: These
valuable updates regarding multinational companies can be used in financial
accounting classes.
QUESTIONS:
1. (Introductory) What is the SEC? What is its area of authority? How
is the SEC involved with financial reporting? Why?
2. (Advanced) What SEC goal is discussed in the article? Why is this
a priority for the SEC?
3. (Advanced) How could these proposals benefit companies? How could
they benefit users of financial statements and other financial-reporting
information? Could any potential negative consequences result from the
proposals?
4. (Advanced) Why are multinational companies the focus of these
changes? Why aren't domestic companies involved?
5. (Advanced) What additional information and reporting might the SEC
decide to require? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
The Securities and Exchange Commission is trying to
strike a delicate balance: advancing its plans to simplify
financial-reporting requirements without making them any less stringent.
The agency, which is operating with just three of
its full complement of five commissioners, including Chairwoman Mary Jo
White, laid out several projects and priorities for 2016 at an annual
conference last week in Washington.
The efforts include making it easier for public
companies with operations abroad to report pertinent financial information,
beefing up disclosure requirements, and clearing the way for progress toward
a single global financial-reporting standard.
“They’re trying to streamline the rules; they’re
trying to reduce the redundancy,” said David Rubenstein, a partner at
accounting firm WeiserMazars LLP in New York, who attended the meetings.
“It’s about getting information out there that’s meaningful and important
and interesting to a stakeholder.”
The SEC is looking to free multinational companies
from what some consider a particularly onerous requirement. Such companies
now must report financial data to the SEC using U.S. generally accepted
accounting principles and reconcile all non-GAAP financial data with that
standard, detailing how they did so.
James Schnurr, the SEC’s chief accountant, said his
office is working on aproposal to drop the reconciliation requirement,
letting companies supplement their U.S. financial reports with ones filed
with foreign regulators using international standards.
Mr. Schnurr didn’t provide a timetable for the
change, which appears to be a refinement of the SEC earlier efforts to allow
companies to report the additional information voluntarily.
“We believe the SEC’s proposal is a useful next
step,” said Paul Andonian, Ford Motor Co. ’s director of global accounting.
“Yet we are concerned that providing both [international accounting
standards] and U.S. GAAP financial data could be complicated.”
U.S. and international accounting rule makers have
failed thus far to unify the U.S. standard with the standards used in more
than 100 countries. Still, the Financial Accounting Standards Board, which
sets U.S. standards, and the International Accounting Standards Boards,
which oversees foreign ones, cooperate closely. “It’s very important for the
two boards, the IASB and the FASB, to continue to work together to try to
have further convergence down the road,” said Mr. Schnurr.
The SEC is especially interested in how well
prepared U.S. public companies might be for new accounting requirements. In
particular, Mr. Schnurr cited concern about new revenue-recognition rules,
which go into effect in 2018. They are less prescriptive than current rules,
and more closely aligned with international accounting standards. That has
contributed to some companies delaying the changes. According to a November
survey by PricewaterhouseCoopers LLP and the Financial Executives Research
Foundation, just 25% of companies have assessed how the rule changes will
affect their business and started preparing.
Continued in article
Teaching Case from The Wall
Street Journal on March 4, 2016
TOPICS: Corporate
Taxation, Cost Sharing, International Business
SUMMARY: Alphabet
Inc., Google's parent company, could gain at least $3.5 billion in new tax
benefits if Intel Corp. succeeds in its international tax dispute with the
Internal Revenue Service, an amount that exceeds Google's entire 2015 tax
cost. Because U.S. companies don't owe U.S. taxes on their foreign profits
until they bring the money home, they have an incentive to earn money abroad
and leave it there. Cost-sharing arrangements typically are agreements
between the U.S. parent and a subsidiary in a low-tax country that manages
and profits from foreign sales. That foreign subsidiary, funded by the
parent company, must pay back the parent for its share of corporate costs,
such as salaries of employees at the U.S. headquarters who develop the
product they are selling abroad. The more that costs stay with the U.S.
parent, the more deductions it can pile up in the U.S. and less income gets
taxed at the 35% U.S. rate. Accordingly, if the foreign subsidiary has fewer
deductions, it can pile up profits that get lower tax rates.
CLASSROOM
APPLICATION: This
article offers a good explanation of cost sharing multinational companies do
to reduce U.S. tax liability.
QUESTIONS:
1. (Introductory) What are the facts of the Intel case? Who are the
parties? In what phase is the case?
2. (Advanced) What is the legal issue in the Intel case? Why could it
have an affect on other companies? What could the impact be on other
companies?
3. (Advanced) Why could Alphabet be affected by the outcome of the
Intel case in such a major way? What is the extent of potential benefits or
penalties?
4. (Advanced) What are the two main legal issues in the Intel case?
What is the likely result for each of these issues?
Reviewed By: Linda Christiansen, Indiana University Southeast
Alphabet Inc., Google’s parent company, could gain
at least $3.5 billion in new tax benefits if Intel Corp. succeeds in its
international tax dispute with the Internal Revenue Service, an amount that
exceeds Google’s entire 2015 tax cost.
The case, which the IRS appealed to the Ninth U.S.
Circuit Court of Appeals last week, is being closely watched in the tech
industry and elsewhere. At least 20 companies, including Microsoft Corp. and
eBay Inc., have disclosed they’re monitoring the outcome of the case
involving share-based compensation. However, the case’s uncertainty has kept
them from quantifying the potential benefits.
“They’re paying a huge amount of attention to this
case, because this is probably the largest unresolved tax issue that
high-technology companies now have,” said Eric Ryan, a partner at the law
firm DLA Piper.
The Intel dispute has been brewing since 2003, part
of a decadeslong tug of war between the IRS and companies over what are
known as cost-sharing arrangements between U.S. corporations and their
low-taxed foreign subsidiaries.
The biggest disclosed possible effect of the Intel
court case is at Alphabet. In its annual report, the company recorded a
potential $3.5 billion benefit, citing a lower court’s ruling. That was
offset by a $3.5 billion deferred tax liability, meaning it didn’t result in
a major one-time boost to the company’s earnings.
In its 10-K, Alphabet said it couldn’t take the
whole tax benefit because it hasn’t decided whether it can and would put the
money it would gain, if Intel wins, into its offshore subsidiaries. Alphabet
could then leave the money abroad, outside the U.S.’s tax reach, until it
decides to bring it home. The company could record the benefit after the
court case concludes.
Alphabet, Intel and the IRS all declined to
comment.
Intel inherited the case from Altera Corp., which
it purchased last year. That case involved about $80 million in corporate
expenses from 2004 to 2007, according to the U.S. Tax Court decision.
“If Google is $3.5 billion, there must be many
other companies that have billions of dollars at stake on this issue,” said
Reuven Avi-Yonah, a tax law professor at the University of Michigan.
That doesn’t even include benefits in future years
that companies could get if Intel prevails.
Continued in article
Teaching Case from The Wall
Street Journal on March 4, 2016
SUMMARY: Accounting
rule makers made their overhaul of lease accounting official, issuing a new
rule that will require U.S. companies to add huge amounts of leases to their
balance sheets and thus make many companies look much more leveraged. Under
the Financial Accounting Standards Board's new rule, companies will have to
add to their books the debt-like obligations they incur when they pay to
lease real estate, airplanes, office equipment and other items. Currently,
companies are required to disclose their lease obligations only out of the
spotlight, in the footnotes to their financial statements. Many companies,
like airlines who lease planes and retail chains who lease real estate for
their stores, have large amounts of long-term lease obligations that are
effectively the same as debt, but under current rules they aren't carried on
the balance sheet and their impact isn't readily visible to the average
investor who doesn't delve into the footnotes. The change is intended to
make it easier for those investors to get a better, clearer picture of
companies' true obligations.
CLASSROOM
APPLICATION: These
articles offer lease accounting updates for financial accounting classes.
QUESTIONS:
1. (Introductory) What changes did FASB make to lease accounting? How
do the changes differ from the previous accounting treatment for leases?
2. (Advanced) How will each of the four financial statements be
affected by the changes in lease accounting? What types of companies will
have improved financial results? Companies in what situations will have less
favorable financial results under the new rules?
3. (Advanced) What is FASB? Why does the organization have the
authority to make this change?
4. (Advanced) The article mentions off-balance-sheet accounting. What
is that? Why do companies use it? What are the benefits? What problems could
it cause?
5. (Advanced) How is accounting by lessors affected by these changes?
Why?
6. (Advanced) What is the IASB? What is its area of authority? What
is it doing regarding accounting for leases?
Reviewed By: Linda Christiansen, Indiana University Southeast
Accounting rule makers made their overhaul of lease
accounting official on Thursday, issuing a new rule that will require U.S.
companies to add huge amounts of leases to their balance sheets and thus
make many companies look much more leveraged.
Under the Financial Accounting Standards Board’s
new rule, companies will have to add to their books the debt-like
obligations they incur when they pay to lease real estate, airplanes, office
equipment and other items. Currently, companies are required to disclose
their lease obligations only out of the spotlight, in the footnotes to their
financial statements.
Some large companies like Walgreens Boots Alliance
Inc. and AT&T Inc. may have to add tens of billions of dollars in leases to
their balance sheets, and overall balance sheets could swell by as much as
$2 trillion, according to some estimates.
The rule, which the FASB approved in principle in
November, will take effect for public companies in 2019.
Many companies, like airlines who lease planes and
retail chains who lease real estate for their stores, have large amounts of
long-term lease obligations that are effectively the same as debt, but under
current rules they aren’t carried on the balance sheet and their impact
isn’t readily visible to the average investor who doesn’t delve into the
footnotes. The change is intended to make it easier for those investors to
get a better, clearer picture of companies’ true obligations.
“It puts things in a more transparent condition,”
said James Kroeker, the FASB’s vice chairman.
In effect in 2019, accounting shift may make many
firms look much more leveraged
Some large companies like AT&T Inc. may have to add
tens of billions of dollars to their balance sheets to account for debt-like
obligations they incur when they pay to lease real estate, airplanes, office
equipment and other items. That’s due to a new rule issued Thursday by the
Financial Accounting Standards Board that takes effect for public U.S.
companies in 2019. ENLARGE Some large companies like AT&T Inc. may have to
add tens of billions of dollars to their balance sheets to account for
debt-like obligations they incur when they pay to lease real estate,
airplanes, office equipment and other items. That’s due to a new rule issued
Thursday by the Financial Accounting Standards Board that takes effect for
public U.S. companies in 2019. Photo: Reuters .
Accounting rule makers made their overhaul of lease
accounting official on Thursday, issuing a new rule that will require U.S.
companies to add huge amounts of leases to their balance sheets and thus
make many companies look much more leveraged.
Under the Financial Accounting Standards Board’s
new rule, companies will have to add to their books the debt-like
obligations they incur when they pay to lease real estate, airplanes, office
equipment and other items. Currently, companies are required to disclose
their lease obligations only out of the spotlight, in the footnotes to their
financial statements.
Some large companies like Walgreens Boots Alliance
Inc. and AT&T Inc. may have to add tens of billions of dollars in leases to
their balance sheets, and overall balance sheets could swell by as much as
$2 trillion, according to some estimates.
The rule, which the FASB approved in principle in
November, will take effect for public companies in 2019.
Many companies, like airlines who lease planes and
retail chains who lease real estate for their stores, have large amounts of
long-term lease obligations that are effectively the same as debt, but under
current rules they aren’t carried on the balance sheet and their impact
isn’t readily visible to the average investor who doesn’t delve into the
footnotes. The change is intended to make it easier for those investors to
get a better, clearer picture of companies’ true obligations.
“It puts things in a more transparent condition,”
said James Kroeker, the FASB’s vice chairman.
‘(The new rule) adds light to one of the last
remaining crevasses of off-balance-sheet accounting.’
—James Kroeker of the Financial Accounting
Standards Board . Regulators and other observers have long been concerned
about rules that allow companies to keep some items off their balance
sheets. Mr. Kroeker said the new lease rule “adds light to one of the last
remaining crevasses of off-balance-sheet accounting.”
The new rule calls for both assets and liabilities
reflecting the value and costs of leases to be added to the balance sheet,
so companies’ book value isn’t likely to change significantly. But
companies’ leverage will be much more evident, and some financial ratios
like return on assets could be affected
Short-term leases, those lasting less than a year,
will be exempt from the new rule. In addition, the accounting for those on
the other end of lease transactions—the lessors, the owners of the property
that’s being leased—will remain largely unchanged from current rules.
The FASB’s new rule culminates more than a decade
of work. Lease-accounting rules haven’t been significantly revamped in 40
years, and critics have contended that companies use the current rules to
their advantage, structuring the terms of their leases to allow them to be
kept off the balance sheet. In 2005, the Securities and Exchange Commission
called on the FASB to overhaul its lease rules, and the board has been
moving toward a revamp since then.
Continued in article
Teaching Case from The Wall
Street Journal on March 4, 2016
SUMMARY: Regulations
requiring companies to divulge more financial information to investors have
contributed to lengthy filings that can make it harder for investors to
identify important information. The Compensation Discussion and Analysis
portion of annual proxy statements are ballooning. The average length of a
S&P 100 company's CD&A proxy segment increased by 705 words in the last five
years to 9,121 words in 2015. Last year's largest CD&A proxy segment, at
19,288 words, was filed by Pfizer Inc. Still, the pursuit of a streamlined
financial reporting process for corporations must be balanced with ensuring
investors aren't overwhelmed by those disclosures.
CLASSROOM
APPLICATION: This
informative article regarding increasing required disclosures can be used in
financial accounting and auditing classes.
QUESTIONS:
1. (Introductory) What is Compensation Discussion and Analysis? Where
is it included? What value does it offer?
2. (Advanced) What disclosure requirements have been added in recent
years? What is the reason for the increase in required disclosure?
3. (Advanced) What problems can result from the proliferation of
disclosures? How can governing bodies balance the advantages of various
types of financial disclosures with the issues and problems that can result?
Reviewed By: Linda Christiansen, Indiana University Southeast
Regulations requiring companies to divulge more
financial information to investors have contributed to lengthy filings that
can make it harder for investors to identify important information.
The Compensation Discussion and Analysis portion of
annual proxy statements are ballooning. The average length of a S&P 100
company’s CD&A proxy segment increased by 705 words in the last five years
to 9,121 words in 2015, according to a study by Equilar Inc., an executive
data provider. Last year’s largest CD&A proxy segment, at 19,288 words, was
filed by Pfizer Inc.PFE -0.30%, Equilar said.
“If the old way of hiding information or making it
less prominent was to put it in the footnotes, the new way is to leave it in
the text,” said Ron Schneider, Director of Governance Services for R.R.
Donnelley RRD +1.03% & sons Co., a printing company which operates EDGAR
Online and annual files more than 166,000 documents with the SEC.
Securities and Exchange Commission Chairwoman Mary
Jo White said last week that “disclosure effectiveness” remains a priority
for the agency. The agency continues to work on simplifying disclosure
requirements without making them less stringent.
Still, the pursuit of a streamlined financial
reporting process for corporations must be balanced with ensuring investors
aren’t overwhelmed by those disclosures, said former SEC Commissioner Troy
Paredes following Ms. White’s comments.
“It’s about the way in which investors can be
actually worse off when they’re overwhelmed with a lot of information that’s
not particularly useful to making an informed investment or voting
decision,” he said.
The length of CD&As — in terms of word count– is
expected grow by at least 20% or more in the next two years, as new
disclosure requirements go into effect, according to John Ellerman, a
Partner at Pay Governance LLC, an executive compensation advisory.
The Securities and Exchange Commission last year
enacted a rule requiring public companies to disclose the ratio of its chief
executive pay relative to the median compensation of its employees. The
Commission is considering additional rules surrounding whether executives
can hedge their stock awards using derivatives, and is pushing companies and
auditors to disclose more detailed analysis of business risks under existing
regulations.
One way companies are helping investors navigate
the tsunami of disclosures is by adding proxy summaries to their filings,
similar to an executive summary found in other kinds of reports. While fewer
than 5% of S&P 100 companies had a proxy summary in 2011, 73% included one
in their most recent year, according to Equilar.
Teaching Case on Pro Forma
Reporting from The Wall
Street Journal on March 4, 2016
TOPICS: Financial
Reporting, GAAP, Pro Forma Reporting
SUMMARY: The
difference between pro forma and GAAP results has long been a point of
contention between companies, regulators and many investors. Companies
ostensibly provide pro forma figures to better reflect the underlying tenor
of their operations. They may, for example, exclude the cost of laying off
workers on grounds this won't recur. To be sure, there are instances when
ignoring items like that which are required under GAAP can make sense. But
companies have had a history of treating the ordinary as extraordinary when
business conditions worsen.
CLASSROOM APPLICATION: This article is appropriate to use
when discussion pro forma reporting.
QUESTIONS:
1. (Introductory) What is pro forma reporting? What does it usually
include and not include?
2. (Advanced) What is GAAP? How can pro forma reporting differ from
GAAP? Why does it differ? Please list some examples featured in the article.
3. (Advanced) Why is GAAP not required for pro forma reporting? Why
are different results allowed to be reported? Could this confuse users of
financial reporting?
4. (Advanced) What are some common circumstances in which pro forma
results and GAAP results differ greatly?
5. (Advanced) What is the value of pro forma reporting? Should
companies be allowed to do pro forma reporting? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
There’s a big difference between companies’ advertised performance in
2015 and how they actually did.
How big? With most calendar-year results now in, FactSet estimates
companies in the S&P 500 earned 0.4% more per share in 2015 than the year
before. That marks the weakest growth since 2009. But this is based on
so-called pro forma figures, results provided by companies that exclude
certain items such as restructuring charges or stock-based compensation.
Look to results reported under generally accepted accounting principles
and S&P earnings per share fell by 12.7%, according to S&P Dow Jones
Indices. That is the sharpest decline since the financial crisis year of
2008. Plus, the reported earnings were 25% lower than the pro forma
figures—the widest difference since 2008 when companies took a record amount
of charges.
The implication: Even after a brutal start to 2016, stocks may still be
more expensive than they seem. Even worse, investors may be paying for
earnings and growth that aren’t anywhere near what they think. The result
could be that share prices have even further to fall before they entice true
value investors.
The difference shows up starkly when looking at price/earnings ratios. On
a pro forma basis, the S&P trades at less than 17 times 2015 earnings. But
that shoots up to over 21 times under GAAP
The difference between pro
forma and GAAP results has long been a point of contention between
companies, regulators and many investors. Companies ostensibly provide pro
forma figures to better reflect the underlying tenor of their operations.
They may, for example, exclude the cost of laying off workers on grounds
this won’t recur.
Continued in article
Teaching Case from The Wall
Street Journal on March 4, 2016
SUMMARY: Marvell
Technology Group Ltd. said an audit-committee investigation identified a
number of accounting problems at the chip maker but didn't find fraudulent
activity. The investigation by the committee of Marvell directors found that
internal protocols weren't fully followed in the case of certain
transactions and some revenue was recognized prematurely. It cited "tone at
the top" issues, including pressure from management on sales and finance
personnel to meet revenue targets. Analysts characterized the committee's
findings as mild, having stopped short of recommending a broad restatement
of Marvell's past financial results.
CLASSROOM
APPLICATION: This
is a good example of an audit committee investigation into accounting
issues. It is appropriate for financial accounting and auditing classes.
QUESTIONS:
1. (Introductory) What is an audit committee? What are its
responsibilities?
2. (Advanced) What are the facts of Marvell's accounting issues? What
are the issues included in the probe? What was the conclusion of the
audit-committee investigation?
3. (Advanced) What problems did the audit committee find? How serious
were these problems? What were some causes of these problems?
4. (Advanced) How did the stock market react to the results of the
investigation? Why? Should management be concerned about its company's stock
price?
5. (Advanced) Why did Marvell hire a new accounting firm? How should
the new firm approach its initial audit of the Marvell given this
information? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Marvell Technology Group Ltd. said an
audit-committee investigation identified a number of accounting problems at
the chip maker but didn’t find fraudulent activity.
The investigation by the committee of Marvell
directors found that internal protocols weren’t fully followed in the case
of certain transactions and some revenue was recognized prematurely. It
cited “tone at the top” issues, including pressure from management on sales
and finance personnel to meet revenue targets.
Marvell, led by the husband-and-wife team of Sehat
Sutardja and Weili Dai, has been grappling with issues that include the
accounting investigation, a patent battle and the disclosure in early
February that activist investor Starboard Value LP held a 6.7% stake in the
company.
Analysts characterized the committee’s findings as
mild, having stopped short of recommending a broad restatement of Marvell’s
past financial results. The company’s shares rose 2% Tuesday.
The probe, launched in September, focused on
accounting of revenue recognized in the quarters ended in January, April and
July of 2015. Marvell later disclosed that the Securities and Exchange
Commission and U.S. Attorney’s Office had also inquired about its accounting
practices.
Continued in article
Teaching Case from The Wall
Street Journal on March 11, 2016
SUMMARY: The
tax rules on record-keeping have a surprising history. In the 1920s, the
entertainer George M. Cohan deducted more than $50,000 for travel and
entertainment related to his profession, including "entertaining" drama
critics. Mr. Cohan didn't have receipts for many of the expenses, so the IRS
denied them. In 1930, however, the celebrated jurist Learned Hand ruled that
Mr. Cohan's lack of records didn't bar him from taking deductions, as long
as they had a basis in fact and could reasonably be estimated. His
pro-taxpayer decision became known as the Cohan Rule. Congress has since
whittled away Mr. Cohan's tax legacy by enacting stiff standards for some
deductions, especially ones subject to abuse. As for the IRS, its gold
standard for write-offs without receipts, such as miles driven in one's own
car for business, is "contemporaneous records." That means notes made when
the expense was incurred, such as a log recording miles driven.
CLASSROOM
APPLICATION: This
article offers good information regarding the history of proof required for
tax deductions and information for what is needed.
QUESTIONS:
1. (Introductory) What is the history of the evidence required for
tax deductions? Why have the rules changed?
2. (Advanced) What are the evidence rules regarding proof of
charitable contributions? What was the example given for how strict the
rules are? How could those taxpayers have planned better? Why are these
rules so strict?
3. (Advanced) What are the rules for travel, meals, and
entertainment? What should taxpayers to do make sure all of their deductions
will be allowed by the IRS?
4. (Advanced) What are the rules for taxation of gain on residences?
Why is it important for homeowners to keep careful records of home
improvements?
5. (Advanced) How long should taxpayers keep tax records? What is the
statute of limitations for tax audits?
Reviewed By: Linda Christiansen, Indiana University Southeas
Working on your tax return? Put your records in
order now to cope with a challenge from the Internal Revenue Service down
the road.
To see the difference proper proof makes, consider
the results of two Tax Court cases released in December. In the first one,
the judge ruled that a business consultant owed more than $23,000 in taxes
and penalties for 2010 and 2011 because he didn’t have convincing records of
write-offs for wages, travel, meals and entertainment.
The same week, another judge ruled that a couple
who owned a small business could deduct nearly $7,000 in mileage expenses
for business travel in 2010—even though their records were handwritten on
index cards, and some were missing.
“The better your records, the less agita you’ll
have with the IRS,” says Ed Mendlowitz, a CPA with accounting firm
WithumSmith+Brown who is based in New Brunswick, N.J.
The tax rules on record-keeping have a surprising
history. In the 1920s, the entertainer George M. Cohan—who wrote the songs
“(I’m a) Yankee Doodle Dandy” and “Give My Regards to Broadway”—deducted
more than $50,000 for travel and entertainment related to his profession,
including “entertaining” drama critics. Mr. Cohan didn’t have receipts for
many of the expenses, so the IRS denied them.
In 1930, however, the celebrated jurist Learned
Hand ruled that Mr. Cohan’s lack of records didn’t bar him from taking
deductions, as long as they had a basis in fact and could reasonably be
estimated. His pro-taxpayer decision became known as the Cohan Rule.
Congress has since whittled away Mr. Cohan’s tax
legacy by enacting stiff standards for some deductions, especially ones
subject to abuse. As for the IRS, its gold standard for write-offs without
receipts, such as miles driven in one’s own car for business, is
“contemporaneous records.” That means notes made when the expense was
incurred, such as a log recording miles driven.
But IRS agents and judges also can accept
good-faith estimates and other forms of proof for write-offs. Because the
couple in the December case kept timely records on index cards, the judge
allowed their testimony regarding some missing cards.
As you make your way to this year’s April deadline,
here is record-keeping advice from experts.
Avoid charitable-donation pitfalls. Current law is
both clear and rigid: taxpayers who make cash contributions need proper
proof of the donation in hand before filing their returns in order to get a
deduction. If the taxpayer gets the proof only after filing, the IRS could
disallow it.
Proper proof of a cash donation typically consists
of a letter from the charity giving its amount, date and the value of
anything (such as a tote bag or dinner) received in return. That value must
be subtracted from the deduction.
The rules for other types of donations, such as
property, are also persnickety about proof. In a famous 2012 case, a
California couple lost an $18.5 million deduction for property donated to
charity because they didn’t have the correct records. The judge acknowledged
that the decision was harsh, but said the law left him no choice. For more
on substantiating charitable deductions, see IRS Publication 526.
Take care with T&E. Large deductions for travel,
meals, and entertainment are often an audit magnet, so treat them carefully.
Taxpayers are supposed to keep records showing who, what, when, where, and
why; experts say the one people most frequently forget is the “business
purpose” of the activity. Suggestion: when setting up a meeting that will
include deductible expenses, record the business purpose at the same time.
For details on travel, meals and entertainment
deductions, see IRS Publication 463.
Update records for your home. Did you add a room to
your home this year, install new windows, or add a deck? Such investments
can increase your “cost basis” in the home, which could lower the tax bill
when it is sold.
For example, say a couple bought a home for
$100,000 years ago in a high-growth area such as Seattle. If they sell it
for $700,000, the law allows them to avoid tax on $500,000 of their $600,000
profit—so they would owe tax on $100,000. If, however, they invested $75,000
in improvements over the years, their cost basis rises by that amount and
they would owe tax only on $25,000 of profit.
For more about what qualifies as an investment in a
home, see IRS Publication 523.
Continued in article
Teaching Case from The Wall
Street Journal on March 11, 2016
SUMMARY: After
working for almost a decade, the FASB issued its new standard on accounting
for leases, ASU 2016-02, which represents a wholesale change to lease
accounting. The IASB issued its own version, IFRS 16, and although the
project was a convergence effort and the boards conducted joint
deliberations, there are several notable differences between the two
standards, which are highlighted in the table included in the article.
CLASSROOM
APPLICATION: This
article offers an excellent summary of the key provisions of the new lease
accounting rules, and compares the U.S. rules to IFRS rules.
QUESTIONS:
1. (Introductory) What is lease accounting? When were the lease rules
changed? When do the new rules go into effect?
2. (Advanced) What is FASB? What is its area of authority? How is
FASB involved in lease accounting? Why does the organization have the
authority to make this change?
3. (Advanced) What is GAAP? What is IASB? What is IFRS? In general,
how does IFRS compare with GAAP?
4. (Advanced) How did the FASB change the lease accounting rules? How
will this change benefit users of the financial statements?
5. (Advanced) Review the table included in the article. What are the
most significant differences between lease accounting rules under GAAP and
under IFRS rules?
6. (Advanced) The article states the FASB and the IASB conducted
joint deliberations. Why were they interested in a convergence effort? Was
it successful?
7. (Advanced) Should GAAP and IFRS be the same? Why or why not? In
general, how do they differ? What are the differences in philosophies?
8. (Advanced) How could each of the four financial statements be
affected by the changes in lease accounting?
9. (Advanced) What types of companies could have improved financial
results under the new rules? Companies in what situations could have less
favorable financial results under the new rules?
Reviewed By: Linda Christiansen, Indiana University Southeast
SUMMARY: Auditing
firms are enlisting cutting-edge technology to help them review their
clients' finances. The Big Four are pouring hundreds of millions of dollars
into new technologies, betting they will make audits more accurate and
comprehensive, giving investors greater assurance that a company's finances
are sound. The new tools automate critical but rote tasks, letting auditors
focus on more substantive issues. The tools can examine all of a client's
transactions, instead of just a sample, reducing the chances of missing a
problem. They also make auditors better able to detect patterns in a
client's finances worth investigating for errors or fraud. The technology
push stems from several factors, including a desire to improve audits, in
part to satisfy regulators who are insisting the firms do so; audit clients
who are upgrading their own technology in a move toward harnessing "big
data"; and competitors who are using technology to make their own push into
parts of the auditing firms' business, such as consulting.
CLASSROOM
APPLICATION: This
is an excellent article to use for an auditing class to discuss new software
and technology used in auditing. What is particularly interesting is how
entry-level auditors no longer do as many basic and mundane tasks as they
would do in the past. Because of technology, our students must be prepared
to do higher levels of work at the beginning of their careers.
QUESTIONS:
1. (Introductory) What is the Big Four? What firms does that include?
How do they differ from other firms? Why are there four?
2. (Advanced) What new software packages are accounting firms using
in their audit practices? What does the software do?
3. (Advanced) How has technology helped the audit process? How is it
changing auditing? What benefits does the audit software offer the firms?
How does it benefit clients?
4. (Advanced) How has the audit software changed the work of
auditors, particularly new staff? How has the entry-level auditing job
changed? Please offer specific examples and details.
5. (Advanced) How can accounting students be well-prepared for the
work in entry-level jobs at accounting firms? What knowledge and skills
should applicants have to be hired and succeed in the position?
6. (Advanced) How can audit software benefit users of financial
statements?
7. (Advanced) What are some potential problems or issues that could
occur as a result of this software usage? How could those issues be
addressed and overcome?
8. (Advanced) How could advances in software change the auditing
industry?
Reviewed By: Linda Christiansen, Indiana University Southeast
KPMG LLP will soon have
a new assistant to help it examine corporate America’s books: Watson.
The auditing firm
is forming an alliance with
International Business Machines Corp.IBM Watson artificial-intelligence
unit to develop high-tech tools for auditing and its other businesses. The
deal is expected to be announced Tuesday
Other auditing firms
also are enlisting cutting-edge technology to help them review their
clients’ finances. Deloitte & Touche LLP has its Argus and Optix. And Ernst
& Young LLP and PricewaterhouseCoopers LLP have their own smart tools.
The Big Four are pouring
hundreds of millions of dollars into new technologies, betting they will
make audits more accurate and comprehensive, giving investors greater
assurance that a company’s finances are sound.
The new tools automate
critical but rote tasks, letting auditors focus on more substantive issues.
The tools can examine all of a client’s transactions, instead of just a
sample, reducing the chances of missing a problem, the firms say. They also
make auditors better able to detect patterns in a client’s finances worth
investigating for errors or fraud.
Other auditing firms also are enlisting
cutting-edge technology to help them review their clients’ finances.
Deloitte & Touche LLP has its Argus and Optix. And Ernst & Young LLP and
PricewaterhouseCoopers LLP have their own smart tools.
The Big Four are pouring hundreds of millions of
dollars into new technologies, betting they will make audits more accurate
and comprehensive, giving investors greater assurance that a company’s
finances are sound.
The new tools automate critical but rote tasks,
letting auditors focus on more substantive issues. The tools can examine all
of a client’s transactions, instead of just a sample, reducing the chances
of missing a problem, the firms say. They also make auditors better able to
detect patterns in a client’s finances worth investigating for errors or
fraud.
Continued in article
Teaching Case from The Wall
Street Journal on March 11, 2016
SUMMARY: A
wave of expected bankruptcy filings and debt restructurings could trigger
taxes for investors at a number of energy firms, a doubly unpleasant outcome
that has companies searching for a fix. The issue stems from the fact that
Linn is taxed as a master limited partnership, or MLP, rather than a
corporation, a popular arrangement among energy companies when oil prices
were soaring. In good times, that status allowed income to flow straight
through to investors without the Internal Revenue Service taking a cut at
the corporate level. But the collapse in oil and gas prices has exposed the
structure's double-sided risk: Investors with potentially worthless shares
(or units) may nonetheless owe taxes on debt that is forgiven in a
bankruptcy or an out-of-court restructuring. That is because MLPs pay no
corporate taxes and instead pass certain tax burdens, along with a share of
their income, to investors. Debt forgiven in a restructuring counts as
noncash income, or "cancellation of debt income," which creates a tax
liability for investors without an associated cash distribution.
CLASSROOM
APPLICATION: This
is an excellent article to use when discussions partnership accounting and
taxation.
QUESTIONS:
1. (Introductory) What is a master limited partnership? How does it
differ in structure from other partnerships?
2. (Advanced) How are MLPs taxed? How are MLP investors taxed? What
are the tax benefits of a MLP? How has this business structure helped
investors?
3. (Advanced) What are the potential problems of owning MLPs? Why do
these problems occur?
4. (Advanced) Why do investors choose MLPs? How could investors in
MLPs plan for tax issues?
Reviewed By: Linda Christiansen, Indiana University Southeast
For some energy investors, there are worse things
than going to zero.
A wave of expected bankruptcy filings and debt
restructurings could trigger taxes for investors at a number of energy
firms, a doubly unpleasant outcome that has companies searching for a fix.
Linn Energy LLC, a Houston-based oil-and-gas
producer, is exploring a change to its corporate structure that could shield
investors from a tax hit triggered by a likely debt restructuring, according
to people familiar with the matter. Distressed peers are watching closely,
hoping Linn can provide a blueprint to follow as low oil prices continue to
spread pain through their ranks.
The issue stems from the fact that Linn is taxed as
a master limited partnership, or MLP, rather than a corporation, a popular
arrangement among energy companies when oil prices were soaring.
In good times, that status allowed income to flow
straight through to investors without the Internal Revenue Service taking a
cut at the corporate level. Linn distributed some billions of dollars of
cash to investors as U.S. energy production boomed.
But the collapse in oil and gas prices has exposed
the structure’s double-sided risk: Investors with potentially worthless
shares—or units, as they are known—may nonetheless owe taxes on debt that is
forgiven in a bankruptcy or an out-of-court restructuring.
That is because MLPs pay no corporate taxes and
instead pass certain tax burdens, along with a share of their income, to
investors. Debt forgiven in a restructuring counts as noncash income, or
“cancellation of debt income,” which creates a tax liability for investors
without an associated cash distribution.
The roughly 60% plunge in oil prices since the
summer of 2014 already has sent a number of energy companies into bankruptcy
court, and more are expected to follow. Fitch Ratings expects the default
rate for U.S. high-yield energy bonds to rise to 11% by the end of the year,
compared with 1.5% for bonds outside the battered energy and
metals-and-mining sectors.
A gusher of bankruptcies and debt restructurings
could be especially painful for MLP investors, most of whom are individual
investors. Big institutions like BlackRock Inc., as well as many endowments
and foreign institutions, can’t legally own partnership units or don’t want
to, given their complexity.
Lee Hiller, a retired retail executive in Boca
Raton, Fla., invested in four energy MLPs and was happy with the payouts for
several years. “The sales literature and much of the press coverage compared
them to toll roads and made them seem pretty safe,” he said. “Rarely, if
ever, was there a discussion of the effect of a major oil-price decline.”
Continued in article
Teaching Case from The Wall
Street Journal on March 11, 2016
SUMMARY: Most
people who got tax credits to buy insurance under the federal health law
will be repaying part of them for the second year in a row, according to a
leading tax preparer. H&R Block Inc. executives said to date, 60% of 2015
tax filers with the credit have found that they owe the government money
because they had been credited too much. That is up from 52% last year, the
first year in which filers had to reckon with reporting the credit and
figuring out if their income projections had been accurate. On average, tax
filers were repaying almost $580 each for excessive credits, up from $530
for overpayments during the 2014 filing year.
CLASSROOM
APPLICATION: This
article is appropriate for individual taxation.
QUESTIONS:
1. (Introductory) What is the ACA? Why is a tax credit associated
with it?
2. (Advanced) How is the ACA tax credit calculated? What taxpayers
are eligible?
3. (Advanced) What percentage of taxpayers who claimed the credit
calculated it correctly? What percentage calculated too high of an amount?
What percentage calculated too low?
4. (Advanced) How must the taxpayers who incorrectly calculated the
ACA tax credit remedy the error?
5. (Advanced) How could these problems and issues be eliminated?
Should the IRS or Congress make some changes? If so, what changes would you
suggest?
Reviewed By: Linda Christiansen, Indiana University Southeast
For
the second year in a row, a majority of filers who used Obamacare tax
credits are finding they owe the government money, according to H&R Block
Most people who got tax credits to buy insurance
under the federal health law will be repaying part of them for the second
year in a row, according to a leading tax preparer.
H&R Block Inc. executives said Tuesday that, to
date, 60% of 2015 tax filers with the credit have found that they owe the
government money because they had been credited too much. That is up from
52% last year, the first year in which filers had to reckon with reporting
the credit and figuring out if their income projections had been accurate.
On average, tax filers were repaying almost $580
each for excessive credits, up from $530 for overpayments during the 2014
filing year.
The Kansas City, Mo., tax-preparation firm based
the calculation on about 10.6 million returns filed to date. There is still
more than a month to go in the filing season. Last year, the share of people
with repayments didn’t decrease over time.
The 2010 health law has a complicated formula for
determining how much financial help low- and middle-income Americans get to
help pay premiums to buy insurance on their own if they don’t get it through
a job or government program such as Medicare.
The exact tax credit is based on a household’s
income for the year as well as the local cost of coverage and the age of the
people insured. Because people can opt to get the credit upfront and
directly applied as a subsidy to their premiums, millions of households have
been wrestling with the new task of predicting their income for the year
ahead. These filers risk receiving lower-than-anticipated refunds if more
money was paid to insurance companies on their behalf than they were
eligible for.
Some consumer groups, aware that people felt stung
by repayments, hope the rate of repayment will drop over time as people
become more used to the system.
Mark Ciaramitaro, vice president of H&R Block taxes
and health-care services, said the current finding suggested there was still
a steep learning curve for tax filers. Mr. Ciaramitaro said he was surprised
that it had grown rather than lessened.
Among the most common situations involved people
who had focused on their main source of income in their projections and
missed other kinds, Mr. Ciaramitaro said. Also affected were people whose
income increased unexpectedly in the year but who didn’t update their
information with HealthCare.gov or a state equivalent, he said. The health
law actually uses a particular kind of income calculation, known as modified
adjusted gross income, that can trip up many.
The finding also showed that, in some cases, people
may have acted in their own interests by erring on the side of getting
needed financial help upfront and repaying it when they were better
positioned to do so, Mr. Ciaramitaro said.
Most people who get too much credit only have to
pay the excess. But people very close to the cutoff to qualify for tax
credits at all—which is four times the federal poverty level, or around
$63,000 for a household of two—are at particular risk from the impact from
unexpected income. If those people go over the line, they lose the whole
credit.
There are few options to rectify that after the
year is up, but a contribution to a traditional IRA account was one choice
still available to people, Mr. Ciaramitaro said.
Continued in article
Teaching Case from The Wall
Street Journal on March 18, 2016
SUMMARY: Despite
continuing efforts by federal agencies, improper payments remain a
government-wide issue. Federal CFOs can help strengthen their agency's
strategies to prevent improper payments by taking three steps: establish a
holistic improper payments risk management framework using fraud risks
assessment techniques, employ continuous monitoring using data analytics,
and deploy root cause analysis techniques to identify and implement
corrective action plans. This article explains all three strategies.
CLASSROOM
APPLICATION: This
article is useful for a governmental accounting class, as well as for use
when covering internal controls in any class.
QUESTIONS:
1. (Introductory) What is a CFO? To whom is the author referring as a
federal CFO?
2. (Advanced) What are internal controls? How are they used? Why are
they important?
3. (Advanced) Please give three general examples of internal controls
that could apply to any business. What are the benefits of each of those
types of internal controls? What issues or problems do they limit?
4. (Advanced) What is an improper payment as the term is used in this
article? Why are improper payments a concern for the federal government?
What are the estimates of losses?
5. (Advanced) What are risk management assessment techniques? How can
they help reduce or eliminate improper payments?
6. (Advanced) What is data analytics? How can it be used to prevent
or detect improper payments?
7. (Advanced) What is root cause analysis? How is it used to remedy
the problem of improper payments?
Reviewed By: Linda Christiansen, Indiana University Southeast
Despite continuing efforts
by federal agencies, improper payments remain a government-wide issue.
Federal CFOs can help strengthen their agency’s strategies to prevent
improper payments by taking three steps: establish a holistic improper
payments risk management framework using fraud risks assessment techniques,
employ continuous monitoring using data analytics, and deploy root cause
analysis techniques to identify and implement corrective action plans.
The federal government
estimates improper payments, attributable to 124 programs across 22 agencies
in fiscal year (FY) 2014, of $124.7 billion, up from $105.8 billion in FY
2013.¹ The latest of several congressional legislations to impose more
stringent improper payments requirements to mitigate the risk of improper
payments, the Digital Accountability and Transparency Act of 2014 (Data
Act), once implemented, will increase agency data transparency and
monitoring requirements and provides more resources to monitor and review
funding under improper payments programs. While preparing for compliance
guidance for implementing the Data Act, CFOs can take steps now to address
improper payments, fraud, waste and abuse.
Recently, the Government
Accounting Office (GAO) presented to the Congressional Oversight Committee
on the progress that CFOs of federal agencies have made in combating
improper payments and fraud, waste and abuse.² The GAO report highlights
significant areas of improper payments. For example, the report provided
noncompliance with criteria in IPERA strategies for using preventive and
detective controls, potentially unreliable or understated estimates,
programs that do not report on improper payments, improper payments
resulting from fraud and root causes of the improper payments.
A review of the report and
an assessment of the improper payments’ results across agencies suggests
that federal CFOs can help strengthen their agencies’ strategies to mitigate
the risks of improper payments by taking the following three actions:
1. Implement a holistic
framework for managing fraud risks by using risk management assessment
techniques. Agencies will benefit from taking an all-inclusive approach
to fraud detection, leveraging an enterprise view of the people,
processes, technology, data and analytic techniques necessary to adopt a
proactive stance against fraud, waste and abuse. CFOs should commit to a
framework that continuously mitigates the risk and likelihood of fraud
by monitoring and adapting to the environment. The GAO has established
the GAO Fraud Risk Management Framework,³ which incorporates a set of
leading practices for CFOs to identify and mitigate fraud risks. The GAO
framework provides agency leadership with guidance on how to effectively
employ risk management activities through the following steps:
—Commit. Leadership is
key in demonstrating integrity and setting the tone to create a fraud
detection culture rooted in the organization. When senior leadership
commits to the prevention, detection and response to fraud, it creates a
culture dedicated to managing and combatting risks facing the agency
from the top-down. It is not enough to rely solely on an initial
commitment to develop the framework— the constant presence of a CFO’s
commitment is integral to the continued success of the programs.
Engaging each individual at all levels of an agency reinforces the
culture throughout and increases the likelihood that fraud can be
prevented.
—Assess. CFOs
should consult with internal and external stakeholders, such as
general counsel or contractors, who may be able to provide
additional insight into potential fraud risks threatening the
program. No two programs will be alike in the inherent risks
threatening an agency; therefore, each risk assessment must be
tailored based on the program. To assess and understand the fraud
risks, the following actions can be considered:
Identify inherent
fraud risks affecting the program
Assess likelihood
and impact of inherent fraud risks
Determine risk
tolerance
Examine the
suitability of existing fraud controls and prioritize residual fraud
risk
Document the
program’s fraud risk
—Design and
Implement. After fraud risks are identified, a strategy is designed
to mitigate these risks with the focus again placed on the
prevention of the assessed risk. A fraud response plan can also be
developed which may include accepting, reducing, sharing or avoiding
the risk. Evaluate control activities, and review costs and benefits
to determine a balance between successfully executing the goals of
the agency and effectively managing this risk. It is important that
CFOs identify the amount of risk they are willing to accept when
evaluating the controls to be implemented. Effective implementation
relies on the involvement and collaboration of those involved at all
levels.
—Evaluate and
Adapt. The creation and implementation of a strategy relying on
control activities designed to combat fraud risks, and the
commitment to understand, monitor, analyze and adapt to the
ever-changing threat environment, both internally and externally,
may allow an agency to take steps to mitigate the likelihood of
fraud occurring. CFOs must understand, however, that risk cannot be
completely eliminated, and controls must be evaluated to achieve an
equilibrium of effective use of resources to prevent, deter and
respond to fraud while achieving the agency’s goals and missions.
2. Continuous
monitoring using data analytics with current data systems and using the
Do Not Pay portal. Agencies will benefit from implementing an integrated
continuous monitoring platform containing a cross-section of
capabilities to provide an effective vehicle for improper payment
mitigation both now and into the future.
Strategic deployment of
data analytics can be used to identify improper payments, providing
operational insight into the agency as a whole as well as the
decentralized field offices, and assist in identifying risks that may
not currently be on the radar. Data analysis is the key to helping
agencies become risk intelligent in managing the decision-making process
for both up and downstream. An effective continuous monitoring platform
can include:
—Real-Time Detection.
In the case of improper payments, an effective strategy involves
deploying a technical infrastructure designed to prevent disbursement of
these funds. Continuous monitoring technology provides the capability to
analyze payment data in near-real time and queue up potential problems
for review before disbursement. By doing so, organizations can move from
“pay and chase” to “protect and prevent” and provide the technological
capability to accelerate follow-up reviews.
Continued in article
Teaching Case from The Wall
Street Journal on March 18, 2016
SUMMARY: Donald
Trump might have millions of dollars in federal tax deductions as a result
of promising to limit development on some of his properties. He donated
development rights for some of his most valuable properties to conservation
groups and local governments, giving himself the ability to claim federal
tax deductions. The easement tax break is a valuable tool for protecting
open spaces and habitats that has bipartisan support in Congress. In 2012,
1,114 taxpayers donated a total of $972 million in conservation easements.
To get a tax break, the taxpayer would need an appraisal before and after
the easement. He or she could then deduct the difference from his federal
income taxes.
CLASSROOM
APPLICATION: This
article offers detailed examples of charitable deductions from donations of
conservation easements for use in an individual tax class.
QUESTIONS:
1. (Introductory) What is a conservation easement? Please give some
examples provided in the article, and also some examples not mentioned in
the article.
2. (Advanced) Why do conservation easements qualify as charitable
contributions for tax purposes?
3. (Advanced) How are conservation easements valued for tax purposes?
What must the taxpayer show to be eligible for the deduction?
4. (Advanced) Why is a taxpayer able to take a charitable tax
deduction if he or she continues to own and enjoy the property?
Reviewed By: Linda Christiansen, Indiana University Southeast
Donald Trump might be scoring millions of dollars
in federal tax breaks by promising to limit development on some of his
properties.
The self-described “ardent philanthropist” donated
development rights for some of his most valuable properties to conservation
groups and local governments, protecting songbirds and big brown bats, and
giving himself the ability to claim federal tax deductions, according to
land records in four states.
Last year, the front-runner for the Republican
presidential nomination pledged not to build on 74% of his Westchester
County, N.Y., estate, and in 2014, he promised not to construct houses on a
driving range in California, according to the records. He previously donated
so-called conservation easements on his Mar-a-Lago Club in Palm Beach, Fla.,
and his Bedminster, N.J., golf course. The land restrictions are legally
binding and permanent.
Mr. Trump’s campaign in a news release described
him last year as a “major contributor” to charities, citing donations of
“valuable parcels of land throughout the country.” The campaign said he had
donated $102 million over five years, far exceeding reported gifts to his
foundation.
The campaign hasn’t provided a detailed list of
donations and didn’t respond to requests for comment.
Because Mr. Trump has so far declined to release
his tax returns, citing continuing audits, it is impossible to tell what he
deducted, how he valued the donations and whether the Internal Revenue
Service challenged him. The 2015 easement would appear on tax returns for
that year. Federal law prohibits the IRS from discussing individual
taxpayers’ returns.
Each easement includes specific prohibitions on
what Mr. Trump can do with the property, and each gives him certain rights,
such as the ability to run a golf course or a private club. At his
Westchester estate, for example, Mr. Trump can install solar panels or wind
turbines, build picnic shelters and fire pits and “construct a reasonable
number of wildlife hunting or observation stands” under the supervision of a
land trust. But he can’t erect any significant building, introduce
non-native plants or excavate.
To get a tax break, Mr. Trump would need an
appraisal before and after the easement. He could then deduct the difference
from his federal income taxes.
Continued in article
Teaching Case from The Wall
Street Journal on March 18, 2016
TOPICS: Financial
Accounting, International Business, Managerial Accounting, Restructuring
SUMMARY: Colgate-Palmolive
Co. said it would look to cut more jobs as part of a restructuring program
that was originally slated to end this year but has been extended through
2017. In a regulatory filing, the company said, as result of the expansion
of the 2012 restructuring plan, the company expected to register charges of
$1.41 billion to $1.59 billion, up from previous estimates of $1.29 billion
to $1.44 billion. Colgate-Palmolive said that the program would focus on
expanding commercial hubs and cutting structural costs. Many
consumer-product companies that do a large amount of business abroad have
blamed the stronger U.S. dollar for lackluster results, as it makes their
products more expensive abroad and diminishes revenue once repatriated. For
Colgate, roughly 80% of revenue is generated abroad.
CLASSROOM
APPLICATION: This
article can be used to show how a restructuring can impact various parts of
a business, as well as affect its accounting and its financial statements.
QUESTIONS:
1. (Advanced) What is a restructuring? Why do companies elect to
restructure?
2. (Introductory) What are the facts of Colgate's restructuring? What
areas of the business are involved? What are some reasons for the
restructure? What does the company hope to achieve with its restructuring?
3. (Advanced) What cost saving measures is the company planning? How
will they help the company? How will those changes affect the financial
statements?
4. (Advanced) What are restructuring charges? What amount of charges
is Colgate expected to report? How are restructuring charges reported on the
financial statements? Which statements are affected?
5. (Advanced) Colgate's business is worldwide. How much of the
company's business occurs outside of the U.S.? How does that affect the
company's financial statements? How does it affect management's strategies?
6. (Advanced) How do exchange rates affect financial statements? How
are exchange rate adjustments and changes reported?
Reviewed By: Linda Christiansen, Indiana University Southeast
Colgate-Palmolive Co. said Thursday it would look
to cut more jobs as part of a restructuring program that was originally
slated to end this year but has been extended through 2017.
The consumer-product company said that a total net
head-count reduction would fall within the range of 3,300 to 3,800
jobs—above the roughly 2,300 jobs the company had originally said it would
cut when it outlined the program in 2012.
The company’s board approved the expanded plan on
Thursday.
In a regulatory filing Thursday, the company said,
as result of the expansion of the 2012 restructuring plan, the company
expected to register charges of $1.41 billion to $1.59 billion, up from
previous estimates of $1.29 billion to $1.44 billion.
Colgate-Palmolive said that the program would focus
on expanding commercial hubs and cutting structural costs.
Many consumer-product companies that do a large
amount of business abroad have blamed the stronger U.S. dollar for
lackluster results, as it makes their products more expensive abroad and
diminishes revenue once repatriated. For Colgate, roughly 80% of revenue is
generated abroad.
Continued in article
Teaching Case: "The Lehman
Brothers Bankruptcy D: The Role of Ernst & Young"
From the CFO Journal's
Morning Ledger on March 22, 2016
Former Lehman CFO tells her side of the firm’s collapse
Erin Montella’s new memoir offers a unique perspective
on the events that led to the financial crisis. “Full Circle,” which was
released Sunday
on Amazon.com, tells the story of how Ms. Montella rose to become the
highest-ranking woman on Wall Street in 2008, only to resign from the firm
six months after being named CFO. She accepted the position only after
becoming convinced she could make the role more important, “something close
to the CEO heir apparent.”
"The Lehman
Brothers Bankruptcy D: The Role of Ernst & Young"
Authors
Rosalind Z.
Wiggins Yale University - Yale Program on Financial
Stability
Rosalind L. Bennett FDIC, Division of Insurance and
Research
Andrew Metrick Yale School of Management ; National
Bureau of Economic Research (NBER)
Abstract:
For many years prior to its demise, Lehman Brothers
employed Ernst & Young (EY) as the firm’s
independent auditors to review its financial
statements and express an opinion as to whether they
fairly represented the company’s financial position.
EY was supposed to try to detect fraud, determine
whether a matter should be publicly disclosed, and
communicate certain issues to Lehman’s Board audit
committee. After Lehman filed for bankruptcy, it was
discovered that the firm had employed questionable
accounting with regard to an unorthodox financing
transaction, Repo 105, which it used to make its
results appear better than they were. EY was aware
of Lehman’s use of Repo 105, and its failure to
disclose its use. EY also knew that Lehman included
in its liquidity pool assets that were impaired.
When questioned, EY insisted that it had done
nothing wrong. However, Anton R. Valukas, the Lehman
bankruptcy examiner, concluded that EY had not
fulfilled its duties and that probable claims
existed against EY for malpractice. In this case,
participants will consider the role and
effectiveness of independent auditors in ensuring
complete and accurate financial statements and
related public disclosure.
JPMorgan Chase & Co (JPM.N) will pay $1.42 billion
in cash to resolve most of a lawsuit accusing it of draining Lehman Brothers
Holdings Inc of critical liquidity in the final days before that investment
bank's September 2008 collapse.
The settlement was made public on Monday, and
requires approval by U.S. Bankruptcy Judge Shelley Chapman in Manhattan.
It resolves the bulk of an $8.6 billion lawsuit
accusing JPMorgan of exploiting its leverage as Lehman's main "clearing"
bank to siphon billions of dollars of collateral just before Lehman went
bankrupt on Sept. 15, 2008, triggering a global financial crisis.
Lehman's creditors charged that JPMorgan did not
need the collateral and extracted a windfall at their expense.
Monday's settlement also resolves Lehman's
challenges to JPMorgan's decision to close out thousands of derivatives
trades following the bankruptcy, court papers showed.
The accord would permit a further $1.496 billion to
be distributed to the creditors, including a separate $76 million deposit,
court papers showed.
Goldman Sachs Group Inc. agreed to the largest
regulatory penalty in its history, resolving U.S. and state claims stemming
from the Wall Street firm’s sale of mortgage bonds heading into the
financial crisis.
In settling with the Justice Department and a
collection of other state and federal entities for more than $5 billion,
Goldman will join a list of other big banks in moving past one of the
biggest, and most costly, legal headaches of the crisis era.
Goldman said litigation legal expenses stemming
from the accord would trim its fourth-quarter earnings by about $1.5
billion, after taxes. The firm is scheduled to report results Wednesday.
“We are pleased to have reached an agreement in
principle to resolve these matters,” Lloyd Blankfein, Goldman’s chief
executive, said in a statement.
Government officials previously won
multibillion-dollar settlements from J.P. Morgan Chase & Co., Bank of
America Corp. and Citigroup Inc. The probes examined how Wall Street sold
bonds tied to residential mortgages, and whether banks deceived investors by
misrepresenting the quality of underlying loans.
The government’s inquiry into Goldman related to
mortgage-backed securities the firm packaged and sold between 2005 and 2007,
the years when the housing market was soaring and investor demand for
related bonds was still strong.
I begin my remarks by echoing others and commending the work of the team
that has been working on this rule, including Rolaine Bancroft, Hughes
Bates, Michelle Stasny, Kayla Florio, Heather Mackintosh, Silvia Pilkerton,
Robert Errett, Max Rumyantsev, and Kathy Hsu.
Heather and Sylvia have been working on the data tagging and preparing EDGAR
to accept this new data. This is no small endeavor.
I want to give a special thank you to Paula Dubberly, who retired last year
from the SEC and is in the audience today. She has been a champion for
investors through her leadership on asset-backed securities regulation from
the development of the initial Reg AB proposal through the rules that are
being considered today.
This rule is an important step forward in completing the mandated Dodd-Frank
Act rulemakings.[1]
The financial crisis revealed investors’ inability to actually assess pools
of loans that had been sliced and diced, sometimes multiple times, by being
securitized, re-securitized, or combined in a dizzying array of complex
financial instruments. The securitization market was at the center of the
financial crisis. While securitization structures provided liquidity to
nearly every sector in the U.S. economy, they also exposed investors to
significant and non-transparent risks due to poor lending practices and poor
disclosure practices.
As we now know, offering documents failed to provide timely and complete
information for investors to assess the underlying risks of the pool of
assets.[2]
Without sufficient and accurate loan level details, analysts and investors
could not gauge the quality of the loans – and without an ability to
distinguish the good from the bad, the secondary market collapsed.
Congress responded and required the Commission to promulgate rules to
address a number of weaknesses in the securitization process.[3]
Six years after the financial crisis, the securitization markets continue to
recover. While certain asset classes have rebounded, others continue to
struggle.
The rule the Commission issues today partially addresses the Congressional
mandate. In effect, today’s rules provide investors with better information
on what is inside the securitization package. The rules today do for
investors what food and drug labeling does for consumers – provide a list of
ingredients.
This rule also addresses certain critical flaws that became apparent in the
securitization process, including a dearth of quality information and
insufficient time to make informed assessments of the underlying
investments. This rule is an important step toward providing investors with
tools and data to better understand the underlying risks and appropriately
price the securities.
There are several important and laudable aspects of today’s rule that merit
specific mentioning.
First, the rule requires the underlying loan information to be standardized
and available in a tagged XML format to ensure maximum utility in analysis.[4]
As noted in the Commission’s 2010 Proxy Plumbing Release: “If issuers
provided reportable items in interactive data format, shareholders may be
able to more easily obtain information about issuers, compare information
across different issuers, and observe how issuer-specific information
changes over time as the same issuer continues to file in an interactive
format.”[5]
The same is true for underlying loan information. Investors can unlock the
value and efficiency that standardized, machine readable data allows.
Today’s rule also improves disclosures regarding the initial offering of
securities and significantly, for the first time, requires periodic updating
regarding the loans as they perform over time. This information will
provide a more nuanced and evolving picture of the underlying assets in a
portfolio to investors.
The rule also requires that the principal executive officer of the ABS
issuer certify that the information in the prospectus or report is
accurate. These kinds of certifications provide a key control to help
ensure more oversight and accountability.
As for the privacy concerns that prompted a re-proposal, the staff has
worked hard to balance investor needs for loan level data with concerns that
the data could lead to identification of individual borrowers. I believe
the rule achieves a workable balance between these two competing needs,
while still providing invaluable public disclosure.
Finally, I believe that the new disclosure rule will provide investors with
the necessary tools to see what is “under the hood” on auto loan
securitizations. In its latest report on consumer debt and credit, the
Federal Reserve Bank of New York noted a recent spike in subprime auto
lending. As the report shows, although consumer auto debt balances have
risen across the board, the real growth has been in riskier loans.[6]
The disclosure and reporting changes that the Commission is adopting today
will help investors see the quality of the loans in a portfolio and the
performance of those loans over time.
While today’s rules are an important step forward, more work needs to be
done regarding conflicts of interest. We now know that many firms who were
structuring securitizations before the financial crisis were also betting
against those same securitizations.
In April 2010, the Commission charged the U.S broker-dealer of a large
financial services firm for its role in failing to disclose that it allowed
a client to select assets for an investment portfolio while betting that the
portfolio would ultimately lose its value. Investors in the portfolio lost
more than $1 billion.[7]
In October 2011, the Commission sued the U.S broker-dealer of a large
financial services firm for among other things, selling investment products
tied to the housing market and then, for their own trading, betting that
those assets would lose money. In effect, the firm bet against the very
investors it had solicited. An experienced collateral manager commented
internally that a particular portfolio was “horrible.” While investors lost
virtually all of their investments in the portfolio, the firm pocketed over
$160 million from bets it made against the securitization it created.[8]
The Dodd-Frank Act directed the Commission to adopt rules prohibiting
placement agents, underwriters, and sponsors from engaging in a material
conflict of interest for one year following the closing of a securitization
transaction. Those rules were required to be issued by April 2011.[9]
The Commission initially proposed these rules in September 2011, and still
has not completed them.[10]
We need to complete these rules as soon as possible, hopefully, by the end
of this year. These rules will provide investors with additional confidence
that they are not being hoodwinked by those packaging and selling those
financial instruments.
Unfortunately, the Commission has put on hold its work to provide investors
with a software engine to aid in the calculation of waterfall models.
Although the final rule provides for a preliminary prospectus at least three
business days before the first sale, this is reduced from the proposal,
which provided for a five-day period. With only three days to conduct due
diligence and make an investment determination, such a software engine could
be an important and much needed tool for investors to use in analyzing the
flow of funds. Such waterfall models can help investors assess the cash
flows from the loan level data. We should return to this important
initiative to provide investors with the mathematical logic that forms the
basis for the narrative disclosure within the prospectus.
SUMMARY: The
SEC fined California's largest agricultural water district $125,000 to
settle civil charges that it misled investors over its ability to pay debt
on a $77 million bond. It is only the second time the SEC has fined a
municipal bond issuer and represents the largest fine paid by an issuer. The
Westlands Water District, which serves central California, overstated its
ability to make payments on a 2012 bond offering as the drought reduced
water supply and depressed revenue. The district assured investors it could
still generate revenue equal to 125% of its debt-service payments, known as
a debt coverage ratio, despite a water shortfall. Investors use those
assurances to make decisions about purchasing bonds. Failing to meet a debt
covenant could put an issuer in technical default and drive up the cost of
borrowing.
CLASSROOM
APPLICATION: This
is a good article for use when covering governmental accounting or financial
statement analysis, as well as for fraud.
QUESTIONS:
1. (Introductory) What are the facts of this case? Who is involved?
What was the result of the investigation?
2. (Advanced) What is a debt coverage ratio? How is it calculated?
What does it communicate?
3. (Advanced) What is a debt covenant? Why are debt covenants
included in lending agreements? What happens if a business violates a debt
covenant? What do debt covenants have to do with accounting or financial
statement analysis? Why are debt covenants important to investors? Why is it
important for companies to monitor financial results related to debt
covenants?
4. (Advanced) The article quotes one official regarding engaging in
"a little Enron accounting." What does that mean? Why did the water district
officials engage in this activity?
5. (Advanced) The article states the district and its officials
agreed to the settlements without admitting or denying wrongdoing. What does
that mean? Why would each of the parties agree to this settlement and also
agree to no admission or denial of wrongdoing?
Reviewed By: Linda Christiansen, Indiana University Southeast
LOS ANGELES—California’s sustained drought has set
another record, this time with the U.S. Securities and Exchange Commission.
The SEC on Wednesday fined California’s largest
agricultural water district $125,000 to settle civil charges that it misled
investors over its ability to pay debt on a $77 million bond. It is only the
second time the SEC has fined a municipal bond issuer and represents the
largest fine paid by an issuer.
According to SEC documents, the Westlands Water
District, which serves central California, overstated its ability to make
payments on a 2012 bond offering as the drought reduced water supply and
depressed revenue.
Long-Parched California Set to Get a Drenching
(March 6, 2016) California Faces Lost Decades in Solving Drought (Dec. 24,
2015) California’s Growers Bear Brunt of Drought Woes(Oct. 25, 2015) .
During a 2010 board meeting discussing transactions meant to boost the
district’s revenue numbers to show investors it could meet its debt
obligations, General Manager Thomas Birmingham joked that district officials
were engaging in “a little Enron accounting,” according to SEC documents.
Mr. Birmingham has agreed to pay a $50,000 penalty,
and former Assistant General Manager Louie David Ciapponi has agreed to pay
$20,000, the SEC said.
The district and its officials agreed to the
settlements without admitting or denying wrongdoing, according to the
district and the SEC.
“Westlands, [Messrs.] Birmingham and Ciapponi
determined that entering into the settlement to fully resolve the matter was
in the District’s best interest,” according to a statement from the
district.
The SEC didn’t allege the district or officials
“intended to mislead potential purchasers” of the 2012 bond, the district
statement said.
California has endured a drought that has pummeled
the state and prompted Gov. Jerry Brown to mandate a 25% cut in water use in
urban areas.
The Westlands Water District supplies water to more
than 700 family-owned farms in western Fresno and Kings counties that
produce $1 billion in crops each year, according to the district.
The district pulls water from the Sacramento-San
Joaquin Delta and the San Luis Reservoir. According to the district’s
website, the total water available “is about 13% short” of what’s needed to
“to water the entire irrigable area” in the district.
The district assured investors it could still
generate revenue equal to 125% of its debt-service payments, known as a debt
coverage ratio. Investors use those assurances to make decisions about
purchasing bonds. Failing to meet a debt covenant could put an issuer in
technical default and drive up the cost of borrowing.
SEC investigators said Westlands “failed to
disclose it had engaged in extraordinary accounting transactions” in 2010 to
meet its debt coverage ratio without raising rates on customers.
Continued in article
Teaching Case from The Wall
Street Journal on March 18, 2016
SUMMARY: The
Public Company Accounting Oversight Board, a little-known body that polices
the biggest U.S. accounting firms, won begrudging approval of its $257
million budget. The SEC under SEC Chairman Mary Jo White has taken a more
critical view of the PCAOB, which was founded 14 years ago after accounting
scandals at Enron Corp. and WorldCom Inc. dented investor confidence in the
auditing profession. Jim Schnurr, the SEC's chief accountant, said in
December 2014 that too many of the PCAOB's rule-making priorities "simply
have been moving too slowly." The total amount of fees charged to industry
will rise 12% this year from 2015 levels. Public companies with a market
value greater than $75 million pay the fee. The levy varies based on a
company's market capitalization, with about 30 firms paying more than $1
million in 2014.
CLASSROOM
APPLICATION: This
article offers information regarding how the PCAOB is funded and its
relationship to the SEC.
QUESTIONS:
1. (Introductory) What is the PCAOB? What is its purpose? When was it
created and why?
2. (Introductory) What is the SEC? How is it related to the PCAOB?
3. (Advanced) How is the PCAOB funded? Why was this funding model
established? Should it be funded differently? Please offer reasons to
support your answer.
4. (Advanced) What complaints does the SEC have about the PCAOB? What
can the PCAOB do to address these complaints? Are the SEC's views
reasonable? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
WASHINGTON—The U.S. watchdog of public-company
auditors is itself increasingly under the microscope.
The Public Company Accounting Oversight Board, a
little-known body that polices the biggest U.S. accounting firms, won
begrudging approval Monday of its $257 million budget. Two members of the
Securities and Exchange Commission, which oversees the PCAOB, voiced
persistent concerns about spending at an agency that pays each of its five
board members more than $540,000 a year.
“I encourage the board to take a hard look at
funding and expenses in the coming year, including with respect to
compensation, and identify possible savings and efficiencies,” SEC Chairman
Mary Jo White said at meeting where commissioners voted 2-1 to authorize the
PCAOB’s funding.
Board members at the PCAOB are paid more than Ms.
White, who receives $170,400 a year; Federal Reserve Chairwoman Janet Yellen,
who gets $199,700; or even President Barack Obama, whose salary is $400,000.
The SEC under Ms. White has taken a more critical
view of the PCAOB, which was founded 14 years ago after accounting scandals
at Enron Corp. and WorldCom Inc. dented investor confidence in the auditing
profession. Jim Schnurr, the SEC’s chief accountant, said in December 2014
that too many of the PCAOB’s rule-making priorities “simply have been moving
too slowly.”
In response, the PCAOB hired an outside consultant
to help speed up its standard-setting agenda, an effort Ms. White applauded
on Monday. But she and Commissioner Michael Piwowar, a Republican who voted
against the budget, both expressed concern about the level of fees charged
to public companies and brokerage firms that pay for the board’s operations.
“The five-year projections for further spending
represent a mountain of escalating costs,” Mr. Piwowar said at the meeting.
“A more modest budget should have been presented for 2016.”
The total amount of fees charged to industry will
rise 12% this year from 2015 levels, Ms. White said Monday. Public companies
with a market value greater than $75 million pay the fee. The levy varies
based on a company’s market capitalization, with about 30 firms paying more
than $1 million in 2014, according to the PCAOB’s most recent annual report.
This year’s spending growth was mostly driven by
the need to hire more inspectors to keep tabs on brokerage-firm auditors,
said PCAOB Chairman James Doty. “We have a very rigorous budget-review
process,” he told reporters after the meeting.
Continued in article
Teaching Case from The Wall
Street Journal on March 25, 2016
SUMMARY: Assigning
a value to a physical asset like a store or equipment is relatively easy.
But, in the murky world of intangible assets, the calculations are squishy.
Under current accounting rules, U.S. companies don't record those items on
their books as assets. These days, companies put far more money into
nonphysical assets, such as customer databases, than they do in building new
factories. The absence of abstractions like brand value on corporate balance
sheets prevents investors from properly gauging their risks. Altogether,
companies in the U.S. could have more than $8 trillion in intangible assets.
CLASSROOM
APPLICATION: This
is an excellent discussion regarding how intangible assets appear on the
financial statements. It also discusses the increase of intangible asset
values in many industries.
QUESTIONS:
1. (Introductory) What are intangible assets? How do they differ from
other types of assets?
2. (Advanced) How do current accounting rules treat intangible
assets? How are they valued? In what situations do intangible assets appear
in the financial statements? When they do appear on the financial
statements, how are they presented?
3. (Advanced) How has intangible asset ownership changed for many
companies and industries in recent years? Have these trends and changes been
properly reflected on the financial statements of those companies? Why or
why not?
4. (Advanced) What is FASB? What is FASB's area of authority? What is
FASB considering regarding accounting for intangible assets?
5. (Advanced) How likely is it that accounting rules for intangible
assets will change in the near future? Should the rules change? Why or why
not?
Reviewed By: Linda Christiansen, Indiana University Southeast
Issue
takes on growing significance as companies rely more on holdings like
brands, data and algorithms.
When RadioShack Corp. filed for bankruptcy
protection last year, it raised more than $170 million by selling such
holdings as real estate, leases and inventories of smartphones, computer
cables and cameras.
But the retailer’s books didn’t acknowledge two of
its most valuable assets: its brand and its customer data.
How do you attach a price tag to something you
can’t see or touch?
The question is increasingly significant for
investors as more companies collect information about their customers and
use it to develop products and services. Some companies rely on the hipness
of their brands to propel sales.
Assigning a value to a physical asset like a store
or equipment is relatively easy. But, in the murky world of intangible
assets, the calculations are squishy. The problem of how to value such
assets has vexed accountants for decades.
Under current accounting rules, U.S. companies
don’t record those items on their books as assets. “It’s 19th-century
accounting,” said Baruch Lev, an accounting and finance professor at New
York University’s Stern School of Business.
The absence of abstractions like brand value on
corporate balance sheets prevents investors from properly gauging their
risks, said Mr. Lev. “It’s an incredibly important issue,” he said.
“Investment in intangibles is almost completely obscured from investors.”
Altogether, companies in the U.S. could have more
than $8 trillion in intangible assets, according to Leonard Nakamura, an
economist at the Federal Reserve Bank of Philadelphia. That’s nearly half of
the combined $17.9 trillion market capitalization of the S&P 500 index.
These days, companies put far more money into
nonphysical assets, such as customer databases, than they do in building new
factories. Companies invested the equivalent of 14% of the private sector’s
gross domestic product in intangibles in 2014, according to research by
economist Carol Corrado. The investment in physical assets was about 10% of
that sum. That’s essentially the reverse of 40 years ago, when 13% of
private-sector GDP went to tangibles and 9% to intangible assets.
Last month a small group of researchers at the
nation’s accounting standards-setter began grappling with the idea of
updating its rules to recognize the growing importance of intangibles. The
effort is still in its early stages, but the Financial Accounting Standards
Board is considering adding the topic to its rule-making agenda. That could
lead to a new rule requiring companies to bring those assets onto their
books.
Continued in article
Teaching Case from The Wall
Street Journal on March 25, 2016
SUMMARY: The
American Gaming Association estimates that more than 70 million Americans
will wager $9.2 billion this year on the NCAA men's basketball tournament
through office pools, Nevada sports books, illicit offshore sites and
bookies, compared with $9 billion last year. All gambling winnings are
taxable, whether or not the game was legal. Meanwhile, gambling losses are
deductible-but only with restrictions. Typically taxpayers can claim losses
only up to the amount of their winnings, and taking losses can require
elaborate record keeping. In 2013, the most recent year for which IRS data
are available, taxpayers claimed about $30 billion of gambling income and
deducted about $17 billion in losses on nearly two million individual tax
returns. Total 2013 earnings were 50% higher than a decade earlier, and the
total number of gamblers was nearly 25% higher.
CLASSROOM
APPLICATION: This
article is appropriate to use when discussing gambling winnings and losses
in an individual taxation class.
QUESTIONS:
1. (Introductory) How are gambling winnings treated for tax purposes?
What portion, if any, is taxable?
2. (Advanced) On what parts of the individual tax return can gambling
winnings and losses appear? Why can they appear on more than one tax form?
What fact situations are appropriate for each of the possible locations?
3. (Advanced) How can gambling be a business for tax purposes? What
are the requirements and limitations?
4. (Advanced) Is income from illegal gambling taxable? Are losses
from illegal gambling deductible? Why or why not?
5. (Advanced) How does a taxpayer prove gambling winnings? How does a
taxpayer prove gambling losses?
6. (Advanced) In general, how is forgiveness of debt treated for tax
purposes? Is the treatment different if it is a result of a gambling debt?
Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
All
gambling winnings are taxable, while gambling losses are deductible—but with
restrictions
Meanwhile, gambling losses are deductible—but only
with restrictions. Typically taxpayers can claim losses only up to the
amount of their winnings, and taking losses can require elaborate record
keeping.
As March Madness gets under way, millions of people
are grappling with critical questions: Can you trust Oregon? Which no. 5
seed will go down this year? Is a busted bracket tax-deductible?
The American Gaming Association estimates that more
than 70 million Americans will wager $9.2 billion this year on the NCAA
men’s basketball tournament through office pools, Nevada sports books,
illicit offshore sites and bookies, compared with $9 billion last year.
Naturally, Uncle Sam wants his cut, and the tax
code’s rules for gamblers have a whiff of “heads I win, tails you lose.”
To begin with, all gambling winnings are taxable,
whether or not the game was legal.
Meanwhile, gambling losses are deductible—but only
with restrictions. Typically taxpayers can claim losses only up to the
amount of their winnings, and taking losses can require elaborate record
keeping.
Advertisement
“The burden of proving losses falls on the
taxpayer, while gambling winnings are often reported to the IRS,” says
Donald Zidik, a CPA with the accounting firm Marcum LLP in Needham, Mass.
In 2013, the most recent year for which IRS data
are available, taxpayers claimed about $30 billion of gambling income and
deducted about $17 billion in losses on nearly two million individual tax
returns. Total 2013 earnings were 50% higher than a decade earlier, and the
total number of gamblers was nearly 25% higher.
Here is what to know about gambling income and
deductions.
Was it business or pleasure? Recreational gamblers
report their winnings on Line 21 of the 1040 form, as “other income.” They
can also owe income tax on “comps” such as free lodging and travel.
According to an IRS spokesman, these gamblers can
deduct losses both from legal and illegal games, if they itemize write-offs
on Schedule A (line 28) instead of taking the standard deduction.
The good news is that such losses needn’t exceed 2%
of adjusted gross income to qualify for a write-off. Taxpayers must have
records proving them, however.
The IRS advises gamblers to keep a diary recording
the date and type of wagers, the name and address of the gambling business,
the names of other people present, and the amounts won or lost. “This can
take some of the fun out of it, but it’s necessary if you want deductions,”
says Scott Kaplowitch, a CPA with Edelstein & Company LLP in Boston. For
more information, see IRS Publication 529, Miscellaneous Deductions.
By contrast, professional gamblers claim both their
winnings and losses on Schedule C, because for them it qualifies as a full
or part-time “trade or business.” In such cases, the taxpayer can deduct
other reasonable costs as well, such as for entertainment, travel, meals and
coaching.
The trouble with that option: The IRS often
scrutinizes taxpayers who claim to be professional gamblers, according to
Mr. Kaplowitch. Recently he won an audit on this issue for a client who is a
full-time poker player with a six-figure income, he says.
He adds that gamblers who qualify for Schedule C
can deduct losses only up to the amount of their winnings—but they can carry
over and deduct excess expenses against profits from other years. In
addition, they often must show a profit in three out of five years, or the
IRS may argue that the business is actually a hobby.
Continued in article
Teaching Case from The Wall
Street Journal on March 25, 2016
SUMMARY: Valeant
Pharmaceuticals International Inc. confirmed a possibility it had raised
last month - that it would have to restate past earnings because it had
recognized a chunk of revenue too soon-and explained more about exactly how
that happened. It also suggested it had effectively counted some revenue
twice. The main accounting issue dogging Valeant is how it accounted for
revenue through a mail-order pharmacy, Philidor RX Services, with which it
had close ties. If the ties were as close as they proved to be, revenue
shouldn't have been counted until drugs reached the patient, not when
Valeant delivered the drugs to Philidor.
CLASSROOM
APPLICATION: This
is an excellent example of accounting problems caused by problematic
internal controls, improper revenue recognition, and a negative "tone at the
top."
QUESTIONS:
1. (Introductory) What is the accounting situation at Valeant? What
areas of accounting have been found to be problematic?
2. (Advanced) What is the main accounting issue at Valeant? What are
the details of that problem? What areas of the financial statements are
affected by these problems?
3. (Advanced) What is a restatement? In general, what are some
reasons for a restatement? What is the reason for Valeant's restatement?
4. (Advanced) What are internal controls? What is the purpose of
internal controls? What internal control problems were present at Valeant?
What did those problems cause? What changes must the management make to
strengthen its internal controls?
5. (Advanced) What is tone at the top? Why is it important? What can
it affect? What was the tone at the top at Valeant? How can it be changed?
Reviewed By: Linda Christiansen, Indiana University Southeast
Drug
company recognized a chunk of revenue too soon and may have counted some
twice
Valeant Pharmaceuticals International Inc. provided
more detail Monday about what went wrong with its accounting.
The drug company confirmed a possibility it had
raised last month—that it would have to restate past earnings because it had
recognized a chunk of revenue too soon—and explained more about exactly how
that happened. It also suggested it had effectively counted some revenue
twice.
The main accounting issue dogging Valeant is how it
accounted for revenue through a mail-order pharmacy, Philidor RX Services
LLC, with which it had close ties. If the ties were as close as they proved
to be, revenue shouldn’t have been counted until drugs reached the patient,
not when Valeant delivered the drugs to Philidor, the company acknowledges
and accountants say.
Valeant had said in February it should have waited
to recognize $58 million in revenue through Philidor, which it said it
wrongly booked upon delivery to Philidor rather than dispensation to
customers. Much of that amount should have been booked in 2015 rather than
2014, Valeant said.
The company did switch in December 2014 to waiting
longer, once it had acquired an option to buy Philidor and started
consolidating the pharmacy’s finances as part of its own.
Valeant elaborated Monday that some sales before the option were “not
executed in the normal course of business,” including sales executed at a
time when the company was expecting the option agreement. It should have
waited to book the revenue on those sales until the medications were
dispensed, it said.
“You would expect they would have figured this out
when they first did the consolidation with Philidor,” said Jack Ciesielski,
president of R.G. Associates, an accounting-research firm.
In addition, on some transactions, Valeant said
Monday, it booked revenue before it was sure it could collect it. So for
that reason as well, Valeant said, it should have waited longer to record
it.
Valeant’s explanation of what happened also
suggests it may have double-counted some revenue, accounting experts said.
In a Securities and Exchange Commission filing on Monday, Valeant said the
$58 million in revenue that was booked too soon, in 2014, “does not result
in an increase to revenue in 2015 as a result of the company having
previously also recognized that revenue in 2015.”
As Valeant explains it, when it consolidated
Philidor in December 2014, the pharmacy was still holding inventory for
which Valeant had already recognized the revenue, under the old delivery-to-Philidor
method. After the consolidation, Philidor itself recognized revenue from
that inventory when the products were dispensed to patients, and that
revenue was consolidated into Valeant’s, Valeant said.
Continued in article
Teaching Case from The Wall
Street Journal on March 25, 2016
SUMMARY: The
Securities and Exchange Commission sounded the alarm on companies' reliance
on customized accounting figures, saying regulators are considering whether
to curb some of the freedom firms enjoy to provide adjusted earnings
figures. SEC Chairman Mary Jo White mention of regulation shows how
skeptical regulators have grown about homegrown accounting measures that
don't comply with generally accepted accounting principles, or GAAP. The
SEC's current rules allow companies to report profit figures that don't
comply with GAAP, provided they don't obscure the official numbers and
reconcile the non-GAAP numbers to the equivalent GAAP figure. Profits
usually are higher under a non-GAAP formula because companies back out what
they consider unusual or noncash costs; they claim the resulting measures
are a better way to gauge core operating performance.
CLASSROOM
APPLICATION: This
is an excellent article to use when covering the use of adjusted earnings,
and how it differs from GAAP.
QUESTIONS:
1. (Introductory) What is the SEC? What is its area of authority and
its charge?
2. (Introductory) What is GAAP? Why do companies use GAAP?
3. (Advanced) What did the SEC's chair state regarding U.S.
accounting rules? Is this possibility significant? Why is the SEC concerned
about what companies are doing?
4. (Advanced) What are adjusted earnings? How do they differ from
GAAP? Why do some companies report adjusted earnings?
5. (Advanced) What are the benefits of GAAP reporting? What are the
benefits of non-GAAP reporting? What are the potential problems? Should non-GAAP
accounting be regulated? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
The Securities and Exchange Commission sounded the
alarm on companies’ reliance on customized accounting figures Wednesday,
saying regulators are considering whether to curb some of the freedom firms
enjoy to provide adjusted earnings figures.
“It’s something that we are really looking
at—whether we need to rein that in a bit even by regulation,“ SEC Chairman
Mary Jo White said Wednesday at a conference of finance and business
lobbyists in Washington. ”We have a lot of concern in that space.”
Ms. White’s use of the “R” word—regulation—shows
how skeptical regulators have grown about homegrown accounting measures that
don’t comply with generally accepted accounting principles, or GAAP. The SEC
has historically policed the customized metrics by questioning aggressive
adjustments, often in letters that investors must sift through the SEC’s
electronic filing system to find.
The SEC’s current rules allow companies to report
profit figures that don’t comply with GAAP, provided they don’t obscure the
official numbers and reconcile the non-GAAP numbers to the equivalent GAAP
figure.
Profits usually are higher under a non-GAAP formula
because companies back out what they consider unusual or noncash costs; they
claim the resulting measures are a better way to gauge core operating
performance. Researchers at the University of Washington and the University
of Georgia have reported this tactic can be opportunistic; their 2014 paper
found companies are more likely to report non-GAAP numbers that back out
losses rather than gains.
The SEC is weighing whether new rules are needed to
‘rein in’ use of non-GAAP reporting. ENLARGE The SEC is weighing whether new
rules are needed to ‘rein in’ use of non-GAAP reporting. Photo: Associated
Press . With companies relying more on non-GAAP results, regulators are
ramping up their scrutiny of the practice. For members of the Dow Jones
Industrial Average that reported non-GAAP earnings per share last year, the
adjusted metric was on average 30% above earnings per share under GAAP,
according to data from FactSet.
Ms. White made clear Wednesday that regulators know
how much better earnings look when some costs are backed out of them. “Your
investor relations folks, your CFO, they love the non-GAAP measures because
they tell a better story,” she told the conference sponsored by the U.S.
Chamber of Commerce.
It is unclear how soon the SEC could propose new
rules that would restrict non-GAAP metrics. Ms. White is likely to leave the
commission sometime before the end of the Obama administration, meaning rule
changes likely aren’t imminent.
Regulators also say they don’t want to choke off
non-GAAP reporting because many investors say it can be valuable in some
circumstances.
Regulators could, however, target gaps in their
rules that allow companies to give more prominence to non-GAAP results on
websites and other venues that aren’t covered by the commission’s rules,
according to a person familiar with the matter. Separately, regulators worry
that less-sophisticated investors rely on media reports and other sources
that don’t always distinguish between adjusted numbers and GAAP results.
“A lot of people would say there is gamesmanship
going on here,” said Joseph Carcello, an accounting professor at the
University of Tennessee who sits on the SEC’s Investor Advisory Committee.
“But you have to craft a rule that targets the abuses without killing what
is valuable information.”
The SEC previously has expressed concern about
companies’ non-GAAP metrics. In 2011, regulators raised questions with
Groupon Inc. before the firm went public about its use of a non-GAAP profit
measure that excluded its marketing costs to land new subscribers. Groupon
scaled back its use of the metric in response to the SEC’s concerns. Groupon
couldn’t be reached for comment.
In addition, the SEC has said in comment letters to
dozens of companies in the past few years that they were giving “undue
prominence” to non-GAAP numbers. In the past year, the SEC sent such letters
to companies including Equifax Inc. and T-Mobile US Inc., both of which told
the commission they would revise their future disclosures to address the
issue.
Continued in article
Teaching Case from The Wall
Street Journal on March 25, 2016
SUMMARY: This
article offers information regarding maximizing home-related deductions,
including mortgage interest deduction, the home office deduction, short-term
rentals of a taxpayer's home, energy credits, charitable contributions of
real estate, and the deduction of points related to the refinancing of a
home mortgage.
CLASSROOM
APPLICATION: This
article is appropriate for an individual income tax class.
QUESTIONS:
1. (Introductory) What are the tax rules regarding the mortgage
interest deduction? What are the limits? For what purchases is it
applicable?
2. (Advanced) What is a home-office deduction? What is deductible?
What are the rules for the simplified method? Why was the new method
instituted?
3. (Advanced) How must taxpayers treat short-term rentals of their
home for tax purposes? What exclusions does the tax law allow? How should
taxpayers plan carefully to benefit the most?
4. (Advanced) How are energy credits related to home ownership? What
are the limitations?
5. (Advanced) What is the tax treatment of costs related to
refinancing a mortgage? What can homeowners do to maximize deductions
related to refinancing?
Reviewed By: Linda Christiansen, Indiana University Southeast
Advice from tax advisers to help maximize home-related deductions on your
income-tax return
April 15 is only about a month away, but there’s
still time for homeowners to reap tax savings on their 2015 returns. Here
are some tips from tax advisers to help maximize home-related deductions. Be
sure to consult a tax expert for specifics on your home and mortgage.
A matter of interest. The biggest deduction is
typically interest paid on up to $1 million of debt used for its purchase,
construction or improvement, as well as an additional $100,000 in debt
applied to purchase or in the form of home-equity loans or lines of credit.
This debt can be from up to two of any combination of a primary residence,
second/vacation home and even a recreational vehicle or boat if it has
plumbing and a bathroom.
Borrowers often assume they will get the biggest
bang from deducting the interest payments on the loan with the highest
interest rate, but that’s not always the case, says Eric J. Wexler, a
Rockville, Md.-based tax attorney/certified public accountant. In year one
of a mortgage, most of the monthly payment is interest and as you get closer
to year 30, it shifts to principal, he adds.
Instead, deduct first on the home with the highest
interest expense, which typically is the one with the most recently closed
loan, Mr. Wexler says. “The only way to tell for sure is to run both
numbers,” he adds. High earners also need to remember that when an income
hits $258,250 (single) or $309,900 (married, filing jointly), the IRS starts
to reduce deductions, such as mortgage interest.
And while married couples are limited to the $1.1
million, a federal appellate court in 2015 ruled that two single people who
co-own a high-end home can each deduct interest up to the $1.1 debt limit,
says Mary Canning, dean emerita and professor, Golden Gate University’s
Braden School of Taxation and Accounting in San Francisco. “It could be a
very good reason not to get married,” she adds.
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://faculty.trinity.edu/rjensen/ListServRoles.htm
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down) CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access.
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation.
Concerns That Academic Accounting Research is Out of Touch With Reality
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of theshift from Gemeinschaftto
Gesellschaft.Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
Jensen Comment
Hell Just Got Cold Enough for Academic Accountants to Ice Skate
Two things just happened that I mistakenly thought would never happen in my
lifetime:
The Accounting Review just published a
mainline content paper that has no equations or statistical tables.
The paper referred to above is an
accounting history paper. I don't think TAR has published a history
paper in decades --- since Steve Zeff was TAR's Senior Editor.
Alan Sanster, in my opinion, specialized in
early Italian accounting more than any other academic that I can think of in
the history of accounting.
Special congratulations to Alan for landing this in TAR. And special thanks
to John Harry Evans III who was Senior Editor of TAR when this paper was
accepted.
The emergence of double entry bookkeeping marked
the shift in bookkeeping from a mechanical task to a skilled craft, and
represented the beginnings of the accounting profession. This study seeks to
identify what caused this significant change in bookkeeping practice. I do
so by adopting a new accounting history perspective to investigate the
circumstances surrounding the emergence of double entry in early 13th
century Italy. Contrary to previous findings, this paper concludes that the
most likely form of enterprise where bookkeeping of this form emerged is a
bank, most likely in Florence. Accountability of the local bankers in
Florence to the Bankers Guild provided a unique external impetus to generate
a new form of bookkeeping. This new bookkeeping format provided a clear and
unambiguous picture of the accounts of all debtors and creditors, along with
the means to check that the entries between them were complete and accurate.
I. INTRODUCTION
Historians generally accept that the “Italian
method” of double entry bookkeeping, based upon making entries of equal
amounts to the debit and credit of two different accounts, was the
foundation for modern accounting. Although all modern accounting systems
rely upon the principle of duality enshrined in that technique, we do not
understand how this system emerged. This unanswered question is the focus of
this paper: What led to the emergence of double entry bookkeeping?
The importance of this question to accountants is
that the emergence of double entry marked the point at which accounting
evolved from a mechanical task that virtually anyone could perform to become
a skilled craft. It signaled the beginnings of the accounting profession. By
identifying what led to this development, we learn about our roots and
improve our understanding of the importance of our discipline and of its
place in the economic history of the past millennium.
I adopt a “new accounting history” perspective that
reflects the historical context, the local conditions, and the language and
vocabulary in which this particular practice was articulated (Miller and
Napier 1993, 631). I incorporate these factors and surviving records of the
period to understand the reasons behind the change in bookkeeping practice
that gave rise to the emergence of double entry bookkeeping.
The motivation for this study was the recent
publication of a best-selling book that has popularized the history of
double entry bookkeeping. Its title—Double Entry: How the Merchants of
Venice Shaped the Modern World and How their Invention Could Make or Break
the Planet (Gleeson-White 2011)—tells us that Venetian merchants invented
double entry bookkeeping, but did they?
Various scholars have speculated upon the origin of
double entry bookkeeping, including Rossi (1896), Besta (1909), Littleton
(1927, 1931, 1933), Peragallo (1938), Melis (1950), Zerbi (1952), de Roover
(1971), Lee (1972, 1973a, 1973b, 1977), and Martinelli (1974). However, with
the exception of Rossi and Littleton and, to a lesser extent, Martinelli,
they focus on the presence of an enterprise-wide accounting system based
upon double entry, something that tells us little of the origins of double
entry many years earlier. To identify how, where, why, and by whom double
entry was first developed, the conditions that gave rise to it are likely to
be more fundamental than the circumstances of its first identifiable
enterprise-wide application. Consequently, in looking for the genesis of
double entry bookkeeping, I focus on how and where the concept of double
entry originated, the circumstances that led to its development, and,
particularly, which professional group first developed it.
I follow the approach adopted by Rossi and
Littleton. Littleton also considered what the terminology of double entry
tells us of its origins. However, neither of them specifically sought to
identify the group that developed the method, nor where it first emerged.
This study builds upon and extends their work. We know with certainty that
the technique of double entry emerged in the 13th century in Italy.
Unfortunately, no complete set of documentation from that period has
survived. The earliest confirmed instance of its enterprise-wide application
is from the final year of the 13th century (Lee 1977), while the evidence
indicates that this was many decades after the technique first appeared.1
Previous studies document that double entry
bookkeeping emerged in different places at different times, and that the
form it took varied from place to place. However, these various forms all
share the fundamental characteristic of “dual entries” that serve as the
starting point in the shift to double entry bookkeeping. Dual entries
require that when accounts were being maintained for the parties to and/or
items involved in a transaction, for each entry made in one account, an
equal and opposite “contra entry” must be made in another account. To that
end, I begin this study by seeking instances of items being recorded in a
consistent dual form that could then have developed into a recognizable form
of double entry bookkeeping.
The difference between dual entry and double entry
lies in how the contra entry is recorded. In double entry, each entry in an
account must include the location of the account in which the contra entry
has been made. No such information is provided in dual entry. Therefore, I
include this essential requirement in the definition of double entry in this
study. That is, my approach requires that this additional step be included
in order for bookkeeping entries to qualify as double entry bookkeeping.
This is an appropriate definition for double entry
for two further reasons. The account books of this period were solely for
debtors and creditors (Goldthwaite 2009) and entries were sometimes made
transferring amounts between two of these accounts, such as between the
accounts of a debtor and a creditor. In such cases, dual entry occurs by
chance because an equal amount is entered on the opposite sides of two
accounts. In contrast, as defined here, the emergence of double entry
stemmed from the belief that each entry should include the location of the
contra entry. This conscious step marked the genesis of double entry
bookkeeping. At this point, bookkeeping moved from being a device used to
maintain a historical record of a transaction to a method that enabled rapid
confirmation that the transaction had been entered accurately in both
accounts. It had become important to ensure that entries were made
correctly. This also marked the point at which bookkeeping shifted from
being a mechanical task to a skilled craft, requiring far more care and
attention, and signaling the beginnings of the accounting profession.
This step was the common starting point for double
entry, the link among all the Italian variants of double entry bookkeeping
that were in use during the 13th to 17th centuries. These variants included
“mingled accounts” (Martinelli 1974) with credits immediately below the
debits, and vice versa; account books with debtor accounts at the front and
creditor accounts at the back; bilateral account books with the debit and
credit entries in each account on opposite-facing pages; and bilateral
account books with the debit and credit entries of each account in two
columns of the same page. All of these formats had their own variants in
word sequence and in the manner in which dates, cross-references, and
amounts were entered. The commonality in the basic underlying rationale of
double entry bookkeeping enabled all these variants to merge into one
unified method many centuries later. Beyond the scope of this study, the
emergence of double entry bookkeeping eventually led to another phase in the
evolution of accounting, which ended with firms combining the details in
their accounts to calculate profits and losses. This subsequent double
entry-based accounting system (Gurskaya, Kuter, Deliboltoayn, and Zinchenko
2012) combined all accounts, represented initially in lists of balances and
then in income statements and balance sheets.
Contribution This study contributes to the debate
concerning the conditions that gave rise to modern bookkeeping and
accounting by amending and extending previous theories. I introduce a
context focused in the city of Florence, as opposed to the entire country of
Italy. My approach embraces explanatory conditions that are unique to
Florence and would explain the emergence of double entry there before other
locations. The continuous threat of external scrutiny and penalties for
failure to meet standards present only in Florence were conditions that
demanded an effective response by bankers. Adopting double entry was the
ideal response.
Continued in article
Jensen Comment
Just think about it --- a TAR article without
equations!
Next thing we know there may be articles that are not
General Linear Model studies using purchased data bases or hypothetical
assumptions for mathematical analysis.
Times may be changing, but I would not count on it
just yet.
The Genesis of Double Entry Bookkeeping.
Alan Sangster, Griffith University, Australia. ABSTRACT. This study
investigates the emergence in Italy early in the ...
Might not be the exact same thing though.
Scott Bonacker CPA –
McCullough and Associates LLC – Springfield, MO
How can this be fixed? It's becoming increasingly
obvious that our accounting systems need to be modified. After all, many of
today's current companies have 75 percent of their value stemming from
intangible assets. These assets may not appear on the company's balance
sheet, but doesn't it seem grossly negligent to completely ignore them
during the company's valuation process? If we can somehow effectuate a major
change in our present accounting systems so that they more accurately track
the value or inventions and other intangible assets like patents or other
forms of intellectual property, companies would hopefully become less
wasteful and make more educated decisions about whether to keep or sell
their inventions and licenses. This ideally would encourage a surge of
inventions and innovations in businesses that enrich our lives in both
monetary and non-monetary ways.
Jensen Comment
Where do accounting innovations come from?
These days they typically come from
standard setters such as when the FASB invented accounting for derivative
financial instruments in SFAS 133.
The last place to look for accounting innovations is our academy of
accounting educators and researchers. The academy divorced its research from the
practicing profession in the 1950s and never looked back until now when the
American Accounting Associate Pathways Commission in the past three years has
attempted to restore interest among accounting professors in doing research of
interest to the accounting profession ---
http://faculty.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms
If you know of any significant innovation or invention by an accounting
professor we would all like to hear from you.
A few years back I conducted a survey among accounting professors on this issue.
Some attributed ABC costing to Harvard's Bob Kaplan, but Kaplan admitted early
on that ABC Costing was developed by accountants in Deere Corporation. Some also
suggested Kaplan's Balanced Scorecard, but once again Kaplan attributes much of
the innovation to practitioners.
Some suggested Dollar-Value Lifo, but Dale Fleisher pointed out
that
Dollazr-Value Lifo was invented by Herbert T. McAnly, who retired in 1964 as a
partner at Ernst & Ernst after 44 years with the firm.
As far
as I can tell the only innovation for accountants came in the AIS field when
Bill McCarthy invented REA ---
https://en.wikipedia.org/wiki/Resources,_events,_agents_(accounting_model)
Has there been any other invention by
accounting professors that excited practitioners?
Accounting History Corner
"MAKING ACCOUNTING HISTORIANS," by Jayne Bisman, The Accounting Historians
Journal, Vol. 36, No. 1 June 2009 pp. 135-162 ---
Go
to
http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Then scroll down to 2010 Volume 36 Number 1 and click on the line that
says to View Searchable PDF Text File Then scroll down to the article Page
numbers may not exactly coincide with the table of contents depending upon
the resolution of your browser.
Abstract:
This paper addresses the question of how accounting educators can “make”
accounting historians or, more precisely, how educators can assist in
fostering the development of historically aware accounting academics and
practitioners. Various approaches to accounting history education are
outlined, situated within the context of efforts to boost the membership of
the community of accounting history scholars, redress deficiencies in
accounting education, and engender the development of competent and broadly
educated practicing professionals. The contributions and benefits of
incorporating accounting history into accounting programs are overviewed,
including an outline of past and contemporary examples of applications of
accounting history in educational practice. A case study of the design and
modeling of a graduate course in accounting history is then discussed and is
offered as a prototype for use or adaptation by accounting educators
interested in harnessing the potential of studies in accounting history to
improve student learning experiences and learning outcomes.
Jensen Comment
Accounting journal editors and referees could do a lot more for accounting
history by simply requiring more of it in journal articles. And if that makes an
article too long more referencing to accounting history relevant to the article
there should be required links to help readers find the history, including links
to where the authors themselves provide more history at Websites like the AAA
Commons where the authors can place more detailed articles on the history.
Authors are not currently using the AAA Commons enough for such purposes.
Accounting is perhaps one of the most innovative
professions. Although the CPA is a relatively young designation, the skills
of a CPA are deeply rooted in history.
3000 B.C. to 2500 B.C.
Ancient Sumerians invent the world’s first written
language. Cuneiform eases record-keeping requirements for Sumerian cities
expanding trade. Across the ancient world, rulers tax their people to
finance public works, making records necessary to account for transactions.
1000 B.C.
The commercially oriented Phoenicians invent a
22-character phonetic alphabet, probably for bookkeeping purposes and to
prevent themselves from being cheated by the more advanced Egyptians.
650 B.C.
An Egyptian sarcophagus describes the decedent as,
among other things, a “comptroller of the scribes.” The rise of commerce and
expansion of business activity has expanded the role of the accountant. The
Old Testament may have recorded the first “management consultant” as Jethro
advises Moses on delegating authority. The “Book of Exodus” (38:21) also has
the first auditor with Moses engaging Ithamar to do an audit of the riches
contributed for the building of the Tabernacle to be used in the 40-year
journey.
500 B.C.
Egyptians invent the bead-and-wire abacus.
423 B.C.
Aristophanes refers to the incorrect accounts of
Pericles in his play The Clouds in 423 B.C. Ancient Egyptians and
Babylonians have instituted auditing systems where everything that went into
and came out of storehouses was double-checked. Such “audit reports” were
given orally, thus the later term “auditor,” derived from the Latin audire,
to hear.
200 B.C.
Egyptians inscribe the Rosetta Stone, a key to
their language and civilization, which includes the account of a tax revolt
and the reaction to it by the Egyptian ruler Ptolemy V. Taxation has become
a fuel of Mediterranean civilization, creating the need for scribes to
record payments.
800 A.D.
The term “rationator” (accountant) is used in a
deed.
1086
William the Conqueror promulgates the Doomsday
Book, which contains records of what is due to the king and his lords in
such detail that it defies refutation. William instituted feudalism in
Britain after defeating the English King Harold, and the system required
more record keeping.
1225
The chief magistrate of Milan renders full accounts
of goods carried on ships. Early Italian republics have passed laws
requiring that public scribes keep track of merchandise.
1374
Poet Geoffrey Chaucer works as the comptroller of
customs in the port of London. Chaucer’s Canterbury Tales includes a
bragging merchant and a reeve whom “no auditor could ever win on.” By the
close of the Middle Ages, commerce is so developed that credit transactions
have become widespread, and record keeping (and record keepers) need to be
more exact.
1492
Rodrigo Sanchez becomes the first accountant in the
New World, being engaged by Queen Isabella to keep track of the “riches”
Columbus was expected to encounter.
1494
Italian monk Luca de Pacioli officially introduces
“double entry” bookkeeping in his Summa de Arithmetica, a compendium of
mathematical knowledge. Pacioli bases his work on procedures that have
generally been used in Genoa, Florence, Milan and Venice since about 1350.
Double–entry bookkeeping made it easier for them to detect errors and
provided a fuller picture of business activity—a balance sheet along with an
income statement.
1553
James Peele writes what is probably the first
original English text on bookkeeping.
1581
The Collegio dei Raxonati becomes the world’s first
society of accountants. By 1669, no one will be permitted to practice in
Venice without being a member of the college.
1600
The East India Company is founded. The trading
company introduces invested capital and dividend distributions, creating a
great need for accountability to investors.
1651
Johnannes Dyckman is engaged as bookkeeper for New
Amsterdam under Gov. Peter Stuyvesant. Dyckman will be replaced one year
later because of improperly rendered accounts. The accounting business has
already started to grow in America.
1775 to 1783
The American Revolution indirectly causes growth of
accountancy in Britain as creditors appoint accountants as trustees during
an explosion of bankruptcies. In 1793, more than 20 banking firms in England
and Scotland fail, and accountants step in to settle their affairs.
1789
The U.S. government creates the Treasury
Department, including a comptroller and auditor. Benjamin Franklin urges
businesspeople to have training and facility in “accompts.” Franklin earned
money as a young man keeping books of account, and used those skills later
to create the postal service. Thomas Jefferson’s two bookkeeping texts are
among the first books in the Library of Congress.
1841 to 1850
Expanding railroad empires employ accountants as
auditors independent of management.
1850
There are 264 “accomptants” listed in London’s
directory of professionals. In 1799, there were only 11; in 1840, there were
107.
1854
Scotland formally recognizes the profession under
the designation of “chartered accountants.”
1880
England formally recognizes the chartered
accountant.
1887
The first accounting organization in the United
States is established.
1896
New York state officially recognizes the profession
under the license of certified public accountant.
1897
The New York State Society of Certified Public
Accountants is organized on January 28. Other states rapidly follow. Charles
Waldo Haskins is elected the first president of the NYSSCPA. Haskins already
was the first president of the Board of State Examiners of Public
Accountants in 1896. In 1900, he becomes the first dean of the New York
University School of Commerce, Accounts and Finance.
1895 to 1905
The New York, Ontario and Western Railway Company
becomes the first railroad in the United States to issue audited financial
statements. United States Steel is the first major industrial corporation to
issue an audited report. Equitable Life Assurance Society becomes the first
insurance company to have an independent audit. The floodgates were opened
for certified public accountants. Meanwhile, major universities like the
University of Chicago and Dartmouth establish accounting courses, though
business colleges have been organized to teach bookkeeping and accounting
skills since the mid-19th century.
1913
The enactment of the income tax laws establishes
accountants as the premier profession in this arena. At the same time, CPA
management expertise catapults the profession as top consultants in
boardrooms and on factory floors.
1931
The Ultramares case establishes the principle that
auditors have liability to third parties relying on the auditor’s report.
The American Institute of CPAs eliminates the word “certify” from the report
and replaces it with “examined” to emphasize the report was an opinion, not
a guarantee.
1933
The Academy of Motion Picture Arts and Sciences
chooses Price Waterhouse to oversee the voting for the Oscar awards in 1933,
in response to the widely held belief that the awards were rigged. The
Academy publicizes the engagement to create public confidence in the Oscar.
1938
A firm records fictitious receivables and
nonexistent inventory in warehouses, leading to an auditing standard
requiring the observance of physical inventory and the direct confirmation
of accounts receivable. It also leads to the reporting consistency
requirement and tests of the internal control.
1941
The Securities and Exchange Commission requires the
auditor’s report to state that the examination was made in accordance with
generally accepted accounting standards.
1968
The Continental Vending Case establishes that the
auditor must disclose improper activities of the client or the client’s
officers when such activities are known to the auditor and may reasonably
affect the audited financial statements; and that compliance with GAAP is
not a conclusive defense against criminal liability.
1973
Public awareness of generally accepted accounting
standards leads to the formation of the independent Financial Accounting
Standards Board.
Jensen Comment
Origins of Double Entry Accounting
are Unknown, but the timeline of Mendlowitz leaves out a few items of
interest in the early history.
1300s A.D. crusades opened the
Middle East and Mediterranean trade routes
Venice and Genoa became
venture trading centers for commerce
1296 A.D. Fini Ledgers in
Florence
1340 A.D. City of Massri
Treasurers Accounts are in Double Entry form.
1458 A.D.Benedikt Kotruljevic (Croatian)
(Dubrovnik,1416-L’Aquila,1469) (His Italian name was Benedetto Cotrugli
Raguseo), wrote The Book on the Art of Trading which is now
acknowledged to be the first person to write a book describing
double-entry techniques (although the origins of double
Mendlowitz does list the 1494 book of Pacioli, which was the first
algebra book ever written. It used double entry bookkeeping mainly as an
illustration of algebra
A nice timeline on the
development of U.S. standards and the evolution of thinking about the income
statement versus the balance sheet is provided at:
"The Evolution of U.S. GAAP: The Political Forces Behind Professional
Standards (1930-1973)," by Stephen A. Zeff, CPA Journal, January
2005 ---
http://www.nysscpa.org/cpajournal/2005/105/infocus/p18.htm
Part II covering years 1974-2003 published in February 2005 ---
http://www.nysscpa.org/cpajournal/2005/205/index.htm
Canadian Printer and Publisher (history of various trades and
industries) ---
http://link.library.utoronto.ca/cpp/
You can search for various industry terms such as accounting, cost,
bookkeeping, etc.
Accounting
History Review was formerly
titled Accounting, Business & Financial History is based out
of Cardiff University. Accounting History is a journal
published by Sage as a journal of the Accounting History Special
Interest Group of the Accounting and Finance Association of
Australia and New Zealand. The Accounting Historians Journal
a publication of the Academy of Accounting Historians is
independently published (and as a result far cheaper in price) than
the other two. The Accounting Historians Journal is much
older than the other two having entered its 39th year of
publication. Older editions of the AHJ are available on JSTOR and
other databases, with older back issues available for free at the
University of Mississippi Libraries website that also maintains the
AICPA libraries. I know editors at all three journals and all are
quite capable and respected individuals. There is a considerable
debate which of the journals are considered better than the other
with arguments made for each of the three.
Jim
McKinney, Ph.D., C.P.A. Accounting
and Information Assurance
Robert H. Smith School of Business
4333G Van Munching Hall
University of Maryland
College Park, MD 20742-1815
http://www.rhsmith.umd.edu
In Washington’s National Gallery of Art
hangs a portrait by Jan Gossaert. Painted around 1530, at the very
moment when the Dutch were becoming the undisputed masters of
European trade, it shows the merchant Jan Snouck Jacobsz at work at
his desk. The painter’s remarkable gift for detail is evident in
Jacobsz’s dignified expression, his fine ermine clothes and
expensive rings. Rendered just as carefully are his quill pen,
account ledger, and receipts.
This is, in short, a portrait of not only
wealth and material success, but of accounting. It might seem
strange that an artist would lavish such care on the nuts and bolts
of something so mundane, like a poet writing couplets about a
corporate expense report. But the Jacobsz portrait is far from
unique: Accounting paintings were a significant genre in Dutch art.
For 200 years, the Dutch not only dominated world trade and
portrayed themselves that way, but in hundreds of paintings, they
also made sure to include the account books.
This was not simply a wealthy nation
crowing about its financial success. The Dutch were the leading
merchants of their time, and they saw good accounting as the key to
both their wealth and the moral health of their society. To the
audience of the time, the paintings carried a clear message:
Mastering finance was an achievement requiring both skill and
humility.
Today when we see accountants in art or
entertainment, they are marginal figures—comically boring
bean-counters or fraudsters cooking the books. Accounting is almost
a synonym for drudgery: from the hapless daydreamer Walter Mitty to
the iconic nerd accountant Rick Moranis plays in “Ghostbusters.”
Accounting is seen as less a moral calling than a fussy brake on the
action.
In the wake of decades of financial
scandal—much of it linked to creative accounting, or to no
accounting all—the Dutch tradition of accounting art suggests it
might be us, not the Dutch, who have misjudged accounting’s
importance in the world. Accounting in the modern sense was still a
new idea in the 1500s, one with a weight that carried beyond the
business world. A proper accounting invoked the idea of debts paid,
the obligation of nightly personal reckonings, and even calling to
account the wealthy and powerful through audits.
It was an idea powerful enough to occupy
the attention of thinkers in religion, art, and philosophy. A look
back at the tradition of accounting in art shows just how much is at
stake in “good accounting,” and how much society can gain from
seeing it, like the Dutch, not just as a tool but as a cultural
principle and a moral position.
***
Scratches on ancient tablets show us that
accounts have been kept for as long as humans have been able to
record them, from ancient Mesopotamians to the Mayans. This kind of
accounting was about measuring stores: Merchants and treasurers
recorded how much grain, bread, gold, or silver they had. Most
ledgers were simple lists of assets or payments.
Accounting in the modern sense started
around 1300 in medieval Italy, when multipartner firms had to
calculate their investments in foreign trade. We don’t know who, if
anyone, can take credit for the invention, but it was around this
time that double-entry bookkeeping emerged in Tuscany. Instead of a
simple list, it consisted of two separate columns, recording income
in one against expenditures in the other. Every transaction of
expenditure could be checked against corresponding income: If one
sold a goat for three florins, one gained three florins and, in the
other column, lost a goat. It was a kind of self-checking mechanism
that also helped calculate profit or loss. In Hogarth’s “Marriage a
la Mode: The Tête a Tête,” the man with the account books walks off
in disgust (left).
HIP/Art Resource, New York
In Hogarth’s “Marriage a la Mode: The Tête
a Tête,” the man with the account books walks off in disgust (left).
It would come to change finance, but was
not an immediate hit. Any system of enforcing fiscal discipline is
an incursion against the absolute control of the account-holder, and
kings and the powerful tended to see themselves above the
merchant-like calculations of bookkeeping. They not only hid their
wealth and debts: They often did not bother to calculate them. In
the end, they saw themselves as only accountable to God; if they
needed more ready cash, they could always lean on their inferiors.
At least in the short run, it was far more comfortable to govern
without the constraints of financial accountability.
But in one place, the idea of financial
accountability did take hold. By the early 1500s, Holland had become
the center of global trade, with Antwerp and later Amsterdam acting
as the most important ports in the world. Ships arrived laden with
spices, exotic fruit, minerals, animals, whale oil, cloths, and
other luxury goods. In 1602, the Dutch government in essence created
modern capitalism by founding both the first publicly traded
company—the Dutch East India Company, or VOC—and the Amsterdam Stock
Exchange.
Accounting was central to managing not only
these companies, but also the Dutch government itself. While not all
tax collectors or company managers kept perfect double-entry books,
it represented an ideal. It was also seen as a necessary skill for
civic participation. Most members of Dutch society were fluent in
accounting, having studied at home or in publicly funded city
accounting schools.
Double-entry accounting made it possible to
calculate profit and capital and for managers, investors, and
authorities to verify books. But at the time, it also had a moral
implication. Keeping one’s books balanced wasn’t simply a matter of
law, but an imitation of God, who kept moral accounts of humanity
and tallied them in the Books of Life and Death. It was a financial
technique whose power lay beyond the accountants, and beyond even
the wealthy people who employed them.
Accounting was closely tied to the notion
of human audits and spiritual reckonings. Dutch artists began to
paint what could be called a warning genre of accounting paintings.
In Jan Provost’s “Death and Merchant,” a businessman sits behind his
sacks of gold doing his books, but he cannot balance them, for there
is a missing entry. He reaches out for payment, not from the man who
owes him the money, but from the grim reaper, death himself, the
only one who can pay the final debts and balance the books. The
message is clear: Humans cannot truly balance their books in the
end, for they are accountable to the final auditor.
This message rubbed off on political and
financial leaders. They were expected to keep good books, and they
could expect to be publicly audited—a notion fiercely resisted in
the great monarchies of the Continent. In the 17th century, another
genre of paintings emerged, showing public administrators holding
their books open for all to see. More than 100 of these paintings
were produced between 1600 and 1800. Transparency became a cultural
ideal worthy of art.
The Dutch also appreciated that ledgers,
bills of exchange, and files, like any tool in human hands, were
liable to misuse in the interest of wealth or pride. Dutch painters
like Marinus van Raemerswaele warned against hubris and greed with
paintings of bookkeepers as twisted, grotesque figures in absurd
hats who would be as likely to commit fraud as to keep good books.
The value the Dutch placed on accounting
made a large impression on the English, who sought to emulate “the
Mighty Dutch” in many ways, including this new business technique.
By the 1700s, they were also the only other nation to paint
accounting pictures. The English celebrated the wealth of their
Industrial Revolution and Empire with portraits of successful
merchants smiling over their books—and, like the Dutch, also used
account books as a way to wag a finger. In one scene from William
Hogarth’s “Marriage à la Mode,” a popular series of paintings from
the 18th century, a noble couple squanders their lives on parties
and gambling. In a final signal of disapproval, almost like a
punctuation mark, their accountant walks away in disgust.
***
By the late 19th century, accounting had
become a profession of its own, rather than fundamentally a shared
practice and value. It receded from the lives of individuals, and
began to take on more the reputation it holds today.
Continued in article
Accounting History Corner
While accrual historical cost accounting evolved in accounting for ventures and
business firms, exit (liquidation) value accounting remained the tradition in
history clear up to today for personal accounts such as exit value reporting for
estates and trusts. The main reason is the purpose of the accounting.
Fair value reporting of going concerns
would be of greater interest if accountants could figure out how to report
"value in use" to investors apart from "exit value in liquidation." But
accountants have never been able to figure out how to reliably measure "value in
use" that economists in history have preferred but never helped accountants
figure out how to reliably measure in practice. The GAAP for going concerns is
now an amalgamation of accrued historical cost (not really valuation at all)
combined with some exceptions such as lower-of-cost or market for inventories
and exit value reporting of financial instruments and derivative financial
instruments. However, it all becomes exit (liquidation) value reporting when a
firm is deemed to be no longer a going concern.
In personal accounting non-going concerns
are usually the rule rather than the exception. When a person dies his or her
estate if valued on the basis of liquidation value and divided up among the
heirs. When a couple is being divorced the marriage is no longer a going
concern, and the assets and liabilities are accounted for at liquidation value.
It is interesting to look back at the
history of "personal" accounting. As you can see the line between personal and
business is very fuzzy in history.
"PERSONAL ACCOUNTS, ACCOUNT BOOKS AND
THEIR PROBATIVE VALUE: HISTORICAL NOTES, c.1200 TO c.1800," by Basil S.
Yamey, Accounting Historians Journal, Volume 39, Number 2 December 2012
pp. 1-26 ---
http://umiss.lib.olemiss.edu:82/articles/1038708.7435/1.PDF
This paper
discusses a number of topics pertaining to personal accounts in
account books in the period roughly between 1200 and 1800. The main
emphasis is on two topics, namely the use of account books as
evidence in courts of law, and bad and doubtful debts and their
accounting treatment. Examples from various countries and periods
are provided to illustrate the discussion, which is not intended to
be exhaustive.
The majority
of accounts in surviving business account books of the period 1200
to 1800 in Western Europe are personal accounts. They record
dealings of the firm with individuals, one-man businesses,
partnerships, joint stock companies, religious establishments, and
government bodies. In many of the account books there are only
personal accounts, and in some there are mainly personal accounts
together with a sprinkling of non-personal accounts. This paper
considers and illustrates a selection of topics that pertain to
personal accounts in the period covered: personal accounts in single
entry and double entry bookkeeping systems; the use of account books
as evidence in law courts; how a merchant could increase the
probative value of his account books; bad and doubtful debtors and
debts, and the various accounting treatm ents given to them; and
some concluding observations, mainly about ledgers in flames.
Continued in
article
New Accounting History Books Worth Noting
Steve Zeff at Rice University is one of the best-known accounting
historians alive today. He's also the current Book Review Editor of
The Accounting Review. This explains, in part, why the July 2013
listing of book reviews four scholarly reference books on accounting
history. I say reference books, because none of the four history books
is light reading to pass the time on airplanes.
SEBASTIAN BOTZEM, The Politics of Accounting Regulation:
Organizing Transnational Standard Setting in Financial Reporting
(Cheltenham, U.K.: Edward Elgar Publishing, 2012, ISBN
978-1-84980-177-5, pp. x, 223).
Reviewer Scholar: STUART McLEAY
WOLFGANG BURR and ALFRED WAGENHOFER (coordinating editors),
Der Verband der Hoschschullehrer für Betriebswirtschaft:
Geschichte des VHB und Geschichten zum VHB (History of the VHB
and Tales of the VHB) (Wiesbaden, Germany: Gabler Verlag, 2012, ISBN
978-3-8349-2939-6, pp. xxi, 338).
Reviewer Scholar: LISA EVANS
MAHMOUD EZZAMEL, Accounting and Order (New York, NY:
Routledge, 2012, ISBN 978-0-415-48261-5, pp. xx, 482).
Reviewer Scholar: SUDIPTA BASU
GARY PREVITS, PETER WALTON, and PETER WOLNIZER (editors),
A Global History of Accounting, Financial Reporting and Public
Policy: Eurasia, the Middle East and Africa (Bingley, U.K.:
Emerald Group Publishing Limited, 2012, ISBN 978-0-85724-815-2, pp.
xi, 249).
Reviewer Scholar: TIMOTHY S. DOUPNIK
Capsule Commentary on The Future of IFRS (London,
U.K.: Financial Reporting Faculty of the Institute of Chartered
Accountants in England and Wales, 2012, ISBN 978-0-85760-652-5, pp.
25). Downloadable at
www.icaew.com.
Reviewer Commentator: STEPHEN A. ZEFF
The MileIQ Gadget from Microsoft Can Save Thousands of
Tax Dollars for a Business Traveler (or lead to greater reimbursements from
employers) ---
Try it for free ---
https://www.mileiq.com/
From drones, cars and robots to jewelry,
appliances and TVs, the new technology on display at the 2016 Consumer
Electronics Show promises to be smarter and friendlier than ever.
The annual tech extravaganza with more than
3,600 exhibitors set to formally start on Wednesday in Las Vegas is
likely to see innovation across a range of sectors, from health care to
autos, connected homes, virtual reality and gaming.
"There are always a couple of winners at CES,
and sometimes there are the sleepers that turn out to be the cool
thing," Gartner analyst Brian Blau told AFP.
But Blau said the innovations are "often
evolutionary, not revolutionary."
Televisions will play starring roles at the
show as usual, with giants such as Samsung, Sony, LG and Vizio among
contenders in a market rapidly shifting to ultra-high definition.
"We are in the sweetest of the sweet spot in
the TV market," NPD analyst Stephen Baker told AFP while discussing CES.
"Sales of 4K TVs are exploding right now," he
said, referring to the popular new high-definition format.
Drones are also expected to make a splash at
CES, where an Unmanned Systems Marketplace has doubled in size from a
year earlier to cover 25,000 square feet (2,300 square meters).
Blau expects the drones on display at the show
to be more sophisticated, with easy controls and even applications that
let them be operated using smartphones.
"If you want to make it popular with consumers
you have to make it relatively easy to use and foolproof," he said. "And
that is what a lot of drone manufacturers have been doing."
- Apple presence felt -
Electronics makers are also using building
smart technology into all manner of devices, allowing them to adapt to
how people use them, responding to voice or gesture, for example.
"A lot more of your devices are going to run
with less direction from you but a greater sense of how to help you
out," Blau said.
Most scams are designed
to defraud you of your money or get your
personal information to access that money. Here
are a few common frauds we should all be aware
of:
--Emails purportedly
from government agencies or financial
institutions requesting personal and financial
information or money
--Calls from familiar
sounding charities pressuring you for quick
donations by credit card or wire transfer
--Offers of discounted
health insurance or low-cost medications
--Goods for sale, such
as a car, at below market value, and insistence
on a rush sale with payment by wire or to a
third party
--Email purportedly
from a legitimate collection agency stating that
a loan is delinquent and must be paid in full to
avoid legal consequences
--Offers for free
gifts, vacations or "found money" dependent on
some sort of upfront payment, such as a finder's
fee, taxes or delivery charges
--Various investment
frauds, including offers of high-yield
investments, letters of credit or prime bank
notes
--Hot stock tips,
especially for "penny stocks," from unknown
callers or e-mails even if they claim to work
for well-known brokerage or investment firms
Jensen Comment
Some of the worst scams are not online; They're on television wanting you to pay
about $20 per month for for a cute/abused pet, a veteran without limbs, a
starving child, etc. All are for good causes but most of these charities spend
more on salaries, parties, and promotions than they do on the victims.
First of all, the Humane Society of the United
States -- the HSUS -- has no connection whatsoever to your local Humane
Society: the one that runs your local shelter.
Purdue is cutting grad enrollments to boost pay of
those it enrolls -- and is pushing professors to teach more intro courses.
Will the approach provide focus? Or is it another attack on English that
could leave undergrads without enough instructors?
Pay for graduate teaching assistants in the College
of Liberal Arts at Purdue University is among the lowest in the Big Ten -- a
little less than $14,000 a year, before taxes. So the college’s recent
announcement that it’s raising graduate pay to $15,000 or more next year was
good news -- to some. Others say that while they applaud the college’s
attention to an important issue, the modest pay bump doesn’t begin to make
up for what Purdue is proposing in exchange: namely, a redistribution of
college resources that includes major cuts to some of the largest graduate
programs, and future cuts to overall graduate student enrollment.
Continued in article
Jensen Comment
The same thing happened in accounting Ph.D. programs in the 1980s, but
accountancy is not at all like English when it comes to doctoral programs.
Accounting Ph.D. graduates have always been in short supply whereas English
Ph.D. graduates have been in oversupply relative to tenure track jobs for as
long as I can remember.
"Exploring Accounting Doctoral Program Decline:
Variation and the Search for Antecedents," by Timothy J. Fogarty and Anthony
D. Holder, Issues in Accounting Education, May 2012 ---
Not yet posted on June 18, 2012
ABSTRACT
The inadequate supply of new terminally qualified accounting faculty poses a
great concern for many accounting faculty and administrators. Although the
general downward trajectory has been well observed, more specific
information would offer potential insights about causes and continuation.
This paper examines change in accounting doctoral student production in the
U.S. since 1989 through the use of five-year moving verges. Aggregated on
this basis, the downward movement predominates, notwithstanding the schools
that began new programs or increased doctoral student production during this
time. The results show that larger declines occurred for middle prestige
schools, for larger universities, and for public schools. Schools that
periodically successfully compete in M.B.A.. program rankings also more
likely have diminished in size. of their accounting Ph.D. programs. Despite
a recent increase in graduations, data on the population of current doctoral
students suggest the continuation of the problems associated with the supply
and demand imbalance that exists in this sector of the U.S. academy
This shortage has made new accounting Ph.D. graduates among the highest paid
in new hires in top research universities in North America. But the result is
that most business schools have shortages of accounting Ph.D.s and have had to
supplement teaching staff with adjuncts and in the case of tax accounting
lawyers are put in tenure track positions. Whereas Purdue will struggle for
graduate assistants in the English Department Purdue will struggle with having
more adjuncts in the business school, especially in accounting. Some
universities like the University of Houston now has over a dozen "clinical"
accounting faculty but an adjunct by any other name is still an adjunct.
SEC
Efforts to Standardize and Simplify World Accounting Standards Without Adopting
IFRS
From the CFO Journal's Morning Ledger on February 23, 2016
Convergence projects, aimed at bringing together
U.S. accounting standards with those used in more than 100 countries around
the world, have largely failed to advance in recent years. But that may be
changing. The Securities and Exchange Commission aims to make it easier for
public companies with operations abroad to report pertinent financial
information, beef up disclosure requirements, and clear the way for progress
toward a single global financial-reporting standard, CFO Journal’s Tatyana
Shumsky reports. SEC Chairwoman Mary Jo White described her agency’s goals
for 2016 at an annual conference last week in Washington.
The SEC is looking to free multinational companies
from what some consider a particularly onerous requirement. Such companies
now must report financial data to the SEC using U.S. generally accepted
accounting principles and reconcile all non-GAAP financial data with that
standard, detailing how they did so. James Schnurr, the SEC’s chief
accountant, said his office is working on a proposal to drop the
reconciliation requirement, letting companies supplement their U.S.
financial reports with ones filed with foreign regulators using
international standards.
From the CFO Journal's Morning Ledger on February
24, 2016
States set up fight over Web sales tax
Officials in 13 states are tired of waiting for
Congress to let them tax out-of-state Internet retailers. So they are moving
to impose levies themselves and daring merchants to challenge them. The
gambit is aimed at creating business blowback and a confusing national
patchwork of laws that might prompt Congress to act.
Jensen Comment
In order to be elected our very liberal Democratic Party Governor in New
Hampshire had to pledge to never support a sales tax. That's why most of the
license plates in our NH parking places are from bordering states. Those
visitors arrive with attached trailers to haul away enormous amounts of high
priced items like computers, television sets, appliances, all-terrain vehicles,
snow throwers, snow mobiles, tires, plantings for landscaping, liquor by the
case, etc.
From the CFO Journal's Morning Ledger on February
23, 2016
SEC to refine rules on executive compensation and clawbacks
The Securities and Exchange Commission is considering
ways to refine pending rules on how and when companies should recover
executive pay tied to company performance. Experts have predicted the only
change will be altered or diminished disclosure.
The Major Cause of the 2008 Economic Meltdown was the Main Street Ponzi Scheme
of Hundreds of Billions in Real Estate Loans to Borrowers Who Could Never
Sustain the Payments
Mortgage originators on Main Street bore none of the default risk
The "poisoned" mortgages became the Achilles Heels of collateralized loan
portfolios (CDOs) resold on Wall Street risk bearers, leading to the downfall of
Bear Stearnes, Lehman Bros., Merrill Lynch, etc.
From the CFO Journal's Morning Ledger on February 4, 2016
Wells Fargo to pay $1.2 billion over faulty mortgages
Wells Fargo & Co.
agreed to pay $1.2 billion to settle a suit that accused it of reckless
lending and leaving a federal program to
pick up the tab. The plan announced
Wednesday
dealt with civil charges brought by the Justice Department, two U.S.
attorneys and the Department of Housing and Urban Development. It would be
one of the largest FHA-related settlements on record.
From the CFO Journal's Morning Ledger on February 16, 2016
If Bernie Sanders taxed Wall Street
The candidate for the Democratic
nomination wants to raise a lot of money from Wall Street. His
plan is to demand it in the form of a financial-transaction tax.
Proponents claim the tax would collect tens of billions of
dollars, discourage speculative and high-frequency trading and
make markets safer and less volatile. Its opponents say the
revenue estimates are overstated and the tax will actually make
markets more volatile.
There's an important
fact Bernie Sanders fails to tell you when he advocates taxing Wall Street
transactions to pay for free college in the USA. What he never tells you is that
Wall Street will not pay those taxes. Those transactions taxes will be passed
along to hundreds of millions of Main Street pension and other investors in the
USA and in other countries whose investors invest in Wall Street traded stocks
and bonds. For example, professor's TIAA-CREF balances will take a big hit every
year. Bob Jensen
From the CFO Journal's Morning Ledger on February 5, 2016
McGraw Hill plans to shed family name after 128 years
The change to S&P Global Inc.
reflects the company’s shift away from its publishing roots. The move
follows decisions in recent years to spin off an education division and move
the corporate headquarters from a midtown Manhattan skyscraper bearing the
founder’s name to a location downtown.
The proposed ASU results from consensuses
reached by the FASB’s Emerging Issues Task Force
(EITF) on eight issues related to cash flows.
Key provisions of the proposed amendments are
summarized below.
For summaries of the decisions reached by the
Emerging Issues Task Force (EITF) on these
issues, see Deloitte’s June
2015, September
2015, and November
2015EITF Snapshot newsletters
Jensen Comment
Keep in mind that lease contracts are being re-written to reduce the impact
of the standard on debt. It will also be interesting to compare the
symmetries between lessee lease debt and lessor lease receivables.
Accounting
History Corner
"Leases: A Review of Contemporary Academic Literature Relating to Lessees,"
by Angela Wheeler SpencerThomas Z. Webb, Accounting Horizons, Volume 29,
Issue 4
(December 2015) ---
http://aaajournals.org/doi/full/10.2308/acch-51239
There is a pay wall for this article
Accounting for corporate leasing activities has
been examined and debated for more than 30 years. Currently both the
Financial Accounting Standards Board (FASB) and International Accounting
Standards Board (IASB) are developing standards to modify financial
reporting for operating leases, which are currently reported off-balance
sheet. In light of these proposals, we examine existing literature to better
anticipate possible effects of any changes. Namely, we review existing
studies to understand why firms engage in operating leases and how
information about these arrangements impacts users. First, we review studies
directly examining leases. As that review reports, some studies show that
companies engage in off-balance sheet leasing at least in part to manage
financial statement presentation. Other studies, however, suggest that firms
utilize operating leases to manage costs and preserve capital. In general,
the research reports that lenders, credit rating agencies, and other capital
market participants sufficiently understand off-balance sheet leases and
consider them in their decision making. Second, we provide commentary on one
of the current proposals' more debated areas and a current point of FASB and
IASB divergence: classification of expenses associated with operating
leases. While the IASB proposes disaggregating interest and amortization
elements, the FASB proposes reporting a single, combined lease expense.
However, very little research explicitly addresses expenses associated with
operating leases. Existing studies do, however, suggest that information
disaggregation, particularly with regard to operating and financing
activities, is important. Our review may be useful to regulators as the
reporting standards for operating leases are debated.
In May 2013, the Financial Accounting Standards
Board (FASB) and International Accounting Standards Board (IASB) jointly
issued a long-awaited Exposure Draft on accounting for leases. If enacted,
this proposed standard will fundamentally alter accounting for operating
leases, most notably, by eliminating current off-balance sheet treatment for
long-term leases and by requiring lessees to recognize a right-of-use (ROU)
asset and associated liability. Subsequent decisions, however, reflect
divergence between the IASB and FASB regarding income statement reporting
related to leases. While the IASB proposes treating all leases in a similar
manner and requiring segregation of interest and amortization components,
the FASB proposes to continue allowing the reporting of a single operating
lease (rent) expense on the income statement.
Proponents of the 2013 Exposure Draft maintain that
these changes will increase faithful representation, aligned with Concept
Statement No. 8 (FASB 2010a), thus improving the usefulness of financial
reporting. Detractors charge that these changes will distort the underlying
economics of some leases, obscure valuable information, and fail to increase
the quality and reliability of financial statements (e.g., Rapoport 2013;
Equipment Lease and Finance Association [ELFA] 2013). In light of this
ongoing debate, we review evidence relevant to the issue of lease
accounting, as it may prove informative in the continuing discussion and
research on this issue. We focus on recent findings related to why firms
lease, broadly speaking, and how information related to these structures may
be applied by users of the financial statements.
Long-standing concerns about accounting for leases
focus largely on the fact that a substantial portion of these structures are
kept off-balance sheet. Under U.S. GAAP, this treatment is made possible
through the application of bright-line tests prescribed by Statement of
Financial Accounting Standards (SFAS) No. 13, Accounting for Leases (FASB
1976) codified as ASC Topic 840, Leases. Currently, leases are classified
into two groups: (1) capital leases, which are effectively treated like
purchases, with required recognition of an associated asset and liability,
and (2) operating leases, for which only rent (lease) expense is recognized.
Because of the bright-line tests associated with this classification,
economically similar transactions sometimes receive dramatically different
accounting treatment, in some cases due to deliberate structuring of the
underlying arrangements (e.g., Weil 2004). Criticism of this standard began
almost immediately after SFAS No. 13 was adopted. In fact, in a March 1979
meeting a majority of the FASB agreed that if SFAS No. 13 were to be
reevaluated, then they would instead support “a property right approach in
which all leases are included as ‘rights to use property' and as ‘lease
obligations' in the lessee's balance sheet” (Dieter 1979, 19).
Concern about proper accounting for operating
leases is understandable, as their economic significance is large. For
instance, the Securities and Exchange Commission (SEC) in 2005 estimated
that while 22 percent of issuers report capital leases totaling
approximately $45 billion (undiscounted), 63 percent of issuers report
off-balance sheet operating leases totaling approximately $1.25 trillion
(undiscounted) (SEC 2005, 64). Cornaggia, Franzen, and Simin (2013) further
detail a dramatic 745 percent relative increase in the use of operating
leases since 1980.
Despite concerns about off-balance sheet treatment,
a substantial body of evidence indicates that users generally see through
the accounting associated with these structures and price the underlying
economics. Given this apparent market efficiency relating to lease
obligations, one might argue there is no need for regulators to act.
However, as the Group of Four Plus One (G4+1)1 proposal noted in 2000, “The
present accounting treatment of operating leases is not the most relevant of
the choices available” (Nailor and Lennard 2000, 5) and, as Lipe (2001, 302)
discusses:
This argument ignores the costs and inaccuracies
that result from numerous analysts performing their own computations. It
also ignores the fact that some contracts or regulations depend solely on
recognized amounts. The representational faithfulness of a coverage ratio
that ignores material amounts of operating leases is questionable given the
empirical results today.
Lipe (2001) summarizes key findings of the
literature related to leasing; however, the last decade has seen a number of
studies, which also examine the leasing question, providing greater insight
into why firms utilize leases as a financing mechanism and how users
interpret the information about these structures. As the FASB and IASB
revise the leasing model to a right-of-use framework, and thus require
recognition of nearly all leases, and as the boards consider the possible
economic consequences of this change in regulation, analysis of existing
evidence is vital. Consequently, this paper extends the work of Lipe (2001)
by summarizing certain studies he includes and discussing in greater detail
key work completed since publication of his paper. Specifically, after
summarizing the institutional background relating to leases, we synthesize
existing work to address questions likely to be of concern to regulators and
researchers as they anticipate the possible economic consequences associated
with a change in financial reporting for these structures. Specifically, we
seek to address the following two questions: (1) Why do firms engage in
off-book lease arrangements? (2) How do users assess information related to
these off-book structures?
Long-standing criticisms of operating leases charge
that the bright-line rules associated with these structures enable many
lessees to enter into these arrangements simply to achieve off-book
reporting. While some recent evidence does suggest that firms use certain
types of leases opportunistically (e.g., Zechman 2010; Collins, Pasewark,
and Riley 2012), other work indicates that firms use leases as a means of
efficient contracting and not simply to achieve off-book treatment (e.g.,
Beatty, Liao, and Weber 2010).2
Even if operating leases are entered into for the
purpose of minimizing costs rather than simply to achieve financial
reporting objectives, recognition of these structures may have substantial
contracting implications for affected firms. For example, while evidence
suggests that operating leases may be indirectly included in contract terms
(e.g., through the inclusion of debt ratings), the results of Ball, Bushman,
and Vasvari (2008) suggest that few debt covenant provisions appear to
directly constructively capitalize operating leases, and a Deloitte (2011)
survey reports that 44 percent of firms anticipate that recognition of
operating leases will affect existing debt covenants.
Further, while the bulk of the evidence supports
the conclusion that off-balance sheet leases are generally well understood
by users, some work suggests that less reliable and less transparent
disclosures may receive different treatment (e.g., Bratten, Choudhary, and
Schipper 2013). Consequently, recognition of these structures may in fact
result in observable shifts in market behavior (e.g., Callahan, Smith, and
Spencer 2013). Additionally, contrary to the proposed change requiring
uniform capitalization of most leases, other evidence suggests that users do
not necessarily consider all leases to have the same economic implications
(e.g., Altamuro, Johnston, Pandit, and Zhang 2014).
Finally, although scant work regarding the income
statement reporting for operating leases exists, this is perhaps the most
controversial of the proposal's unsettled issues. Users have mixed views (FASB
2013) and this issue is currently a point of divergence between the FASB and
IASB.3 To better understand the potential implications of reporting the
financing and operating components separately (the IASB's proposal) and of
reporting lease costs as a single combined amount (the FASB's proposal), we
extend our review to include literature on income statement disaggregation.
While some evidence suggests limited information content associated with
disaggregated earnings (e.g., Callen and Segal 2005), other work suggests
information about disaggregated earnings is useful to users (e.g., Lipe
1986), particularly with regard to information concerning operating and
financing activities (e.g., Lim 2014).
From our review we conclude that while some
negative contracting effects may be associated with recognition of operating
leases, given what appears to be a sophisticated understanding of these
structures, balance sheet recognition of these leases should have minimal
implications from a user perspective. If anything, recognition would appear
to aid users in understanding the value of the more opaque aspects of these
arrangements. However, considering that users appear to value these
arrangements differently in certain contexts, it seems imperative that
complete disclosures be provided about recognized amounts. Finally, although
users express different opinions on the proper income statement treatment
for operating lease arrangements (e.g., Financial Accounting Standards Board
[FASB] and International Financial Reporting Standards [IFRS] Foundation
2013), based on evidence to date, information on the operating and financing
components of these structures appears important.
We proceed by first examining the institutional
background of leases. Second, we review literature on why firms enter into
leases (broadly speaking) and operating leases (specifically). Finally, we
review literature on how users apply information about operating leases,
including potential use of operating and financing expense components. Table
1 summarizes a selection of the accounting studies cited.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on January 29,
2016
TOPICS: Capital
Leases, Financial Accounting, Lease Accounting, Operating Leases
SUMMARY: Finance
chiefs have at least three years until they officially have to bring
trillions in off-balance-sheet leases onto their company's books,
but experts say they should already be preparing. The 100 public
companies in the Fortune 500 with the most such obligations have a
total of over half a trillion dollars in off-balance-sheet leases.
CLASSROOM APPLICATION: These
articles and the following questions offer a perspective on the
extent of liabilities to be booked under the new lease accounting
rules. These are appropriate for financial accounting classes.
QUESTIONS:
1. (Introductory) What changes did FASB make to lease
accounting? How does this differ from the previous accounting
treatment for leases?
2. (Advanced) What is FASB? Why did it have the authority to
make this change?
3. (Advanced) What is the extent of the new liabilities to be
booked under the new rules? Are these significant amounts for the
companies? For what companies and industries would the amounts be
material on the financial statements?
4. (Advanced) How are companies preparing for the new rules?
What must they do for the new presentation of the lease information?
5. (Advanced) Name the two types of leases and define each of
them. How do they differ? Which type is affected by the new rules?
Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Off-balance-sheet lease obligations on the
books of 100 large U.S. companies
Finance chiefs have at least three years until
they officially have to bring trillions in off-balance-sheet leases
onto their company’s books, but experts say they should already be
preparing.
There are two general types of leases. Capital
leases are long-term, and the lessee assumes ownership-like benefits
and risks; they go on the balance sheet as assets and liabilities.
Operating leases are far more common, covering everything from
property rent to tools to vehicles. Financial information about
these leases appear only as footnotes in a company’s annual report,
not on its balance sheet, even though they represent contractual
commitments.
The 100 public companies in the Fortune 500
with the most such obligations have a total of over half a trillion
dollars in off-balance-sheet leases, according to a recent study
from LeaseAccelerator Inc., a leasing-software firm. The rule change
is in the final stages and likely to be approved by the Financial
Accounting Standards Board this year.
Most companies will have to begin preparing
for lease-accounting-rule changes starting in 2017 because they will
need to present two years of comparable books when reporting results
under the new standard in 2019.
Multinationals could have the trickiest task,
evaluating leases across the globe, said Michael Keeler,
LeaseAccelerator’s chief executive. They spend more money on
real-estate leases, but have many more equipment leases, which are
more complex and require more accounting assumptions.
Walgreens Boots Alliance Inc. tops the list,
with $33.7 billion in off-balance-sheet assets at its most recent
year-end. That number would swell by nearly a quarter if it
completes its acquisition of drugstore rival Rite Aid Corp., No. 15
on the list with about $8 billion.
U of
California professors object to new system -- installed secretly -- to
monitor emails and use of computer networks. University cites security needs
and pledges to protect privacy.
"Secret monitoring is ongoing."
Those ominous words captured the attention of many
faculty members at the University of California at Berkeley's College of
Natural Resources when they received an email message from a colleague on
Thursday telling them that a new system to monitor computer networks had
been secretly installed on all University of California campuses months ago,
without letting any but a few people know about it.
"The intrusive device is capable of capturing and
analyzing all network traffic to and from the Berkeley campus, and has
enough local storage to save over 30 days of *all* this data ('full packet
capture'). This can be presumed to include your email, all the websites you
visit, all the data you receive from off campus or data you send off
campus," said the email from Ethan Ligon, associate professor of
agricultural and resource economics. He is one of six members of the
Academic Senate-Administration Joint Committee on Campus Information
Technology.
Ligon went on to say that UC system officials asked
the members of the committee to keep this information to themselves. But,
Ligon added, he and other tenured faculty members decided that "continued
silence on our part would make us complicit in what we view as a serious
violation of shared governance and a serious threat to the academic freedoms
that the Berkeley campus has long cherished."
The professor provided a copy of his email to
Inside Higher Ed after The San Francisco Chronicle reported on the
controversy over the new monitoring.
The university system is defending the new
monitoring as necessary, and says that it is not routinely reviewing
anyone's email. While some faculty leaders may yet be convinced about the
need for the system, many are speaking out against the secretive way that it
was deployed without going through standard faculty committees that in the
past have had the chance to be briefed on technology security measures.
Continued in article
Jensen Comment
This is controversial in many respects, especially when campus computer networks
interact with telephone services such as Skype. There's also the controversial
aspect of cost and resource allocation. Are the benefits of such monitoring
system exceeding the cost of monitoring. Of course it's impossible to answer
this question because it cannot be known how much monitoring prevents abusive
use of the networks from happening vis-a-vis the abuse that would take place
without monitoring. It's a little like putting in a Webcam pointed at t child's
computer screen When the child knows that recorded screen images are being
recorded and possibly being examined by parents the kid is less likely to use
that particular computer for inappropriate viewing such as porn sites or sharing
of nude photographs with friends.
The problem is that monitoring
will not stop all determined behavior. The kid who cannot watch inappropriate
material in a bedroom will probably view that material elsewhere on a laptop
screen such as at a public library or in the attic. In fact with teenagers
sometimes banning certain types of behavior like drinking or smoking pot or
viewing porn simply becomes a challenge to get away with it just because it is
banned by parents.
What also is a problem in the
UC monitoring of networks are the unknown punishment plans. What is to be done
with a tenured professor who watches porn or uses online gambling sites about an
hour each morning before 8:00 a.m. or after 5:00 p.m.? Are such behavior
discouragements spelled out in the Faculty Handbook? What happens to Blundering
Betty or Naive Ned infects a university server with a horrible new virus?
Jensen Comment
The article does not elaborate regarding which types of faculty members are
"objecting" to the merger, but my guess is that most of the objections come from
the schools being merged. One of the main fears is probably that there will be
some loss of control with regard to hiring, retention, curriculum, resource
allocation, etc.
I doubt that such a merger
really leads to research or teaching collaborations that would not have come
about before the merger except that the merger may inspire some creative
thinking that might not have otherwise taken place. Perhaps such thinking could
be inspired in ways other than forcing a merger of schools.
I can think of innovations that
might not have happened if departments or schools were merged. For example, at
Trinity University there is virtually zero interest among business faculty for
development of online courses or degree programs. However, the School of Health
Care Administration one floor above was the first division, and I think to date
is the only division, to commence an online degree program ---
https://new.trinity.edu/academics/departments/health-care-administration/executive-program
Also there can be costs and
benefits in terms of salaries and other sharing of resources. At one time I was
on the faculty (not at Trinity) where the Economics Department had previously
(before my time) voted to move to the College of Social Sciences. Then after a
few years of getting lower pay raises than their former business faculty
colleagues the Economics Department voted to rejoin the College of Business.
The February 2016 Econometrics Reading List from
David Giles
Here's a suggested
reading list for February:
Casey, G. and M. Klemp,
2016. Instrumental variables in the long run. MPRA Paper No. 68696.
Falorsi, S., A. Naccarato,
and A. Pierini, 2015. Using Google trend data to predict the Italian
unemployment rate. Working Paper No. 203, Dipartimento di Economia, Università
degli studi Roma Tre.
Harris, D., S. J. Leybourne,
and A. M. Robert, 2016. Test of the co-integration rank in VAR models
in the presence of a possible break in trend at an unknown point. Working Paper
No. 5 01-2016, Essex Finance Centre, Essex Business School, University of Essex.
Inoue, A. and G. Solon,
2010. Two-sample instrumental variables estimators. Review of Economics and
Statistics, 93, 557-561.
Kim, N., 2016. A
robustified Jarque-Bera test for multivariate normality. Economics Letters,
in press.
For years the conventional wisdom in finance
has been that bitcoins are a silly technological game, a bubble, and a
fad.
Today: Not so much.
Bitcoins have just gotten serious, and people
are going to have to start paying attention to this digital currency.
That means investors, governments, and those trying to fight crime as
well.
This was already true even before the news out
of California that criminals just used bitcoins to extort $17,000 in
blackmail from a hospital and make, so far, a clean getaway.
Bitcoins are booming. They have doubled in
price in the last six months. Indeed bitcoins were actually the best
performing currency in the world last year. I ran an exhaustive screen
on FactSet, making sure to include everything from the Afghanistan
afghani (down 16% against the U.S. dollar DXY, -0.17% ) to the Zambian
kwacha (down 42%). Bitcoin trounced them all. The dollar value of each
bitcoin jumped 40% during 2015, from $310 to $434. (The currency in
second place, the Gambian dalasi of all things, was nowhere near: It
rose just 9% against the U.S. dollar.).
At current prices, the total value of bitcoins
in the world now tops $6 billion. That’s quite some “fad.”
The total value of the digital currency Bitcoin is
over $5 billion, reflecting how some people think it will one day become
widely useful. But a new analysis of the software that powers the currency
concludes that Bitcoin needs a complete redesign if it is to support more
than the paltry number of transactions that take place today.
That suggests that the people, companies, and
investors who are banking on the currency becoming widely used must overcome
fundamental technical challenges that currently have no known solutions, not
just the economic and cultural issues associated with a currency independent
of any government.
The findings, from a large group of researchers
mostly affiliated with Cornell University, also offer new perspective on an
acrimonious debate that has recently riven the world of Bitcoin (see
“The
Looming Problem That Could Kill Bitcoin”).
"There is no
generally accepted accounting principles (GAAP) that specifically
addresses financial reporting for bit coins, which means this would
fall under other comprehensive basis of accounting (OCBOA), FASB
members who weighed in said."
I don't know if I agree
with that assessment — assuming that it is accurately reported. Bit
coins are clearly not a currency (yet), since they are not universally
(or near universally) accepted as a medium of exchange. Thus, it seems
to me that the portion of the ASC dealing with barter credits (starting
at ASC 845-10-30-17) covers bit coins. Basically, a sale in exchange for
a barter credit can be counted as revenue if the entity has a practice
of converting the barter credit into cash in the "near term."
Am I missing something?
I realize that the sponsors (if that's the right word) aspire that bit
coins should become a new currency, but right now, they seem to be the
functional equivalent of some forms of barter credits.
Best,
Tom
Jensen Reply
Hi Tom,
You made a very good point since both
bitcoins (and other virtual currencies) and barter credits are sometimes
traded on exchanges that set values apart from the fair values of the
items traded initially. In the exchange markets values can be
complicated by speculators in the virtual currencies and the varying
willingness of businesses to accept them.
The question is whether barter credits
meet the definitions of virtual currencies. I'm not familiar enough with
barter credits to know that they have the "block chain central bodies"
doing the mathematical calculations that, among other things, prevent
double spending ---
http://en.wikipedia.org/wiki/Bitcoin
Virtual currencies differ from private
currencies, and I tend to view barer credits private currencies
rather than virtual currencies ---
http://en.wikipedia.org/wiki/Private_currency
One key difference is that private currencies tend to trade in terms of
specified commodities (such as gold) or regions (such as BerkShares in
the Berkshire region of Massachusetts) whereas virtual currencies tend
to take on a life of their own. apart from commodities or spending
regions.
It seems like accounting for bitcoins
may become less complicated than accounting for private currencies in
that bitcoins and other virtual currencies are more like international
legal tender than private currencies subject to possible thinner markets
such as the market for BerkShares. Of course bitcoins are not yet legal
tender per se.
Barter credit accounting is also
complicated by other revenue recognition rules. For example, if barter
credits apply to discount coupons then all the complications of revenue
accounting for discount coupons enter the picture.
I don't think the IRS, the FASB, and the
IASB have yet dealt with all the complications of private currencies or
virtual currencies traded on exchanges and the liquidity risks and
speculation risks inherent in such transaction valuations. One
complication is that the markets may be very thin such as the BerkShares
trading market restricted to vendors in the Berkshires region.
Commercial barter
transactions have been increasing in recent years, and there are
currently a number of commercial barter websites. A barter transaction
can involve an exchange of goods or services for other goods or
services, or barter credits. In a transaction involving barter credits,
a company exchanges an asset such as inventory for barter credits. The
transaction might be done directly with another entity that will provide
goods or services, or it might be done through a barter broker or
network. In a barter network, goods or services are exchanged for barter
credits or "trade dollars" that can be used to purchase goods or
services from either the barter broker or members of the network. The
goods and services to be purchased may be specified in a barter contract
or may be limited to items made available by members of the network.
Credits for advertising are the most common items received in barter
transactions. This is because advertisers can often run additional spots
with little additional overhead and are therefore willing to exchange
such services for nonmonetary consideration.
When a company enters
into a barter transaction, two things need to be addressed from an
accounting standpoint. First, the exchange transaction needs to be
accounted for properly. Second, the recorded amount of unused barter
credits has to be evaluated at each financial statement reporting date.
Recording the
Exchange Transaction
Guidance on accounting
for the exchange transaction is provided in FASB Emerging Issues Task
Force (EITF) Issue No. 93-11, Accounting for Barter Transactions
Involving Barter Credits. The task force reached a consensus that APB
No. 29, Accounting for Nonmonetary Transactions, should be applied to an
exchange of a nonmonetary asset for barter credits. The basic principle
of APB No. 29 is that accounting for nonmonetary transactions should be
based on the fair values of the assets or services involved. (This
excludes situations where the exchange is not the culmination of an
earning process, in which case the recorded amount of the asset
surrendered should be used.) The transaction is generally measured based
on the fair value of the asset surrendered. The fair value of the asset
surrendered becomes the cost basis of the asset acquired. A gain or loss
should be recognized based on the difference between the fair value of
the asset surrendered and its carrying amount.
The fair value of the
asset received in an exchange should be used to record the transaction
only if it is more clearly evident than the fair value of the asset
surrendered. In the case of barter credits, it should be presumed that
the fair value of the asset exchanged is more clearly evident than the
fair value of the barter credits received. Accordingly, the barter
credits received should be recorded at the fair value of the asset
exchanged. That presumption might be overcome if the barter credits can
be converted into cash in the near term, or if independent quoted market
prices exist for items to be received in exchange for the barter
credits.
When determining the
fair value of the asset surrendered, it should be presumed that the fair
value of the asset does not exceed its carrying amount, unless there is
persuasive evidence supporting a higher value. When determining the
value of inventory or other assets exchanged in a barter transaction,
skepticism should be used. The reality is that the company would prefer
to sell the inventory for cash rather than barter credits. The fact that
the company is bartering with inventory could indicate that the
company's normal selling price may not be an accurate measure of fair
value. This could also raise lower-of-cost-or-market valuation questions
about any items remaining in inventory.
The EITF also concluded
that if the fair value of the asset exchanged is less than its carrying
amount, an impairment should be recognized prior to recording the
exchange. For example, inventory exchanged in a barter transaction
should be adjusted to the lower of cost or market prior to recording the
barter transaction. In the case of long-lived assets, impairment should
be measured and recognized in accordance with SFAS No. 121, Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to Be
Disposed Of.
Evaluating the
Recorded Amount of Barter Credits
At each balance sheet
date, the recorded amount of barter credits should be evaluated for
impairment. An impairment loss should be recognized if the fair value of
any remaining barter credits is less than the carrying amount, or if it
is probable that the company will not use all of the remaining barter
credits.
The first step in
evaluating the realizability of barter credits is to evaluate the
likelihood that the counterparty will perform. If the credits are
directly with another entity that will provide the goods or services,
that entity should be evaluated. This can be done by investigating the
credit rating of that entity and obtaining references from other
companies that have been involved in similar transactions with the
entity. If the credits are with a barter broker or network, the
credibility and history of the broker or network should be evaluated.
This can be done by contacting the International Reciprocal Trade
Association (www.irta.net) or similar organizations.
The next step is to
evaluate, based on current and future operations, whether the company is
expected to fully utilize the recorded amount of the credits. For
example, if a company has available $100,000 of advertising credits, but
typically spends only $5,000 on advertising each year, it might take 20
years to fully utilize the credits. Similarly, credits may allow the
company to purchase whatever goods or services happen to be available
from members of the network, and it may be uncertain whether the company
will ever need any of them. Barter credits may also have a contractual
expiration date, at which time they become worthless. Finally, some
arrangements may require the payment of cash in addition to barter
credits, in which case the ability of the company to use the credits may
be limited. *
FASB
issued a proposal Friday that is intended to reduce diversity in practice in
how certain cash receipts and cash payments are presented and classified in
the statement of cash flows.
All
entities would be affected by the proposed amendments, which are described
in Proposed Accounting Standards Update, Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments.
The
proposal, a consensus of FASB’s Emerging Issues
Task Force, addresses eight specific cash flow issues for which existing
guidance does not exist or is unclear:
Debt prepayment or debt extinguishment costs. Cash payments for these items would be classified as cash outflows
for financing activities.
Settlement of zero-coupon bonds.
At settlement, the portion of the cash payment attributable to the
accreted interest would be classified as cash outflows for operating
activities, and the portion of the cash payment attributable to the
principal would be classified as cash outflows for financing activities.
Contingent consideration payments made after a business combination.
Cash payments made by an acquirer that are not paid soon after a
business combination for the settlement of a contingent consideration
liability would be separated and classified as cash outflows for
financing activities and operating activities. Cash payments up to the
amount of the contingent consideration liability recognized at the
acquisition date would be classified as financing activities; any excess
would be classified as operating activities.
Proceeds from the settlement of insurance claims.
Cash proceeds received would be classified on the basis of the related
insurance coverage (i.e., the nature of the loss). For insurance
proceeds that are received in a lump-sum settlement, an entity would be
required to determine the classification on the basis of the nature of
each loss included in the settlement.
Proceeds from the settlement of corporate-owned life insurance
policies, including bank-owned life insurance policies.
Cash proceeds received would be classified as cash inflows from
investing activities. The cash payments for premiums on corporate-owned
policies may be classified as cash outflows for investing activities,
operating activities, or a combination of investing and operating
activities.
Distributions received from equity-method investees.
These would be presumed to be returns on investment and classified as
cash inflows from operating activities. The exception would occur when
the investor’s cumulative distributions received, less distributions
received in prior periods that were determined to be returns of
investment, exceed cumulative equity in earnings recognized by the
investor. When such an excess occurs, the current-period distribution up
to this excess would be considered a return of investment and would be
classified as cash inflows from investing activities. This proposed
solution does not address equity-method investments measured using the
fair value option.
Beneficial interests in securitization transactions.
A transferor’s beneficial interest obtained in a securitization of
financial assets would be disclosed as a noncash activity, and cash
receipts from payments on a transferor’s beneficial interests in
securitized trade receivables would be classified as cash inflows from
investing activities.
Separately identifiable cash flows and application of the
predominance principle.
Additional guidance would clarify when an entity should separate cash
receipts and cash payments and classify them into more than one class of
cash flows, and when an entity should classify the aggregate of those
cash receipts and payments into one class of cash flows on the basis of
predominance. -
The Centers
for Medicare & Medicaid Services released the covered outpatient drugs
final rule
that clarifies the Medicaid reimbursement and drug rebate program provisions
of the Patient Protection and Affordable Care Act. Life sciences entities
need to evaluate the effect of the rule on their financial statements and
disclosures, including their 2015 financial statements and disclosures
(e.g., Medicaid rebate estimates for inventory in the distribution channel)
if they haven’t yet issued their financial statements or made them available
to be issued. The rule is effective
1 April 2016. The definition of a line extension drug remains open for
comment.
What
you need to know
•
The Centers for Medicare & Medicaid Services issued its final rule on
covered outpatient drugs that clarifies the Medicaid drug reimbursement
and rebate program provisions of the Patient Protection and Affordable
Care Act.
•
The rule is effective 1 April 2016 and will be applied prospectively.
Life sciences entities need to evaluate the rule and make any necessary
changes to their processes and systems, internal controls, price
calculation methodologies and rebate estimates by that date.
•
Life sciences entities need to assess the effect of the rule on their
2015 financial statements and disclosures (e.g., Medicaid rebate
estimates for inventory in the distribution channel) if they haven’t yet
issued their financial statements or made them available to be issued.
•
The definition of line
GASB Failure: For decades,
state and local governments have been able to essentially hide—or at least
downplay—the size of their unfunded pension and retiree health-care liabilities
"California's Deep Debt Problems: Gov. Jerry Brown is pushing unions to
contribute more for health care," by Steven Greenhut, Reason Magazine,
February 5, 2016 ---
http://reason.com/archives/2016/02/05/californias-deep-debt-problems
For those who wonder
about the practical importance of transparency, I offer as evidence the
latest result of a modest rule change in California from a mind-numbingly
named organization—the
Governmental Accounting Standards Board, or GASB
(pronounced Gaz-bee). The group's stated goal is to promote accountability
through "excellence in public-sector financial reporting." This is exciting
stuff for people who wear green eyeshades.
But it has practical
importance for taxpayers. For decades, state and local governments have been
able to essentially hide—or at least downplay—the size of their unfunded
pension and retiree health-care liabilities, or debts.
GASB passed rule changes that make governments more directly account for
these debts. California governments are starting
to report pension debts differently in their 2015 financial statements,
which is becoming a wake-up call. (Medical costs and other non-pension
benefits will be accounted for differently in the 2017-2018 fiscal year.)
As a result,
localities are facing much larger pension debts than previously reported.
Pension problems have long been the subject of public and media discussion.
We're also seeing that "unfunded retiree health-care
liabilities" are potentially more astounding. Pension liabilities are the
calculation of future dollars owed to current workers and retirees. Most
systems have a large "unfunded" liability, but there is a lot of prefunding.
In other words, agencies and even employees kick in a portion of each
paycheck to address the eventual costs.
California Controller Betty Yee this week released
a new report just on the retiree health-care situation, in response to the
new GASB requirements. "The state's cost for retiree health and dental
benefits has grown to $74.1 billion," according to Yee's office. "The total
liability grew $2.38 billion compared to the prior fiscal year, but the size
of the increase was $1.5 billion less than estimated in last year's
report... These costs have increased dramatically over the past 15 years."
Those liabilities are only for state agencies.
They do not include liabilities for teachers or University of California
employees, which have their own systems. They also do not include cities,
counties and other local governments. One think-tank analysis suggested that
Los Angeles County alone has an unfunded retiree health-care liability of
many billions, so the controller's numbers might only reveal the tip of the
iceberg.
At the local level,
these soaring costs have pushed some cities into troubled fiscal waters.
Stockton's unusually generous health-care plan—a
Lamborghini-style plan, according to one council member—helped push the city
into bankruptcy. Stockton cut back the benefits because—unlike
pensions—medical plans are not always considered "vested," or guaranteed. In
many cases, the agency can unilaterally cut back the benefits or require
higher contributions.
But there is some
hopeful news.
In his State of
the State address, Gov. Jerry Brown (D) made
reference to the problem: "To date, we have set aside only a token amount to
pay for $72 billion in future retiree health benefits. These liabilities are
so massive that it is tempting to ignore them. We can't possibly pay them
off in a year or two or even 10... Yet it is our moral obligation to do
so—particularly before we make new commitments."
And those strong words
apparently are being backed up with a little action. It's disappointing the
governor refuses to reopen the pension issue, and continues to claim that a
modest three-year old reform law has done its job. But news reports suggest
he is negotiating with the state's public-employee unions to exact
contributions from employees to help fill the
medical-liability hole.
Feb 3 Britain's accounting watchdog came under
further political pressure on Wednesday to undertake a full, independently
supervised investigation into the auditing of HBOS's accounts by KPMG before
the bank collapsed in 2008.
The Financial Reporting Council said last month it
would undertake an initial enquiry into how KPMG and its staff audited HBOS
before it went bust at the height of the financial crisis.
That announcement followed calls for a full probe
from Andrew Tyrie, chairman of parliament's Treasury Select Committee, who
on Wednesday intervened again to detail the conditions he wanted for the FRC
enquiry to "command public confidence".
"This work is long overdue. Furthermore, the
process by which the FRC has reached this decision, as well as the approach
it plans for its preliminary enquiries, both raise a number of concerns,"
Tyrie said in a letter to the FRC and released to the media.
The FRC, which had no immediate comment, looked at
aspects of KPMG's accounts of HBOS during 2013, but found no grounds to take
matters further.
In his letter, Tyrie asked why the FRC was still
only looking at two elements of the HBOS audit rather than undertaking a
broader review.
He said a review of the HBOS collapse by the Bank
of England and the Financial Conduct Authority published last November had
benefited from independent supervision.
"What provision will be made for independent and
external oversight of the FRC's enquiries into the auditing of HBOS ?"
Tyrie asked what deadline the FRC was working to,
and whether the findings will be published in full.
Steve Ballmer stepped down
as the CEO of Microsoft two years ago, handing over the reins to Satya
Nadella.
Microsoft has made some
notable changes since his departure, in practice and rhetoric, including an
enthusiastic embrace of cloud computing and a more cooperative stance toward
computing platforms from other companies. The market seems to like the
change: The stock price has gone up around 40% in the last two years even as
earnings have stayed relatively flat.
Ballmer, meanwhile, has
carved a new life for himself as the owner of the NBA's Los Angeles
Clippers, where he shows his enthusiasm from the sidelines at many home and
away games.
We caught up with Ballmer to
ask him about his life after Microsoft and his thoughts on technology and
the game of hoops.
Continued in article
Jensen Comment
In addition to owning the Clippers, Steve Ballmer now teaches entrepreneurship
at Stanford University.
Jensen Comment
The best states for business are not all red (conservative, low-tax) states as
evidenced by IBM's recent headquarters move to Boston. The least friendly states
for business growth are mostly in the south with the exception of Hawaii, New
Mexico, West Virginia, and Rhode Island. You would think that the states near
the bottom would do more to retain and attract businesses. Some are really
hurting from the highest proportions of unfunded pensions for state workers.
Last September, at a law firm overlooking San
Francisco Bay, Andrew Penney, a managing director at Rothschild & Co., gave
a talk on how the world’s wealthy elite can avoid paying taxes.
His message was clear: You can help your clients
move their fortunes to the United States, free of taxes and hidden from
their governments.
Some are calling it the new Switzerland.
After years of lambasting other countries for
helping rich Americans hide their money offshore, the U.S. is emerging as a
leading tax and secrecy haven for rich foreigners. By resisting new global
disclosure standards, the U.S. is creating a hot new market, becoming the
go-to place to stash foreign wealth. Everyone from London lawyers to Swiss
trust companies is getting in on the act, helping the world’s rich move
accounts from places like the Bahamas and the British Virgin Islands to
Nevada, Wyoming, and South Dakota.
“How ironic—no, how perverse—that the USA, which
has been so sanctimonious in its condemnation of Swiss banks, has become the
banking secrecy jurisdiction du jour,” wrote Peter A. Cotorceanu, a lawyer
at Anaford AG, a Zurich law firm, in a recent legal journal. “That ‘giant
sucking sound’ you hear? It is the sound of money rushing to the USA.”
Rothschild, the centuries-old European financial
institution, has opened a trust company in Reno, Nev., a few blocks from the
Harrah’s and Eldorado casinos. It is now moving the fortunes of wealthy
foreign clients out of offshore havens such as Bermuda, subject to the new
international disclosure requirements, and into Rothschild-run trusts in
Nevada, which are exempt.
The U.S. “is effectively the biggest tax haven in
the world” —Andrew Penney, Rothschild & Co.
The firm says its Reno operation caters to
international families attracted to the stability of the U.S. and that
customers must prove they comply with their home countries’ tax laws. Its
trusts, moreover, have “not been set up with a view to exploiting that the
U.S. has not signed up” for international reporting standards, said
Rothschild spokeswoman Emma Rees.
Others are also jumping in: Geneva-based Cisa Trust
Co. SA, which advises wealthy Latin Americans, is applying to open in
Pierre, S.D., to “serve the needs of our foreign clients,” said John J. Ryan
Jr., Cisa’s president.
Trident Trust Co., one of the world’s biggest
providers of offshore trusts, moved dozens of accounts out of Switzerland,
Grand Cayman, and other locales and into Sioux Falls, S.D., in December,
ahead of a Jan. 1 disclosure deadline.
“Cayman was slammed in December, closing things
that people were withdrawing,” said Alice Rokahr, the president of Trident
in South Dakota, one of several states promoting low taxes and
confidentiality in their trust laws. “I was surprised at how many were
coming across that were formerly Swiss bank accounts, but they want out of
Switzerland.” Why the Wealthy Are Moving Their Money Into the U.S.
Rokahr and other advisers said there is a
legitimate need for secrecy. Confidential accounts that hide wealth, whether
in the U.S., Switzerland, or elsewhere, protect against kidnappings or
extortion in their owners’ home countries. The rich also often feel safer
parking their money in the U.S. rather than some other location perceived as
less-sure.
“I do not hear anybody saying, ‘I want to avoid
taxes,’ ” Rokahr said. “These are people who are legitimately concerned with
their own health and welfare.”
And, just maybe, get busted: “At that moment,
man finds his character.”
That, anyway, is the Hollywood version, circa
1987, in “Wall Street.”
On the real Wall Street, insider trading has
rarely been that clear. And now, the prickly legal questions around it
-- questions that have been around since the days of Gordon and Bud --
could get even thornier.
Almost three decades after the film, and seven
years after the start of another dragnet that ensnared dozens, the U.S.
Supreme Court is poised to take up the issue in a case involving
brothers-in-law.
But before that happens, Judge Jed S. Rakoff --
who wrote the opinion headed to the Supreme Court -- is getting another
chance to weigh in.
Simple Answer?
This week, Rakoff, a Manhattan federal court
judge, is set to preside over a case that highlights a question that has
many traders on edge: Just what is insider trading anyway? The answer
might seem simple, but it’s not and never has been.
Part of insider trading requires that tippers,
or people who pass inside information, get a “benefit.” After a pair of
appeals court rulings since December 2014, it’s now unclear what counts
as a benefit. Cash? Yes. Career advice. No. But say the tipper and the
trader are just brothers-in-law and no money is exchanged. Or roommates
who occasionally share secrets. Is that insider trading?
That’s what this trial is about.
Tuesday’s case was brought by the U.S.
Securities and Exchange Commission against two brokers, and it centers
on a merger tip passed from one roommate to another. The tip was about a
billion dollar deal that made its way to the two brokers now on trial.
Lawyer’s Tip
According to the SEC, a lawyer who worked at
Cravath, Swaine & Moore LLP told his friend, a stock trader, about
International Business Machine’s acquisition of SPSS Inc. in 2009. The
friend in turn bought shares in SPSS and told his roommate, who then
tipped broker Daryl Payton and two colleagues. One of those brokers told
another colleague, Benjamin Durant.
Rakoff said in rulings last year that the SEC
may have a case against Payton and Durant, who are on trial. The
evidence may well show that the tips were swapped in exchange for “past
and prospective services rendered” by one roommate to the other. If the
jury agrees, that would be enough to establish the benefit required
under insider-trading law, he said.
“They together ate dinner, drank beers, played
video games, watched TV, used drugs and discussed their respective days,
current events and personal details of their lives,” Rakoff said,
summarizing the SEC’s claims. One roommate “took the lead in organizing
and paying shared expenses, and resolving problems at the apartment.”
Nine Months
Lawyers for Payton and Durant are expected to
argue that the tip to the roommate didn’t include a benefit -- so
neither that, nor anything that followed, was insider trading. The
lawyers say the roommates didn’t have a close relationship; they lived
together for only nine months, didn’t share details about one another’s
work, and hadn’t met one another’s families or friends. Payton and
Durant knew even less about the roommates’ relationship, their lawyers
say.
Hoary legal definitions -- in fact, no single
U.S. statute covers insider trading -- have complicated the issue for
years, as have different views from different global jurisdictions.
Pretty much everyone is confused, from traders, to prosecutors to
corporate executives.
“It’s a scary world when nobody knows how to
conduct themselves,” said Jeffrey Robertson, a Washington-based lawyer
who represents clients in securities litigation. “Obviously, it’s a
state of flux.”
It’s so confusing, in fact, that Payton and
Durant were criminally charged with insider trading, only to see those
cases dismissed after a federal appeals court changed the law in
December 2014.
California Case
The Supreme Court may at last provide guidance.
Last month, it agreed to review a case from California in which Rakoff
-- who was sitting on the appeals court there as a visiting jurist --
wrote an opinion on benefit that was favorable to prosecutors.
Continued in article
Jensen Comment
In my opinion, the more insider traders get away with exploiting private
information the more investors will abandon the market. It's as simple as
that. To protect the market you have to both discourage and punish insider
trading even if its an accidental mistake.
According to the SEC’s
order instituting a settled administrative proceeding against Monsanto,
accounting executives Sara M. Brunnquell and Anthony P. Hartke, and
then-sales executive Jonathan W. Nienas:
· Monsanto’s sales force began telling U.S.
retailers in 2009 that if they “maximized” their Roundup purchases in the
fourth quarter they could participate in a new rebate program in 2010.
· Hartke developed and Brunnquell approved talking
points for Monsanto’s sales force to use when encouraging retailers to take
advantage of the new rebate program and purchase significant amounts of
Roundup in the fourth quarter of the company’s 2009 fiscal year.
Approximately one-third of its U.S. sales of Roundup for the year occurred
during that quarter.
· Brunnquell and Hartke, both certified public
accountants, knew or should have known that the sales force used this new
rebate program to incentivize sales in 2009 and Generally Accepted
Accounting Principles (GAAP) required the company to record in 2009 a
portion of Monsanto’s costs related to the rebate program. But Monsanto
improperly delayed recording these costs until 2010.
· Monsanto also offered rebates to distributors who
met agreed-upon volume targets. However, late in the fiscal year, Monsanto
reversed approximately $57.3 million of rebate costs that had been accrued
under these agreements because certain distributors did not achieve their
volume targets (at the urging of Monsanto).
· Monsanto then created a new rebate program to
allow distributors to “earn back” the rebates they failed to attain in 2009
by meeting new targets in 2010.
· Under this new program, Monsanto paid $44.5
million in rebates to its two largest distributors as part of side
agreements arranged by Nienas, in which they were promised late in fiscal
year 2009 that they would be paid the maximum rebate amounts regardless of
target performance.
· Because the side agreements
were reached in 2009, Monsanto was required under GAAP to record these
rebates in 2009. But the
company improperly deferred recording the rebate costs until 2010.
· Monsanto repeated the program the following year
and improperly accounted for $48 million in rebate costs in 2011 that should
have been recorded in 2010.
· Monsanto also improperly accounted for more than
$56 million in rebates in 2010 and 2011 in Canada, France, and Germany.
They were booked as selling, general, and administrative (SG&A) expenses
rather than rebates, which boosted gross profits from Roundup in those
countries.
Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement,
said, “Monsanto devised rebate programs that elevated form over substance,
which led to the booking of substantial amounts of revenue without the
recognition of associated costs. Public companies need to have robust
systems in place to ensure that all of their transactions are recognized in
the correct reporting period.”
Monsanto consented to the SEC’s order without admitting or denying the
findings that it violated Sections 17(a)(2) and 17(a)(3) of the Securities
Act of 1933, the reporting provisions of Section 13(a) of the Securities
Exchange Act of 1934 and underlying rules 12b-20, 13a-1, 13a-11, and 13a-13;
the books-and-records provisions of Exchange Act Section 13(b)(2)(A); and
the internal accounting control provisions of Exchange Act Section
13(b)(2)(B).
Valeant Pharmaceuticals International Inc. is
constantly defending its business strategy—spending more to acquire
companies with valuable drugs it can market than on research and development
of new drugs.
New, original research by MarketWatch, supported by
data gathered by financial research firm Calcbench, shows how Valeant VRX,
-3.66% uses a rare accounting maneuver to obscure the true details of its
many complex deals. In particular, it shows how much it pays for companies
over book value and how it adjusts that amount over time without hitting
prior income statements.
Last Thursday Valeant’s interim CEO Howard Schiller
was subjected to a bipartisan grilling from members of the House Committee
on Oversight, who questioned him about the company’s drug pricing tactics.
Valeant’s business strategy has been to buy companies with drugs that have
little or no generic competition and then raise the prices substantially to
capitalize on desperate demand for these drugs. The company has been under
scrutiny for its aggressive accounting activities ever since a short seller,
Citron, accused it last fall of fraud related to its previously undisclosed
specialty pharmacy Philidor. The company has since terminated its
relationship with Philidor.
Jensen
Comment
Many of these changes will be dead in the water in part because the USA deficit
went over $19 trillion and this budget alone for 2017 is $4 trillion.
Idea for
Teaching and Research
The following Amazon illustration could be a great starting point for a teaching
module on the reasons for and accounting rules for equity share repurchases.
These reasons should include both stock that is cancelled versus stock that is
held for reissuance (treasury shares). Of course you've made great progress once
you convince a student that there's a great difference when Amazon buys 100
shares of Amazon stock versus when Amazon buys 100 shares of General Electric.
In terms of
research the world could use a good accounting history study on the history of
stock repurchases.
In terms of
research and teaching the world could use a good case on on the decision making
process for a particular real-world company's stock repurchase program such as
that of Amazon in 2016.
Amazon.com Inc. said its board
authorized the repurchase of as much as $5 billion of the online retailer’s
stocks.
The company’s shares, which have
fallen 19% in the past month, rose 1.4% to $497.50 in recent after-hours
trading.
In a regulatory filing, Amazon said
the latest stock-buyback plan replaces its previous $2 billion
share-repurchase program that the board approved in 2010.
Late last month, Amazon reported the
largest quarterly profit in its 19-year history as a public company, as more
consumers eschew brick-and-mortar retail for the convenience of ordering
goods and services from their couch. However, the results missed analysts
expectations.
In this paper, the focus is on how excessive
directors’ and officers’ liability insurance coverage is associated with
risk-taking behavior in financial reporting. This study examines the
implications of two alternative hypotheses. The opportunism hypothesis
predicts that the covered executive is overly buffered from recourse via
securities litigation, which leads to aggressive accounting choices. The
alternative hypothesis is the economic insurance hypothesis which
predicts that firms will over-invest in directors’ and officers’
liability insurance coverage independent of their aptitude for
accounting manipulation because of the managers’ risk aversion.
Aggressive accounting is measured using regulatory accounting
enforcement actions and earnings restatements. I find evidence
consistent with the opportunism hypothesis in both the enforcement
action and restatement setting, suggesting that officers rely on
excessive insurance in making financial reporting decisions. The
findings have implications for managerial private information and its
impact on financial reporting decisions
Accounting Standards Enforcement in an International Setting: Testing the
Impact of Cultural, Religious, Political and Legal Environment on National
Regulatory Efforts
SSRN, February 5, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2728452
Authors
Gary Kleinman Montclair State University
Beixin Betsy Lin Montclair State University
Rebecca Bloch Fairfield University - Charles F. Dolan School of Business
Abstract
As the world has become more connected through
advancements in technology and expansions of multinational corporations, the
call has grown louder for a global set of financial reporting standards to
help compare the financial results of companies conducting business
internationally to better measure performance in comparison with competitors
from countries using diverse sets of local or international accounting
standards. Although in theory a global set of reporting standards creates a
more cohesive and comparable financial reporting environment, this argument
fails to take into account how the underlying differences in the culture,
political, and legal environments across nations impacts the enforcement of
these standards. If the enforcement efforts of accounting standards do vary
as a result of national characteristics, it adds an important dimension to
the arguments for and against the globalization of accounting standards for
the purposes of improved comparability and standardization, because it has
implications for the comparability of financial reports across nations with
differing levels of enforcement. This study evaluates whether the accounting
standards enforcement efforts vary as a result of underlying differences in
cultural, religious, political and legal environments. Whereas there is a
body of literature focusing on the adoption of IFRS and the quality of
financial reporting, this study provides a new and important contribution to
the literature seeking to understand whether the often advocated widespread
adoption of any set of international standards can provide the link in
comparability across nations that proponents have been calling for. Rather
than focusing on the standards themselves, this study focuses on the
hypothesized determinants of variation in enforcement efforts across
nations. The results indicate that there are systematic differences in
enforcement based on underlying cultural, religious, political and legal
environment differences.
Amrita Nain University of Iowa - Henry B. Tippie College of Business
Anand M. Vijh University of Iowa - Department of Finance
Abstract
We point out several methodological flaws in
previous research that concludes that managers mislead shareholders into
selling their stock for too cheap by releasing overly negative information
before stock repurchases. In particular, this research relies primarily on
measured market reaction to management guidance which suffers from
endogeneity concerns. Using a sample of 3,181 repurchase firms and matching
rival firms during 2003-2012, we find insignificant differences between
their frequencies of management guidance, the implied earnings updates, and
the closeness of earnings guidance to actual earnings. In contrast, there is
a significant difference in market reaction to guidance, which is 1.5% lower
for repurchase firms than for rival firms after accounting for differences
in earnings updates and other information. Our evidence suggests that
repurchases occur in response to investor misreaction to management
guidance, but we find no evidence to suggest that managers mislead investors
before this dominant form of shareholder returns.
P. Richard Hahn University of Chicago - Booth School of Business;
University of Chicago - Booth School of Business - Econometrics and
Statistics
Jared S. Murray CMU
Ioanna Manolopoulou University College London - Department of Statistical
Science
Abstract
This paper describes the use of flexible Bayesian regression models for
estimating a partially identified probability function. Our approach permits
efficient sensitivity analysis concerning the posterior impact of priors on
the partially identified component of the regression model. The new
methodology is illustrated on an important problem where only partially
observed data are available – inferring the prevalence of
accounting misconduct among
publicly traded U.S. businesses.
Renee E. Weiss Queens College, CUNY; Queens College
John Shon City University of New York (CUNY)
Abstract
The SEC’s Division of Corporate Finance
sent “Dear CFO” letters to certain registrants in 2008
requesting voluntary disclosures to improve transparency of
Level 3 fair value measures and valuation of financial
instruments in inactive or illiquid markets. We expect these
bank holding companies were among the companies that the
Division of Corporate Finance targeted. We consider the
discussion points from the Dear CFO letters to identify the
disclosures to analyze in this study. We find that disclosures
about valuation techniques and the use of broker quotes or
prices from pricing services are associated with increased
information asymmetry and disclosures about the use of market
indices or illiquidity adjustments are associated with decreased
information asymmetry. When interacted with Level 3 assets,
disclosures about changes in valuation techniques intensify the
positive relation between Level 3 assets and information
asymmetry and disclosures about asset-backed securities mitigate
the positive relation between Level 3 assets and information
asymmetry. Our study provides insight about the types of
disclosures that impacted information asymmetries during the
financial crisis. However, this setting of uncertainty and use
of a small sample size may limit the ability to generalize these
inferences to other time periods or other financial firms.
Jensen Comment
I have not yet had time to get to all the articles below. But many of them
look like they would be useful to both teaching and research.
An Opportunity to Write a
Case on Going Concern Issues
Ceres, a Thousand Oaks-based ag-biotech
company, made the announcement in a filing with the Securities and
Exchange Commission. The filing says Ceres hired Los Angeles-based
Marcum as its new independent accountant and dismissed its old
accountant, KPMG. Ceres fired KPMG because of a disagreement over issues
concerning language in its past two yearly reports. “KPMG’s reports
contained a paragraph stating that ‘The Company incurred recurring
losses and expects the current level of cash and cash equivalents will
only be sufficient to fund operations until January 2016 which raises
substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also described in note
1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty,’” Cere’s Feb. 23
filing said. KPMG’s conclusion appeared several times in Ceres’ 2014 and
2015 annual reports. Ceres officials did not agree with KPMG’s
conclusion and decided to make a change. KMPG said in a statement
attached to the filing that it received the dismissal notification
today, but was not in a position to judge Ceres’ actions. “We are not in
a position to agree or disagree with Ceres, Inc.’s statements regarding
the process to determine the independent registered public accounting
firm,” KMPG’s statement read. -
SUMMARY: KPMG
LLP, says the Commodity Futures Trading Commission understated its
obligations by about $212 million in fiscal 2014 and $194 million in
fiscal 2015. The agency hasn't properly accounted for its future
costs of leasing office space. The auditor issued only a "qualified"
opinion, indicating its judgment that the CFTC's financial
statements for fiscal 2015, which ended
Sept. 30, were flawed. The
CFTC has a material weakness in its internal controls as a result.
The CFTC said it "does not concur" with KPMG's position, but in a
letter also included in the 2015 financial report, the agency
acknowledged it was "reasonably possible" KPMG was correct.
CLASSROOM APPLICATION: This
is a rare article regarding qualified audit opinions that could be
used as an example for auditing courses.
QUESTIONS:
1. (Advanced) What is a clean opinion vs. a qualified
opinion? What are the differences? What are the implications of
each?
2. (Advanced) What is the CFTC? What is KPMG? What is their
relationship?
3. (Introductory) What are the facts of this situation? What
are the issues or problems?
4. (Advanced) How could the status of the current CFTC audit
affect previous audits? Should there be any affect? What has KPMG
announced?
Reviewed By: Linda Christiansen, Indiana University Southeast
The Commodity Futures Trading Commission
is fighting with its outside auditor, which is refusing to give
the agency a clean bill of health because of what it says is a
significant error on the CFTC’s books.
The auditor, KPMG LLP, says the CFTC
understated its obligations by about $212 million in fiscal 2014
and $194 million in fiscal 2015, according to a KPMG opinion
included in the CFTC’s 2015 financial report. The agency hasn’t
properly accounted for its future costs of leasing office space,
KPMG said.
The auditor issued only a “qualified”
opinion, indicating its judgment that the CFTC’s financial
statements for fiscal 2015, which ended Sept. 30, were flawed.
The CFTC has a material weakness in its internal controls as a
result, KPMG said.
The CFTC said it “does not concur” with
KPMG’s position, but in a letter also included in the 2015
financial report, the agency acknowledged it was “reasonably
possible” KPMG was correct. The CFTC said the Government
Accountability Office, the congressional watchdog agency, is
investigating the matter.
A CFTC spokesman said the agency believes
the dispute is a technical accounting issue and is waiting for
the GAO to weigh in before the CFTC acts to address it. A KPMG
spokesman declined to comment on the matter, citing client
confidentiality.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on January 29,
2016
TOPICS: Capital
Leases, Financial Accounting, Lease Accounting, Operating Leases
SUMMARY: Finance
chiefs have at least three years until they officially have to bring
trillions in off-balance-sheet leases onto their company's books,
but experts say they should already be preparing. The 100 public
companies in the Fortune 500 with the most such obligations have a
total of over half a trillion dollars in off-balance-sheet leases.
CLASSROOM APPLICATION: These
articles and the following questions offer a perspective on the
extent of liabilities to be booked under the new lease accounting
rules. These are appropriate for financial accounting classes.
QUESTIONS:
1. (Introductory) What changes did FASB make to lease
accounting? How does this differ from the previous accounting
treatment for leases?
2. (Advanced) What is FASB? Why did it have the authority to
make this change?
3. (Advanced) What is the extent of the new liabilities to be
booked under the new rules? Are these significant amounts for the
companies? For what companies and industries would the amounts be
material on the financial statements?
4. (Advanced) How are companies preparing for the new rules?
What must they do for the new presentation of the lease information?
5. (Advanced) Name the two types of leases and define each of
them. How do they differ? Which type is affected by the new rules?
Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Off-balance-sheet lease obligations on the
books of 100 large U.S. companies
Finance chiefs have at least three years until
they officially have to bring trillions in off-balance-sheet leases
onto their company’s books, but experts say they should already be
preparing.
There are two general types of leases. Capital
leases are long-term, and the lessee assumes ownership-like benefits
and risks; they go on the balance sheet as assets and liabilities.
Operating leases are far more common, covering everything from
property rent to tools to vehicles. Financial information about
these leases appear only as footnotes in a company’s annual report,
not on its balance sheet, even though they represent contractual
commitments.
The 100 public companies in the Fortune 500
with the most such obligations have a total of over half a trillion
dollars in off-balance-sheet leases, according to a recent study
from LeaseAccelerator Inc., a leasing-software firm. The rule change
is in the final stages and likely to be approved by the Financial
Accounting Standards Board this year.
Most companies will have to begin preparing
for lease-accounting-rule changes starting in 2017 because they will
need to present two years of comparable books when reporting results
under the new standard in 2019.
Multinationals could have the trickiest task,
evaluating leases across the globe, said Michael Keeler,
LeaseAccelerator’s chief executive. They spend more money on
real-estate leases, but have many more equipment leases, which are
more complex and require more accounting assumptions.
Walgreens Boots Alliance Inc. tops the list,
with $33.7 billion in off-balance-sheet assets at its most recent
year-end. That number would swell by nearly a quarter if it
completes its acquisition of drugstore rival Rite Aid Corp., No. 15
on the list with about $8 billion.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 5,
2016
SUMMARY: Caterpillar
Inc. warned its revenue this year could sink to a six-year low on
falling demand but held out hope for better earnings as the heavy
equipment maker swung to a fourth-quarter loss on restructuring
expenses. Caterpillar forecast 2016 earnings of $4 a share,
excluding additional restructuring costs and including the benefit
of lower pension costs, up from $3.50 a share in adjusted earnings
in 2015. Analysts were expecting $3.48 a share excluding charges.
Its pension costs this year are expected to fall on a change in
accounting practices, a move that provided most of the higher
per-share profit in the company's forecast.
CLASSROOM APPLICATION: This
article could be used as a real-world example when covering the
topics of budgeting and forecasting.
QUESTIONS:
1. (Advanced) What is a forecast? What is a budget? How do
they differ?
2. (Introductory) What information has Caterpillar
publicized? What is its outlook for 2016?
3. (Advanced) How do companies develop forecasts? What
information should management use? What assumptions and estimates
might they have to use?
4. (Advanced) How did Caterpillar develop the numbers it has
reported? What industry trends are affecting the forecasts? What
company-specific issues did the company have to consider?
5. (Introductory) How should investors and other interested
parties react to this information? What can they do with the
forecast?
6. (Advanced) How can forecasts affect stock prices? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Caterpillar Inc. warned
its revenue this year could sink to a six-year low on falling demand
but held out hope for better earnings as the heavy equipment maker
swung to a fourth-quarter loss on restructuring expenses.
The mining and
construction equipment supplier said depressed prices for iron ore,
copper and other commodities, cheaper oil and weakness in developing
countries are weighing on sales of its bulldozers, excavators,
mining trucks and engines.
The Peoria, Ill.-based
company now expects 2016 revenue of about $42 billion, more than
one-third below the company’s peak of $65.9 billion four years ago.
The projected 10% decline is twice what it had forecast for the year
in October and would leave revenue at below what it had before its
acquisition of mining equipment company Bucyrus International Inc.
in 2011.
Caterpillar forecast
2016 earnings of $4 a share, excluding additional restructuring
costs and including the benefit of lower pension costs, up from
$3.50 a share in adjusted earnings in 2015. Analysts were expecting
$3.48 a share excluding charges. Its pension costs this year are
expected to fall on a change in accounting practices, a move that
provided most of the higher per-share profit in the company’s
forecast.
The
better-than-expected profit view helped lift the company’s shares.
Caterpillar gained 4.7% to $61.08 a share at 4 p.m. in New York
trading on Thursday.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 5,
2016
SUMMARY: Most
people overlook health-savings accounts, or HSAs, as a
retirement-savings vehicle. But these accounts, which were
authorized in 2003, come with more tax advantages than 401(k)s and
individual retirement accounts when used to cover medical costs,
which are a major expense in retirement. As with a traditional
401(k) or IRA, an HSA allows you to set aside pretax money without
paying federal or state income tax on it. Most people who contribute
through payroll deductions also save 7.65% in FICA tax, which
finances Social Security and Medicare. Money in HSAs grows tax-free
and, if used for medical expenses, can also be withdrawn tax-free.
In contrast, with a traditional 401(k) or IRA, you pay income tax on
your withdrawals.
CLASSROOM APPLICATION: This
is the excellent summary of HSA benefits to use in individual
taxation classes.
QUESTIONS:
1. (Introductory) What is an HSA? When were they first
allowed?
2. (Advanced) What are the tax advantages of HSAs? How are
these advantages greater than other savings accounts and tax-saving
options?
3. (Advanced) What requirements does tax law impose on HSAs?
Why?
4. (Advanced) How can a vehicle intended to pay medical bills
be used as a retirement savings vehicle?
5. (Advanced) What tax-planning ideas does the article offer
regarding HSAs? Are these options available to all taxpayers? For
whom are they well-suited?
Reviewed By: Linda Christiansen, Indiana University Southeast
When saving for
retirement, there is a place to put money that may be even better
than your 401(k).
Most people overlook
health-savings accounts, or HSAs, as a retirement-savings vehicle.
But these accounts, which were authorized in 2003, come with more
tax advantages than 401(k)s and individual retirement accounts when
used to cover medical costs, which are a major expense in
retirement.
“It’s the most
tax-preferred account available,” says Michael Kitces, director of
financial planning at Pinnacle Advisory Group Inc. in Columbia, Md.
“Using one to save for retirement medical expenses is a better
strategy than using retirement accounts” to cover those expenses, he
says.
As with a traditional
401(k) or IRA, an HSA allows you to set aside pretax money without
paying federal or state income tax on it. Most people who contribute
through payroll deductions also save 7.65% in FICA tax, which
finances Social Security and Medicare.
Money in HSAs grows
tax-free and, if used for medical expenses, can also be withdrawn
tax-free. In contrast, with a traditional 401(k) or IRA, you pay
income tax on your withdrawals.
Due to this combination
of tax advantages, HSAs—which are paired with the HSA-qualified
health plans available on health-care exchanges and offered by 43%
of employers—can even be a better deal than a 401(k) with an
employer matching contribution. That is most likely to be the case
if you are in a high tax bracket and the 401(k) match is less than
dollar for dollar, says Greg Geisler, an associate professor of
accounting at the University of Missouri-St. Louis.
For people with a high
deductible health plan, “an HSA should be either the first or second
place they look to save” for later life, Prof. Geisler says.
To open an HSA, you
must be covered by an HSA-qualified health plan. For 2016, these
plans have deductibles of at least $1,300 for individuals and $2,600
for a family. In return for exposing policyholders to potentially
higher out-of-pocket costs, the plans generally charge lower
premiums and offer individuals and families the chance to save up to
$3,350 or $6,750 a year, respectively, in an HSA. (Those over 55 can
save $1,000 more).
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 5,
2016
TOPICS: Cost
of capital, Financial Accounting, Financial Statement Analysis,
Return on Investment
SUMMARY: More
than half (55%) of nearly 42,000 companies around the world didn't
generate returns on their invested capital last year that were high
enough to cover the cost of their borrowings and stock. The
companies' median return was 3.1% less than their cost of capital,
or the rate of return required to cover the riskiness of their
investments. A company's overall cost of capital reflects the cost
of both its equity and debt.
CLASSROOM APPLICATION: The
real-world information in this article would be good to use when
studying financial statement analysis.
QUESTIONS:
1. (Advanced) What is cost of capital? How is it calculated?
How can that information be used? Who would be interested in a
company's cost of capital?
2. (Advanced) How is return on invested capital calculated?
How could it be used? What value does it offer in financial
statement analysis?
3. (Introductory) What data does this article offer regarding
return on capital among various companies? How do industries differ?
What are the reasons for these differences?
4. (Advanced) What are the ramifications of low returns? What
are the benefits of high returns?
5. (Advanced) What can companies do to boost returns?
Reviewed By: Linda Christiansen, Indiana University Southeast
Proportion of companies
whose returns fell short of their cost of capital in 2015
Many economists say
companies aren’t investing enough money in their businesses. A new
analysis suggests, however, that such investments might not be
paying off.
More than half—55%—of
nearly 42,000 companies around the world didn’t generate returns on
their invested capital last year that were high enough to cover the
cost of their borrowings and stock, according to Aswath Damodaran, a
finance professor at New York University’s Stern School of Business.
Indeed, the companies’
median return was 3.1% less than their cost of capital, or the rate
of return required to cover the riskiness of their investments.
A company’s overall
cost of capital reflects the cost of both its equity and debt.
The formula also
incorporates interest rates—which have been exceptionally low in
recent years—and measures of implied investment risks, which have
risen. Mr. Damodaran said the combination has been keeping the
overall cost of capital flat.
Tobacco was among the
best-performing industries last year, according to Mr. Damodaran.
After costs, Reynolds American Inc. earned a 139% return on its
invested capital, and Philip Morris International Inc. earned 87%.
The oil-and-gas, coal
and steel industries fared the worst. Exxon Mobil Corp. lost 2.6% on
its invested capital, after costs, while BP PLC lost 15.4%.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 5,
2016
TOPICS: Accounting
for Contracts, FASB, IASB, IFRS
SUMMARY: The
FASB and IASB have been working to identify issues related to the
implementation of the new revenue standard since its release in May
2014. The first annual period to which organizations will need to
apply the standard (issued as ASU 2014-09 by the FASB and IFRS 15 by
the IASB) is fiscal years beginning on or after January 1, 2016. It
will take time for companies to develop and test appropriate changes
to their systems, processes and internal controls related to
accounting for contracts with customers and tracking information. In
addition, complexities due to an entity's size, the number of
geographical regions in which it operates, and the nature of its
revenue streams could add considerable time to these efforts. This
article discusses certain considerations related to implementing the
new revenue standard and includes data from an informal
Deloitte-sponsored survey.
CLASSROOM APPLICATION: This
article would be informative for financial accounting classes when
covering accounting for contracts or implementation of new
standards.
QUESTIONS:
1. (Introductory) What is FASB? What is its function and area
of authority? What is IASB? What is its function and area of
authority? How do the two organizations overlap? How do they differ?
2. (Advanced) What are the details of the new revenue
standard discussed in the article? Why was it implemented?
3. (Advanced) What are the implementation issues associated
with this revenue standard? Does it appear that implementation is
onerous, or does it seem easy? What challenges do companies face?
Reviewed By: Linda Christiansen, Indiana University Southeast
The following
summarizes and compares the boards’ tentative decisions related to
IP:
Topic: Determining the
nature of an entity’s promise in granting a license
FASB’s Tentative
Decision: The FASB tentatively agreed with its staff’s
recommendation to update the standard to include “Articulation B,”
which would require an entity to characterize the nature of a
license as either functional or symbolic.
IASB’s Tentative
Decision: The IASB tentatively agreed with its staff’s
recommendation to update the standard to include “Articulation A,”
which would potentially require an entity to assess the utility of a
license before characterizing it as functional or symbolic.
Comparison: The
decisions are different, but the differences are currently expected
to affect only a small subset of licenses.
Topic: Sales-based and
usage-based royalties
FASB’s Tentative
Decision: The FASB tentatively agreed with its staff’s
recommendation to update the standard to clarify that rather than
splitting a royalty (and applying both the royalty and general
constraints to it), an entity would apply the royalty constraint if
the license is the predominant feature to which the royalty relates.
IASB’s Tentative
Decision: The IASB tentatively agreed with its staff’s
recommendation, which was the same as the FASB staff’s.
Comparison: The
decisions are the same; continued convergence is expected.
The following
summarizes and compares the boards’ tentative decisions related to
identifying performance obligations:
Topic: Identifying
promised goods or services
FASB’s Tentative
Decision: The FASB tentatively agreed with its staff’s
recommendation to amend the standard to permit entites to evaluate
the materiality of promises at the contract level and that, if the
promises are immaterial, the entity would not need to evaluate such
promises further.
IASB’s Tentative
Decision: The IASB tentatively agreed with its staff’s
recommendation that no updates or standard setting should be
undertaken.
Comparison: The
decisions are different but because they are intended to clarify the
guidance, divergence is currently not expected.
Topic: Distinct in the
context of the contract
FASB’s Tentative
Decision: The FASB tentatively agreed with its staff’s
recommendations to update the standard to (1) define the term
“separately identifiable,” (2) reframe the separation criteria to
focus on a bundle of goods or services, and (3) add illustrative
examples.
IASB’s Tentative
Decision: The IASB tentatively agreed with its staff’s
recommendation to add illustrative examples but otherwise not amend
the standard’s guidance.
Comparison: The
decisions are the same except for what were termed “minor” wording
differences. As a result, divergence is currently not expected.
Topic: Shipping and
handling services
FASB’s Tentative
Decision: The FASB tentatively agreed with its staff’s
recommendation to add guidance that (1) clarifies that shipping and
handling activities that occur before control transfers to the
customer are fulfillment costs and (2) allows entities to elect a
policy to treat shipping and handling activities as fulfillment
costs if they do not represent the predominant activity in the
contract and they occur after control transfers.
IASB’s Tentative
Decision: The IASB tentatively agreed with its staff’s
recommendation that no updates or standard setting should be
undertaken at this time because the staff was unclear about whether
and, if so, the extent to which shipping and handling is an issue
for IFRS constituents.
Comparison: It is
unclear whether the different decisions will lead to divergence
because it appears that the boards may need further information to
finalize their views. Specifically, the boards may later decide to
make changes on the basis of future feedback from their constituents
or the revised text.
Next Steps
Continued in article
Currently, banks don’t record losses on bad loans
until there is evidence a loss actually has occurred, but many observers
believe that approach led banks during the financial crisis to record losses
in a way that was too little and too late. The FASB proposal, which has been
pending since 2012, would require banks to book losses and set aside
reserves based on future projections on whether the loans will go bad.
Moreover, it would force banks to record the projected losses expected over
the lifetime of a loan as soon as the loan is made. That could cause banks
to significantly boost their loan-loss reserves, cutting into their profits.
Estimates vary widely, but the OCC estimated in 2013 that the FASB’s
proposal would lead banks to boost reserves by 30% to 50% industrywide. See below
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 5,
2016
SUMMARY: Tax
experts provide a suggestions for this filing season, including
what's new as well as tricky issues that are easy to misunderstand -
the filing deadline, educator expenses, sales-tax deduction,
charitable donations, excess social security, and reinvested
dividends.
CLASSROOM APPLICATION: This
is a good list of tax updates for filing 2015 returns.
QUESTIONS:
1. (Introductory) What is the typical tax filing deadline for
individual returns? What is the deadline for 2015 returns? Why is it
different?
2. (Advanced) To what expenses does the deduction for
educator expenses apply? What taxpayers are eligible for this
deduction? Why does the article state that this deduction is
especially valuable?
3. (Advanced) What taxpayers would benefit from the sales-tax
deduction? Why aren't all taxpayers benefited by that deduction?
4. (Advanced) What does the article mean by excess social
security? How should a taxpayer obtain a refund?
5. (Advanced) What are reinvested dividends? What must
taxpayers do regarding reinvested dividends for tax purposes?
Reviewed By: Linda Christiansen, Indiana University Southeast
It is Feb. 1. For tens
of millions of taxpayers, that means the same thing: Plenty of time
to procrastinate.
Resist that temptation.
Getting started early can help make one of America’s most
exasperating, frustrating and time-consuming annual chores less
taxing.
Procrastination may be
hazardous to your wealth even if you pay a tax professional to do
your returns or if you use tax-preparation software. After all, it
takes considerable time and patience to collect all the necessary
forms and documents. And even if you aren’t affected by any new
laws, IRS pronouncements, or court decisions, you may need to take a
fresh approach to your taxes if you experienced major life changes
last year, such as a marriage, birth, divorce or death. But perhaps
most important, our tax laws have grown so complex that it is easy
to misunderstand the mountains of fine print.
We asked tax experts
for a few suggestions that might be helpful to taxpayers this filing
season, including what’s new as well as tricky issues that are easy
to misunderstand:
Deadlines: Everyone
knows the filing deadline for most taxpayers is April 15, right?
Not this year. This
year, it will be Monday, April 18, because of Emancipation Day, an
official holiday in Washington, D.C., celebrating the freeing of
slaves in the district on April 16, 1862. Because Emancipation Day
falls on a Saturday this year, it will be observed on Friday, thus
pushing the tax-filing deadline to Monday for most of the nation,
the IRS says.
There are some
exceptions. The deadline will be Tuesday, April 19, in Maine and
Massachusetts, because of Patriots’ Day, a holiday in those states
commemorating the battles of Lexington and Concord in 1775.
Many taxpayers in
places jolted by severe storms get even more time. For example, the
IRS said recently that storm victims in Mississippi and Missouri
will have until May 16 to file returns and pay any taxes due. “All
workers assisting the relief activities who are affiliated with a
recognized government or philanthropic organization also qualify for
relief,” the IRS says. For more details, see the websites of the
Internal Revenue Service or the Federal Emergency Management Agency.
If you need even more
time to file, you can request a six-month extension until Monday,
Oct. 17. You don’t need to give the IRS a reason, and millions of
people do it every year. Just remember that a filing extension won’t
give you additional time to pay whatever you might owe.
Educator expenses: Late
last year, Congress resurrected many popular tax breaks that had
expired at the end of 2014 and made them permanent. Among them is
one that benefits millions of elementary and secondary-school
teachers and other educators. Under this provision, an eligible
educator can deduct as much as $250 of unreimbursed costs of
classroom supplies, such as books, computer equipment and software.
This applies to “a kindergarten through grade 12 teacher,
instructor, counselor, principal or aide in school for at least 900
hours during a school year,” an IRS publication says. It is
especially valuable since they can deduct it from their total
income, using line 23 on Form 1040, rather than as a miscellaneous
itemized deduction, the IRS says. (If you file Form 1040A, deduct
these expenses on line 16, the IRS says.)
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 12,
2016
SUMMARY: The
Financial Accounting Standards Board has proposed a rule that would require
banks to record loan losses much more quickly than they do now, setting
aside more in reserves to protect themselves if the loans go bad. The idea
is intended to require banks to be safer and disclose more about their
risks, following a wave of bank failures during the financial crisis.
Nationwide, a total of 440 banks failed between 2009 and 2012, almost all of
them community banks.
CLASSROOM
APPLICATION: This
article shows FASB's authority, as as well how its rules can affect business
and particular industries - banking in this case.
QUESTIONS:
1. (Introductory) What is FASB? What is its area of authority?
2. (Introductory) What are the details of FASB's proposal? What
industry is affected?
3. (Advanced) What part of the industry is opposed to FASB's
proposal? Why? How is that group affected differently than the rest of the
industry?
4. (Advanced) What are the statistics regarding bank failures? Is
this a good reason for the new rules, or is the problem exaggerated? What
other reasons does FASB have for supporting those rules?
Reviewed By: Linda Christiansen, Indiana University Southeas
Community banks are giving
an earful to those who make accounting rules.
Bankers sounded
off Thursday on a proposal from the Financial
Accounting Standards Board that would require
firms to record loan losses much more quickly
than they do now, setting aside more in reserves
to protect themselves if the loans go bad.
The idea, discussed at
a FASB meeting in Norwalk, Conn., is intended to
require banks to be safer and disclose more
about their risks, following a wave of bank
failures during the financial crisis.
Nationwide, a total of
440 banks failed between 2009 and 2012, almost
all of them community banks, regulators say. But
many community bankers say the accounting change
is unnecessary because they are close enough to
their customers to know the credit risks.
Timothy Zimmerman, president and chief executive of
Standard Bank, a community bank in Monroeville, Pa., just east of
Pittsburgh, said he is concerned his business could be severely crimped if
the standards board follows through on its plan. He worries that it could
force community banks such as his to use complex, expensive models to
calculate how much they should book on loan losses.
“Every dollar I spend on a model is a dollar I
won’t lend,” Mr. Zimmerman said in an interview. Big banks may be able to
adapt, he said, but the new method will place too great a burden on
community banks and the towns that rely on them.
“We are not systemically important, but we’re
important to a lot of communities around the U.S.,” he told FASB members,
regulators and auditors at the meeting.
Mr. Zimmerman isn’t alone. At the roundtable,
community bankers and their advocates slammed the FASB as out of touch with
small banks and heedless of the impact of its plan.
If the plan is enacted, some smaller banks “are
out of business,” said James Kendrick, vice president of accounting and
capital policy for the Independent Community Bankers of America.
The FASB defended its proposal and said some of the
community bankers’ concerns were overblown, but the board’s members said
they welcomed the dialogue. The roundtable was an “insightful discussion
that resulted in what we believe is an improved understanding” of the
board’s proposal, FASB Chairman Russell Golden said afterward.
Some banking regulators support the proposal.
Thomas Curry, who oversees the Office of the Comptroller of the Currency,
has called it “sound” and “preferable” to existing policy, though he also
said he was “concerned” about the potential impact on community banks.
Currently, banks don’t record losses on bad loans
until there is evidence a loss actually has occurred, but many observers
believe that approach led banks during the financial crisis to record losses
in a way that was too little and too late. The FASB proposal, which has been
pending since 2012, would require banks to book losses and set aside
reserves based on future projections on whether the loans will go bad.
Moreover, it would force banks to record the projected losses expected over
the lifetime of a loan as soon as the loan is made.
That could cause banks to significantly boost their
loan-loss reserves, cutting into their profits. Estimates vary widely, but
the OCC estimated in 2013 that the FASB’s proposal would lead banks to boost
reserves by 30% to 50% industrywide.
Jensen Comment
I'm just not as confident in the profession of "independent valuation
experts." You get ten such experts to give you a number, and you will get
ten possibly widely divergent numbers to a point that management and/or
auditors can selectively manage earnings by using carefully chosen valuation
"experts." Most such valuations rely upon crucial assumptions that are
highly uncertain, especially in the case of foreign debt like Argentine
bonds.
Secondly, I'm not certain about the benefit-cost of such valuations of
banks having a lot of branches spread across the USA. This is the
Ole-versus-Sven debate that I've used with Tom too often already --- See
Below
From the CFO Journal's Morning Ledger on May 1,
2015
The FASB is finalizing amendments to its
guidance on the impairment of financial instruments, which would
introduce a new impairment model based on expected losses rather than
incurred losses. The proposed model aims to provide more timely
recognition of credit losses and reduce the complexity of U.S. GAAP by
decreasing the number of credit impairment models used. Deloitte’s
“Heads Up” newsletter discusses the new proposed amendments and provides
related comparisons and illustrative examples.
Continue »
Deloitte’s Heads Up newsletter
provides a comprehensive summary of the FASB’s proposed changes to the
credit impairment guidance under current U.S. GAAP, which are reflected
in the Board’s December 2012 proposed
ASU³ and subsequent tentative decisions.⁴ In
addition, the
full newsletter contains several
appendixes. Appendix A compares the impairment models under current U.S.
GAAP, the FASB’s tentative approach, and the IASB’s recently amended
IFRS 9, respectively. Appendix B, in the full Heads
Up newsletter, gives an
overview of the existing impairment models under U.S. GAAP for loans and
debt securities. Appendix C and Appendix D provide illustrative examples
of how an entity might apply the CECL model to purchased credit-impaired
(PCI) assets and trade receivables, respectively.
The CECL Model
Scope
The CECL model would apply to
most⁵ debt instruments (other than those measured at fair value through
net income (FVTNI)), trade receivables, lease receivables, reinsurance
receivables that result from insurance transactions, financial guarantee
contracts,⁶ and loan commitments. However, available-for-sale (AFS) debt
securities would be excluded from the model’s scope and would continue
to be assessed for impairment under ASC 320⁷ (the FASB has proposed
limited changes to the impairment model for AFS debt securities).
Recognition of Expected Credit
Losses
Unlike the incurred loss models in
existing U.S. GAAP, the CECL model does not specify a threshold for the
recognition of an impairment allowance. Rather, an entity would
recognize an impairment allowance equal to the current estimate of
expected credit losses (i.e., all contractual cash flows that the entity
does not expect to collect) for financial assets as of the end of the
reporting period. Credit impairment would be recognized as an
allowance—or contra-asset—rather than as a direct write-down of the
amortized cost basis of a financial asset. However, the carrying amount
of a financial asset that is deemed uncollectible would be written off
in a manner consistent with existing U.S. GAAP.
Measurement of Expected Credit
Losses
Under the proposed amendments, an
entity’s estimate of expected credit losses represents all contractual
cash flows that the entity does not expect to collect over the
contractual life of the financial asset. When determining the
contractual life of a financial asset, the entity would consider
expected prepayments but would not be allowed to consider expected
extensions unless it “reasonably expects that it will execute a troubled
debt restructuring with the borrower.”⁸
The entity would consider all
available relevant information in making the estimate, including
information about past events, current conditions, and reasonable and
supportable forecasts and their implications for expected credit losses.
That is, while the entity would be able to use historical charge-off
rates as a starting point in determining expected credit losses, it
would have to evaluate how conditions that existed during the historical
charge-off period differ from its current expectations and accordingly
revise its estimate of expected credit losses. However, the entity would
not be required to forecast conditions over the contractual life of the
asset. Rather, for the period beyond the period for which the entity can
make reasonable and supportable forecasts, the entity would revert to an
unadjusted historical credit loss experience.
Unit of Account
The CECL model would not prescribe a
unit of account (e.g., an individual asset or a group of financial
assets) in the measurement of expected credit losses. However, an entity
would be required to evaluate financial assets within the scope of the
model on a collective (i.e., pool) basis when similar risk
characteristics are shared. If a financial asset does not share similar
risk characteristics with the entity’s other financial assets, the
entity would evaluate the financial asset individually. If the financial
asset is individually evaluated for expected credit losses, the entity
would not be allowed to ignore available external information such as
credit ratings and other credit loss statistics.
SUMMARY: The
Government Accountability Office said that while Congress authorized
the Commodity Futures Trading Commission to enter into multiyear
leases, its practices of recording lease obligations only for the
current year rather than the full amount of the leases was unlawful.
CLASSROOM APPLICATION: This
is an interesting article to use when studying governmental
accounting. One interesting point is that while the recording law
does not provide for criminal liability for violations, another law,
the Antideficiency Act, could apply to the case and does provide for
criminal liability.
QUESTIONS:
1. (Introductory) What is the GAO? What is it's area of
authority? What is its involvement in this case?
2. (Advanced) What are the facts of this case? What rules did
the CFTC allegedly violate? Why do the rules require this particular
reporting? What are the benefits?
3. (Advanced) What are the penalties and other possible
implications for violating the lease accounting rules?
Reviewed By: Linda Christiansen, Indiana University Southeast
WASHINGTON—A congressional watchdog rebuked
the Commodity Futures Trading Commission on Thursday, saying the
agency violated federal law over the way it kept track of multiyear
lease costs for its offices.
The Government Accountability Office said
that while Congress authorized the CFTC to enter into multiyear
leases, its practices of recording lease obligations only for the
current year rather than the full amount of the leases was unlawful.
“When the CFTC entered into multiple-year
leases, it was required to record an obligation equal to the
government’s total liability over the term of each lease,” the GAO
said.
The dispute stems from the CFTC’s leasing
of office space for its Washington headquarters and regional offices
in Chicago, New York and Kansas City, Mo.
Thursday’s report ratcheted up tension
between CFTC officials and their congressional overseers, who have
been reluctant to boost the agency’s $250 million annual funding,
citing broad federal budget constraints.
“The
CFTC misinterpreted fundamental laws governing recording lease
obligations,” Sen. John Boozman (R., Ark.), who requested the GAO
review, said. “The agency’s long-standing practice of improperly
recording leases raises serious questions about its oversight of
day-to-day operations of the agency.”
Senate Agriculture
Committee Chairman Pat Roberts (R., Kan.) asked CFTC Chairman
Timothy Massadfor more details on the
leasing issue earlier this week, saying the agency’s practices
reveal “either incompetence at best or willful negligence.”
CFTC
spokesman Steven Adamske said the agency will move expeditiously to
address concerns raised by the GAO report. He said the CFTC’s
historical practice was to record current rent payments and to
disclose all payments owed in future years in a note to its
financial statements. He said neither the agency’s internal watchdog
nor its independent accountants had raised objections with that
practice until the GAO questioned it this past fall.
Thursday’s report
doesn’t directly address recent
criticisms by CFTC auditor KPMG LLP, which refused to
give the CFTC a clean bill of health on the grounds the agency
hasn’t properly accounted for its future costs of leasing office
space. Specifically, KPMG said the CFTC understated its obligations
by about $212 million in fiscal 2014 and $194 million in fiscal
2015.
Instead, the congressional watchdog says the CFTC didn’t
sufficiently adhere to federal recording requirements designed to
help Congress track how much agencies spend their appropriated
money. In other words, GAO believes the CFTC must change its
internal accounting systems.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 12,
2016
SUMMARY: Compliance
officers on Wall Street in charge of ensuring that traders and other
employees stay on the right side of laws and regulations are
increasingly in the cross hairs themselves. Several recent
enforcement actions found compliance officers personally liable for
mistakes within their firms. Meanwhile, New York's principal
financial regulator, backed by New York Gov. Andrew Cuomo, wants the
power to seek criminal charges against compliance officers in some
cases. The heightened accountability is driving experienced people
to be more cautious about the profession and making it difficult for
banks to find replacements.
CLASSROOM APPLICATION: This
is an interesting look at one of the employment opportunities and
issues in upper-management in accounting and finance careers - the
compliance officers.
QUESTIONS:
1. (Introductory) What is a compliance officer? What is a
compliance plan? What led to the creation of these kinds of
positions?
2. (Advanced) How have the requirements for compliance
officers changed, and how could they change in the future? Why? How
are the changes affecting the availability and compensation of
qualified compliance officers?
3. (Advanced) What value does a compliance officer add to a
business? Should companies have this kind of position? Why or why
not? How could governmental bodies and corporations make the
compliance office position more attractive to qualified applicants?
Reviewed By: Linda Christiansen, Indiana University Southeast"
Those officers on Wall Street in charge of
ensuring that traders and other employees stay on the right side of
laws and regulations are increasingly in the cross hairs themselves.
Several recent enforcement actions found
compliance officers personally liable for mistakes within their
firms. Meanwhile, New York’s principal financial regulator, backed
by New York Gov. Andrew Cuomo, wants the power to seek criminal
charges against compliance officers in some cases.
Compliance officers are “shaking in their
boots,” said Carrie Mandel, a member of recruiter Spencer Stuart’s
legal, compliance and regulatory practice. She is among a number of
recruiters, lawyers and executives who say the heightened
accountability is driving experienced people to be more cautious
about the profession and making it difficult for banks to find
replacements.
Around three dozen senior bank-compliance
executives left their jobs in 2015, three times the number of a year
earlier, said Daniel Solo, a managing director at recruiter
Sheffield Haworth. Most of those were in positions overseeing
anti-money laundering or financial crime, he said.
Compliance officers say they feel unfairly
singled out.
“It’s easier for firms to give up their
compliance officer, because what are they going to do, give up the
CEO?” asked a compliance officer who has worked for large U.S. and
foreign banks.
Since the financial crisis, banks have
hired compliance officers by the thousands to address internal
issues that led to massive fines. They are also often responsible
for getting banks to adapt to the flood of new regulations in recent
years.
While industrywide figures aren’t
available, many banks have touted their investment in this area:
J.P. Morgan Chase & Co., the country’s biggest bank by assets, said
in its annual CEO shareholder letter in April that the firm added
8,000 compliance employees.
When Goldman Sachs Group Inc. recently said
it had increased its head count by 8% to 36,800 in 2015, the firm
cited compliance as the main area of growth.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 12,
2016
SUMMARY: The
last big U.S. tax overhaul is making the next one harder. A sweeping
1986 law invited business owners to avoid the corporate income-tax
system and enjoy lower taxes by passing profits through to their
individual returns. Now, instead of a neat separation between
business and personal taxes, the U.S. system muddles them together.
The two are tied so closely that any attempt to equalize tax rates
across industries changes taxes for individuals. The 1986 tax
overhaul brought about a proliferation of so-called pass-through
firms, which pass on profits to owners' individual returns.
CLASSROOM APPLICATION: This
is an interesting article about the history of the 1986 Tax Reform
Act and the resulting increase in pass-through entities. These and
other factors are affecting the current tax rates and the complexity
of reforms.
QUESTIONS:
1. (Introductory) What features of the Tax Reform Act of 1986
are included in the article? How did tax law impact businesses and
the way they were taxed?
2. (Advanced) What is a pass-through entity? How are they
taxed? What are the various types of pass-through entities?
3. (Advanced) Why does the writer of the article think the
existence of pass-through entities contribute to the complexities of
tax reform? How could the tax code be reformed despite the existence
of pass-through entities?
4. (Advanced) What other challenges to tax reform does the
writer mention? How do they affect the possibilities of tax reform?
Are these challenges surmountable?
Reviewed By: Linda Christiansen, Indiana University Southeast
The last big U.S. tax overhaul is making
the next one harder.
A sweeping 1986 law invited business owners
to avoid the corporate income-tax system and enjoy lower taxes by
passing profits through to their individual returns.
Now, instead of a neat separation between
business and personal taxes, the U.S. system muddles them together.
The two are tied so closely that any attempt to equalize tax rates
across industries changes taxes for individuals.
That is complicating Congress’s
ability—despite bipartisan agreement—to address discrete
business-tax problems such as inversions, where American firms move
their tax address abroad, or the forces that left the U.S. with the
developed world’s highest corporate tax rate. The links between
corporate and individual taxation inevitably lock policy makers in
intractable disputes about popular deductions and the question that
divides the parties most bitterly: Is the U.S. collecting enough
money from wealthy individuals?
The complexities have prevented the biggest
U.S. corporations from getting the tax-rate cut they want. And they
are bound to bedevil the next president, too.
Until 1980, when the top individual rate
was 70% and the corporate rate was 46%, the two systems were largely
separate. Big businesses paid the corporate income tax, then when
shareholders got capital gains or dividends, they paid again on the
same profits. Small businesses paid as individuals.
The 1986 tax overhaul flipped that
calculation, dropping the top individual tax rate to 28% and the
corporate rate to 34%. New businesses saw little reason to become
traditional C corporations that pay the corporate tax—unless they
planned to go public. That has left the corporate tax as the domain
of the largest companies. Meanwhile, states liberalized
business-formation laws and Congress loosened eligibility rules for
S corporations that don’t pay the corporate tax.
That brought about a proliferation of
so-called pass-through firms, which pass on profits to owners’
individual returns. Today, these range from small businesses to
fast-growing new companies.
By 2011, 54% of business income was earned
by pass-through entities, including sole proprietorships,
partnerships and S corporations. That’s up from 21% in 1980,
according to a study by Treasury Department economists and academic
researchers. These companies pay lower tax rates—and they’re not
just mom-and-pop shops anymore. Among them are hedge funds and
global accounting firms whose owners include some of the wealthiest
people in the country. The top 1% of households get more than
two-thirds of all partnership and S corporation income, according to
the study—something lawmakers need to be aware of, its authors say.
“If they’re not addressing pass-through
income, they’re missing half of business tax reform,” said Owen
Zidar, a co-author of the study and an economist at the University
of Chicago’s Booth School of Business.
Still, many pass-throughs think they are
disadvantaged because the top individual rate of 39.6% exceeds the
35% corporate rate. Last year, Rep. Paul Ryan (R., Wis.), who has
since become speaker, sought political overlap with President Barack
Obama on a corporate-rate cut and explored whether pass-throughs
could accept anything besides a corresponding rate reduction.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 12,
2016
TOPICS: Accounting
for Rebates, Financial Accounting, Material Misstatement, SEC
SUMMARY: Monsanto
Co. agreed to pay an $80 million fine to settle federal accusations
of accounting violations related to a rebate program for the
company's trademark weedkiller Roundup. The SEC said Monsanto didn't
properly account for tens of millions of dollars in rebates the
company paid to retailers and distributors, the costs of which
weren't fully reflected when Monsanto booked Roundup sales, leading
Monsanto to "materially" misstate its earnings over a three-year
period. As part of the settlement, three accounting and sales
executives at the biotech seed giant agreed to pay a total of
$135,000 in penalties to settle individual charges, and Monsanto
agreed to retain an independent compliance consultant.
CLASSROOM APPLICATION: This
article is appropriate for a financial accounting class for coverage
of rebate accounting, and also for coverage of settlements with the
SEC for material misstatements.
QUESTIONS:
1. (Introductory) What is the SEC? What is its area of
authority? How is it involved with enforcement of financial
accounting standards?
2. (Advanced) What are the facts of Monsanto's settlement
with the SEC? What was its violation?
3. (Advanced) What is a material misstatement? Why are they
problematic and a concern of the SEC? Who could be harmed by a
material misstatement?
4. (Advanced) The article states Monsanto agreed to the
penalty while not admitting or denying the allegations. What does
that mean? Why would a company agree to a penalty? What are the
benefits of not admitting to the allegations, but paying a penalty?
5. (Advanced) What is the proper way to account for rebates?
How did Monsanto account for rebates? Should the company end its use
of rebates? Why or why not?
Reviewed
By: Linda Christiansen, Indiana University Southeast
Monsanto Co. agreed to pay an $80 million
fine to settle federal accusations of accounting violations related
to a rebate program for the company’s trademark weedkiller Roundup.
The investigation, which Monsanto disclosed
in 2011, centers on an incentive program launched in 2009 that aimed
to promote Roundup at a time when the product was ceding market
share to competitors selling cheaper generic versions of the
herbicide.
The SEC said Monsanto didn’t properly
account for tens of millions of dollars in rebates the company paid
to retailers and distributors, the costs of which weren’t fully
reflected when Monsanto booked Roundup sales, leading Monsanto to
“materially” misstate its earnings over a three-year period. The SEC
didn’t specify the amount by which Monsanto misstated its earnings.
As part of the settlement, three accounting
and sales executives at the biotech seed giant agreed to pay a total
of $135,000 in penalties to settle individual charges, and Monsanto
agreed to retain an independent compliance consultant, the SEC said.
Monsanto agreed to the penalty while not
admitting or denying the SEC’s allegations, the agency said. The
accounting and sales executives also didn't admit or deny the
alleged violations.
Monsanto said the company is “pleased to
put the matter behind it” and said it was “committed to operating
its business with the utmost integrity and transparency and in
compliance with all applicable laws and regulations.” The settlement
didn’t require Monsanto to make any further changes to its
historical financial statements, after Monsanto already restated
results for its 2009 fiscal year through the third quarter of 2011
following an “internal investigation,” the company said.
“Financial reporting and disclosure cases
continue to be a high priority for the Commission and these charges
show that corporations must be truthful in their earnings releases
to investors and have sufficient internal accounting controls in
place to prevent misleading statements,” Mary Jo White, chairman of
the SEC, said in a statement.
Though regulators have assessed far larger
fines in some other matters, the penalty ranks high among recent SEC
accounting fraud cases.
In addition to the settlement, Monsanto
Chief Executive Hugh Grant reimbursed the company $3.2 million for
cash bonuses and some stock awards received during the period in
which the SEC said Monsanto broke the accounting rules, according to
the SEC. The SEC’s investigation found no personal misconduct by Mr.
Grant, and his voluntary return of the bonuses and awards made it
unnecessary for the SEC to attempt to force one under U.S.
securities rules, the agency said.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 19,
2016
TOPICS: Financial
Accounting, GAAP, Program Accounting, SEC
SUMMARY: Boeing
Co. shares fell sharply as fresh concerns about the company's accounting
method for its jetliners added to investor anxiety about the outlook for the
commercial-aircraft market. The world's largest aerospace company long has
employed a system called program accounting that averages out expected costs
and revenue on airplane programs over years of production, enabling it to
book anticipated future profits as part of current earnings. The system is
compliant with Generally Accepted Accounting Principles but rarely used by
other companies, and some investors and shareholders have raised concerns
that it builds long-term assumptions into Boeing's financial reporting about
factors that are too uncertain. Attention to the accounting method renewed
after a report that the Securities and Exchange Commission is investigating
whether Boeing properly accounted for the long-term costs and expected sales
of two of its most prominent jet programs.
CLASSROOM
APPLICATION: This
article is appropriate for financial accounting classes.
QUESTIONS:
1. (Introductory) What is GAAP? Who determines GAAP? What is included
in GAAP?
2. (Advanced) What are the details of Boeing's accounting issues
featured in the article? What is program accounting? Why does Boeing choose
to use it? Are there any issues associated with using it?
3. (Advanced) What is the SEC? What is its area of authority? Why is
the SEC involved with Boeing's accounting and financial reporting?
4. (Advanced) How were Boeing's share prices affected by concerns
about its accounting methods? Why did the market react that way?
5. (Advanced) Why is program accounting not widely used? What are the
other options? Should Boeing change? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
Boeing Co. shares fell sharply Thursday as fresh
concerns about the company’s accounting method for its jetliners added to
investor anxiety about the outlook for the commercial-aircraft market.
The world’s largest aerospace company long has
employed a system called program accounting that averages out expected costs
and revenue on airplane programs over years of production, enabling it to
book anticipated future profits as part of current earnings.
The system is compliant with Generally Accepted
Accounting Principles but rarely used by other companies, and some investors
and shareholders have raised concerns that it builds long-term assumptions
into Boeing’s financial reporting about factors that are too uncertain.
Attention to the accounting method renewed on
Thursday after a report that the Securities and Exchange Commission is
investigating whether Boeing properly accounted for the long-term costs and
expected sales of two of its most prominent jet programs—the 787 Dreamliner
and the 747 aircraft. The report, by Bloomberg News, which cited people with
knowledge of the matter, said SEC enforcement officials hadn’t reached
conclusions and could decide against bringing a case.
Boeing and the SEC declined to comment. “We
typically do not comment on media inquiries of this nature,” said John Dern,
a Boeing spokesman.
Boeing shares ended down 6.8% in Thursday
trading—after recovering from much steeper declines—to their lowest closing
price since September 2013. The stock is down 25% this year on concerns that
years of record jet deliveries may be petering out due to strong competition
and global economic weakness.
Boeing declined Thursday to comment on its
accounting methods. In the past, Boeing has said that program accounting,
which it has used for decades, is critical to avoiding big swings in
earnings that could make it difficult to pursue projects that can stretch
over years but require huge outlays up front.
Several analysts on Thursday called the stock
selloff overblown, saying that even if Boeing had to change its accounting
practices the likely impact on its cash flow would be small.
However, accounting method aside, if Boeing’s
cost-saving projections fall short, then it won’t meet cash-generation
goals, eagerly awaited by investors.
Program accounting requires Boeing to estimate cost
levels, sales volumes, and anticipated productivity improvements and pricing
for jets that might be made years in the future. Some analysts and investors
have said that the difficulty of predicting such long-term factors could
make such accounting conclusions arbitrary.
From the Dreamliner’s start, Boeing has had to
spend more producing each of the technologically advanced,fuel-efficient
jets than it gets selling them. Boeing tallies the accumulated shortfall as
“deferred production costs.”
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 19,
2016
TOPICS: Corporate
Taxation, International Business
SUMMARY: The
U.S. stepped up a spat with European officials concerning their
investigations of U.S. companies' tax practices, warning in a letter from
the U.S. Treasury Secretary Jack Lew that they are creating a "disturbing"
precedent. European regulators have been investigating whether individual
countries' tax breaks for certain companies violate rules against excessive
"state aid." If deemed illegal, European officials could then press the
countries to recover corporate funds related to the tax breaks. In his
letter to European Commission President Jean-Claude Juncker, Mr. Lew said
those investigations appear to be "disproportionately" targeting U.S.
companies and seeking much more money in those instances. In some cases, Mr.
Lew wrote, the Europeans are trying to target income they have no right to
tax.
CLASSROOM
APPLICATION: This
is an interesting and potentially challenging topic for corporate accounting
and tax classes.
QUESTIONS:
1. (Introductory) What tax issue is the U.S. addressing? Who is
leading the communications? Why?
2. (Advanced) How are U.S. companies taxed when doing business in
other countries? How does the U.S. approach taxing income earned outside the
U.S.?
3. (Advanced) What have European Union regulators been investigating?
Why? How is this affecting U.S. companies?
4. (Advanced) How have EU officials responded to the allegations? How
have U.S. companies responded?
5. (Advanced) What could the U.S. do if it is not convinced the EU is
acting appropriately? Should the U.S. take this step? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
WASHINGTON—The U.S. stepped up a spat with European
officials concerning their investigations of U.S. companies’ tax practices,
warning in a letter from the Treasury secretary that they are creating a
“disturbing” precedent.
U.S. Treasury Secretary Jack Lew in the letter
asked European officials to rethink the probes, saying they “undermine the
well-established basis of mutual cooperation and respect that many countries
have worked so hard to develop and preserve.”
U.S. companies whose tax practices are under
investigation include Apple Inc. and Amazon.com Inc. Non-U.S. companies also
have been affected.
European regulators have been investigating whether
individual countries’ tax breaks for certain companies violate rules against
excessive “state aid.” If deemed illegal, European officials could then
press the countries to recover corporate funds related to the tax breaks.
In his letter to European Commission President
Jean-Claude Juncker, Mr. Lew said those investigations appear to be
“disproportionately” targeting U.S. companies and seeking much more money in
those instances. In some cases, Mr. Lew wrote, the Europeans are trying to
target income they have no right to tax.
The EU “appears to be adopting an entirely new
legal theory and applying it retroactively in a broad and sweeping manner,”
Mr. Lew wrote in his first extensive comments on the EU-U.S. taxdispute.
“This raises serious concerns about fundamental fairness and the finality of
tax rulings throughout the entire European Union.”
The EU rejected accusations it was discriminating
against U.S. companies in its tax probes.
“EU law applies indiscriminately to all companies
operating in Europe—there is absolutely no bias against U.S. companies,”
said European Commission spokesman Ricardo Cardoso. “In its state-aid
decisions on tax rulings to-date, the commission has ordered member states
to recover unpaid taxes mostly from European companies.”
Mr. Cardoso said the EU isn’t operating
retroactively and is applying longstanding principles to the probe.
EU officials have said they didn’t think the
investigations into the tax practices would make Europe a less attractive
destination for companies to invest in because the bloc’s single market of
500 million consumers remains a major draw.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 19,
2016
SUMMARY: While
the broad strokes of the president's new budget proposal are unlikely to
become reality, some tax specialists are nonetheless focusing on details
that would curtail money-saving strategies and planning opportunities for
individuals should they find they way into the final bill. Some of the
narrower proposals that individuals and financial advisers may want to watch
include: back-door contributions to Roth IRAs, mandatory distributions from
Roth IRAs, so-called stretch IRA, the end of a tax break for employer stock
held in retirement plans, a new tax on high-income business owners, and
helping the long-term unemployed tap retirement accounts for cash.
CLASSROOM
APPLICATION: It
is always good to discuss proposed changes to the tax code so students
become accustomed to staying up-to-date for tax-planning purposes.
QUESTIONS:
1. (Introductory) Why does the writer of this article believe these
tax rules could change? What indications have government officials given to
support these concerns?
2. (Advanced) Why should accountants be informed about possible tax
law changes? How does it affect tax planning and client service?
3. (Advanced) What are back-door contributions to Roth IRAs? What
must taxpayers do to take advantage of this option? Who is benefited by it?
Why would the president want to eliminate this option?
4. (Advanced) What are the rules regarding mandatory distributions
from a retirement account? What are the current distribution rules for Roth
IRAs? How could that change? How could such a change affect tax planning for
retirement?
5. (Advanced) What is a stretch IRA? Why are experts warning that
could change? How could that cause changes to tax planning for retirement?
6. (Advanced) What are the rules regarding employer stock held in
retirement plans? What changes is the president proposing? How could those
changes alter tax-planning advice you would give to a client?
7. (Advanced) What new tax does the president want to impose on
business owners? What is the reason for that tax? How might taxpayers act
differently if this tax is imposed?
8. (Advanced) How might the government change tax rules for
retirement account withdrawals by unemployed people? How could this affect
those taxpayers at the time of withdrawal, and in future years?
Reviewed By: Linda Christiansen, Indiana University Southeast
While the broad strokes of the president’s new
budget proposal are unlikely to become reality, some tax specialists are
nonetheless focusing on details that would curtail money-saving strategies
and planning opportunities for individuals should they find they way into
the final bill.
Such narrow provisions can be “thrown into
legislation at the last minute” to raise revenue for other priorities, says
Michael Kitces, director of financial planning at Pinnacle Advisory Group
Inc. in Columbia, Md.
Some of the proposals in the budget’s fine print
are also “a warning shot across the bow” that Uncle Sam may eventually limit
or scrap strategies that have been useful in trimming taxes for some
individuals, Mr. Kitces says.
If some sound familiar, that is because the
president has floated many of the same proposals in past budgets, says Ed
Slott, an IRA expert in Rockville Centre, N.Y. “It’s the same wish list,” he
says.
President Barack Obama’s fiscal 2017 budget,
released on Tuesday, contains several proposals to raise taxes—from raising
the top tax rate on capital gains and dividends to 24.2% to imposing a
minimum 30% income tax on people with incomes over $2 million.
Such major tax changes have little chance of
passing in an election year. The president’s final budget proposal is
generally seen as an effort to leverage a few spots of bipartisan agreement
and lay out an agenda for a potential Democratic successor.
Here are some of the narrower proposals that
individuals and financial advisers may want to keep an eye on:
End of so-called back-door contributions to Roth
IRAs. A brief reference in the massive budget document—“Limit Roth
conversions to pretax dollars”—would end a strategy that high earners can
use to funnel large sums into Roth individual retirement accounts.
The big appeal of Roth accounts is that they can
grow tax-free and no tax is due when money is withdrawn in retirement. Roth
contributions are made with after-tax dollars and are subject to both annual
dollar limits and income caps.
But high earners can currently sidestep the income
limits on Roth contributions by making after-tax contributions to a
conventional IRA or 401(k) and then immediately converting it into a Roth.
The provision to shut the door on conversions of after-tax contributions was
included in last year’s budget proposal as well.
Introduction of mandatory distributions from Roth
IRAs. Another holdover from last year’s budget would require people with
Roth IRAs to take required minimum distributions starting at age 70½.
Currently, owners of Roth accounts are exempt from these mandatory
withdrawals, which apply to traditional IRAs. By forcing people to withdraw
money on a set schedule from tax-free Roth accounts, the measure effectively
could increase sums in taxable brokerage accounts, where investment gains
and dividend and interest payments are subject to tax, says Mr. Kitces. The
proposal would also prevent any additional contributions to Roth accounts
after age 70½.
At the same time, the budget would eliminate
required distributions for people with $100,000 or less in all of their
retirement accounts. The measure was resurrected from past budgets and would
potentially prolong the liquidation of these accounts and free affected
individuals from the administrative hassle of calculating a required minimum
distribution, says Mr. Slott.
Elimination of the so-called stretch IRA for many
beneficiaries. If you die owning a traditional 401(k) or IRA, your heirs
must pay income tax on the withdrawals they take. But under current tax law,
they can stretch out those withdrawals over their own lifespans, prolonging
the tax advantages. As it did last year, the White House has proposed
eliminating the stretch IRA for most beneficiaries other than spouses, by
requiring these nonspouse beneficiaries to liquidate the IRAs and 401(k)s
they inherit within five years. Many experts believe it is just just a
matter of time until the measure becomes law.
Case on Pro Forma Reporting
From the CFO Journal's Morning Ledger on February
25, 2016
Pro-forma earnings, which exclude certain items such
as restructuring charges or stock-based compensation, showed the weakest
growth last year since 2009, the
WSJ’s Justin Lahart reports.
The trouble is that those excluded items were so big,
that they obscure the reality that results reported under GAAP show that
earnings per share in the S&P 500 actually fell by 12.7%. That means that
even after the market rout that kicked off the year, shares might still be
expensive.
The difference between pro forma and GAAP results has
long been a
point of contention between companies,
regulators and many investors. Companies ostensibly provide pro forma
figures to better reflect the underlying tenor of their operations. They
may, for example, exclude the cost of laying off workers on grounds this
won’t recur. To be sure, there are instances when ignoring items like that
which are required under GAAP can make sense. But companies have had a
history of treating the ordinary as extraordinary when business conditions
worsen.
Teaching Case
From The Wall Street Journal Weekly Accounting Review on February 19,
2016
SUMMARY: Accounting
standards allow management teams discretion and flexibility in reporting
results. According to a survey, CFOs believe 20% of public companies
"intentionally misrepresent" earnings using discretion allowed under
generally accepted accounting principles. And while common motivations cited
for those overstating earnings include juicing the stock price, companies
that take liberties with accounting choices aren't necessarily flattering
their earnings profile. The survey found that as much as one third of
earnings misrepresentation could be to revise numbers lower, perhaps to gain
leverage in negotiations with stakeholders such as employees.
CLASSROOM
APPLICATION: This
is interesting and eye-opening financial-reporting information to share with
our students.
QUESTIONS:
1. (Introductory) What are the results of the survey featured in the
articled? Who was surveyed? Are the survey participants knowledgeable on the
topic surveyed?
2. (Advanced) What are generally accepted accounting principles? Why
are they important? How are they determined?
3. (Advanced) How much discretion is there with generally accepted
accounting principles? Please offer an example of an area in which GAAP
allows some discretion and flexibility. Why is some discretion and
flexibility allowed? How can it be good? What problems could occur as a
result of some flexibility and discretion?
4. (Advanced) What issues and potential problems do the survey
results present? For whom might this information be concerning? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
“Don’t believe everything you read,” the saying
goes. Evidently, that applies to financial statements.
Four business school professors surveyed nearly 400
chief financial officers on earnings quality. Their findings, published in
the current edition of Financial Analysts Journal, are stark: on average,
the CFOs believe 20% of public companies “intentionally misrepresent”
earnings using discretion allowed under generally accepted accounting
principles. Private company CFOs, on average, pegged the number even higher,
at 30%.
Areas highlighted by the survey that provide the
opportunity for earnings management include acquisition accounting, pension
accounting, and the use of subsidiaries and off-balance sheet-entities.
It’s important to note accounting standards do
allow management teams discretion and flexibility in reporting results. And
while common motivations cited for those overstating earnings include
juicing the stock price, companies that take liberties with accounting
choices aren’t necessarily flattering their earnings profile. The survey
found that as much as one third of earnings misrepresentation could be to
revise numbers lower, perhaps to gain leverage in negotiations with
stakeholders such as employees.
Still, this should give investors pause. The study
doesn’t even contemplate so-called pro-forma financial reporting, which
doesn’t conform to GAAP. The Wall Street Journal found in December that
roughly one fourth of public companies used pro-forma results in securities
filings last year.
And the study found the magnitude of the
misrepresentation within GAAP could be as high as ten cents on the dollar.
That could easily be the difference between meeting analyst expectations and
missing them; between reporting growth or decline.
Better, then, to not skip over the
financial-statement footnotes.
TOPICS: Corporate
Taxation, International Business
SUMMARY: Under
current law, U.S. companies owe taxes on the income they earn around the
world. They get tax credits for payments to foreign governments and have to
pay the residual U.S. tax only when they bring the money home. That system
encourages companies to book profits overseas in low-tax countries and leave
them there, which they have done now to the tune of more than $2 trillion.
Last year's bipartisan position was for a one-time tax on those profits,
regardless of whether they are brought home. Then, a new system would be
written that wouldn't link U.S. taxation with the act of repatriation.
Lawmakers in Congress are divided in particular over whether to use a
one-time tax on companies' stockpiled offshore profits to pay for a burst of
spending on highways and other construction projects.
CLASSROOM
APPLICATION: This
update is appropriate for use in a corporate tax class.
QUESTIONS:
1. (Introductory) What are the current tax rules regarding taxation
of offshore profits of U.S. companies? Why are some government officials
concerned about these rules?
2. (Advanced) What update on the status of taxation of offshore
profits? How could the tax law change and what is the likelihood it will
pass?
3. (Advanced) How could the proposed tax changes affect how U.S.
companies do business in other countries and plan for tax liabilities?
Reviewed By: Linda Christiansen, Indiana University Southeast
A bipartisan push to change the tax rules governing
U.S. corporate profits overseas that seemed promising just months ago is now
in danger of crumbling.
Lawmakers in Congress are divided in particular
over whether to use a one-time tax on companies’ stockpiled offshore profits
to pay for a burst of spending on highways and other construction projects.
Democrats, including Sen. Charles Schumer (D.,
N.Y.) want a significant amount of the one-time money be used for
infrastructure. Republicans such as Sen. Rob Portman (R., Ohio) are growing
wary of that approach, though Mr. Portman said Wednesday he was probably the
only remaining Finance Committee member who thinks a deal can be reached in
2016.
Lawmakers and the Obama administration were close
to attaching an international tax agreement to a long-term highway funding
bill. It didn’t happen. Instead, Congress cobbled together other money for a
transportation bill, and now there is a divide emerging over whether to
continue pressing ahead with the same approach on international taxes and
infrastructure.
“I just hope people on the other side won’t pull
away from that [infrastructure spending], because that will make it much
harder to pass it,” Mr. Schumer said Wednesday at a hearing of the Senate
Finance Committee.
The basic idea remains the same. Under current law,
U.S. companies owe taxes on the income they earn around the world. They get
tax credits for payments to foreign governments and have to pay the residual
U.S. tax only when they bring the money home.
That system encourages companies to book profits
overseas in low-tax countries and leave them there, which they have done now
to the tune of more than $2 trillion. Companies such as Apple Inc. and
Oracle Corp. have been agitating for change.
A senior Treasury official said this week that the
department’s estimates of offshore profit-shifting have increased. An
administration proposal for a 19% minimum tax on future foreign profits
would raise $350 billion over 10 years, 70% more than last year’s estimate
of the same proposal.
Last year’s bipartisan position—shared by many
House Republicans, some Democrats and President Barack Obama—was for a
one-time tax on those profits, regardless of whether they are brought home.
Then, a new system would be written that wouldn’t link U.S. taxation with
the act of repatriation.
Prof. Mansfield (who died in 2014), told a story
about two guys driving a hearse from Maine down to Boston late one winter’s
night to deliver a corpse for a funeral the next morning. The guy who was
riding shotgun dozed off about 11. A little while later the driver, who was
also beginning to nod, pulled over at a Howard Johnson’s to get some coffee
for both of them. When he came out, snow had started to fall, and there was
a guy with a duffel bag standing beside the hearse. He asked the driver if
he could catch a lift to Boston. “Sure,” the driver told him, “if you don’t
mind riding in the back with the deceased.” The stranger didn’t mind, and he
climbed into the coffin compartment through the wide back door, glad to be
out of the cold. The driver, deciding it was his partner’s turn behind the
wheel, woke him up and gave him the extra cup of coffee.
About 2 a.m., the threesome (foursome if you
include the deceased) was nearing Newburyport north of the city. That was
when the passenger in the back woke up and reached through the velvet
curtain separating the coffin compartment from the front seat. He tapped the
driver softly on the shoulder and whispered, “How much farther to Boston?”
It was at this point the guy who had taken over the
driving at the Howard Johnson’s screamed in terror and swerved the car off
U.S. Highway 1, plunging into a snow bank.
I couldn’t contain myself. I laughed hard—prompting
the roomful of future attorneys, who hadn’t made a sound during the entire
lecture, to turn and stare at me in mass rebuke. I quickly settled down, but
too late. Prof. Mansfield removed his glasses from his tweedy jacket pocket
and scanned the audience for the source of the interruption. His eyes
settled on me. He looked down at a seating chart and ran his finger across
it, then looked at me again.
“Mr. Dorffmond,” he said. “As a result of the
accident, the passenger in the back of the hearse sustained a compound
fracture of his left arm and numerous facial lacerations. He subsequently
obtained counsel and brought suit. My questions to you, Mr. Dorffmond, are
these: First, against whom should his attorney have advised him to bring
suit? Second, on what basis? And finally, in your considered legal opinion
should the plaintiff have been awarded damages?”
I felt sick. I tugged at my maroon scarf, which
felt like a noose. A few seats away, my brother buried his face in his fat
book of case studies.
I had unwisely made eye contact with Prof.
Mansfield, and now I was locked in his glare, unable to speak. “Sir,” a
helpful-sounding voice behind me said, “I believe a visitor is sitting in
Mr. Dorffmond’s seat this morning. He may not understand English.” There
were muffled snickers, but it worked: Prof. Mansfield moved on with the
lecture, and I spent the rest of the time trying to look Armenian. I
resolved on the spot never to go to law school—but I sensed that my rescuer
had a great future as a legal advocate.
Later, as my brother and I walked home, he made
only one comment: “See, I told you to wear a tie.”
Mr. Bascom, a former high-school English teacher in St. Louis,
provided the photographs for John William Houghton’s “Falconry and Other
Poems” (Unlimited Publishing, 1996).
Forwarded by Auntie Bev
If God wanted us to vote, he would have given us candidates.
~Jay Leno~
The problem with political jokes is they get elected.
~Henry Cate, VII~
We hang the petty thieves and appoint the great ones to public office
~Aesop~
If we got one-tenth of what was promised to us in these State of the Union
speeches, there wouldn't be any inducement to go to heaven.
~Will Rogers~
Politicians are the same all over. They promise to build a bridge even where
there is no river.
~Nikita Khrushchev~
When I was a boy I was told that anybody could become President; I'm
beginning to believe it.
~Clarence Darrow~
Politicians are people who, when they see light at the end of the tunnel, go
out and buy some more tunnel.
~John Quinton~
Why pay money to have your family tree traced; go into politics and your
opponents will do it for you.
~Author unknown~
Politics is the gentle art of getting votes from the poor and campaign funds
from the rich, by promising to protect each from the other.
~Oscar Ameringer~
I offer my opponents a bargain: if they will stop telling lies about us, I
will stop telling the truth about them.
~Adlai Stevenson, 1952~
A politician is a fellow who will lay down your life for his country.
~ Tex Guinan~
I have come to the conclusion that politics is too serious a matter to be
left to the politicians.
~Charles de Gaulle~
Instead of giving a politician the keys to the city, it might be better to
change the locks.
~Doug Larson~
There ought to be one day -- just one -- when there is open season on
Congressmen.
~Will Rogers
Forwarded by Paula
In my many years I have come to a conclusion that one useless man is a shame,
two is a law firmand three or more is a congress. John Adams 2. If you don't
read the newspapeyou are uninformed, if you do read the newspaper you
aremisinformed. -- Mark Twain
3. Suppose you were an idiot. And suppose you were a member of Congress. But
then I repeatmyself. -- Mark Twain
4. I contend that for a nation to try to tax itself into prosperity is like a
man standing in a bucket and trying to lift himself up by the handle. -- Winston
Churchill
5. A government which robs Peter to pay Paul can always depend on the support
of Paul. -- George Bernard Shaw
6. A liberal is someone who feels a great debt to his fellow man, which debt
he proposes to pay off with your money. -- G. Gordon Liddy
7. Democracy must be something more than two wolves and a sheep voting on
what to have for dinner. -- James Bovard, Civil Libertarian (1994)
8. Foreign aid might be defined as a transfer of money from poor people in
rich countries to rich people in poor countries. Douglas Case, Classmate of Bill
Clinton at Georgetown University .
9. Giving money and power to government is like giving whiskey and car keys
to teenage boys. P.J. O'Rourke, Civil Libertarian
10. Government is the great fiction, through which everybody endeavors to
live at the expense of everybody else. -- Frederic Bastiat, French
economist(1801-1850)
11. Government's view of the economy could be summed up in a few short
phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops
moving, subsidize it. Ronald Reagan (1986)
12. I don't make jokes. I just watchthe government and report the facts. Will
Rogers 13. If you think health care is expensive now, wait until you see what it
costs when it's free! P. J. O'Rourke
14. In general, the art of government consists of taking as much money as
possible from one party of the citizens to give to the other. -- Voltaire (1764)
15. Just because you do not take an interest in politics doesn't mean
politics won't take an interest in you! -- Pericles (430 B.C.)
16. No man's life, liberty, or property is safe while the legislature is in
session. Mark Twain (1866)
17. Talk is cheap, except when Congress does it. -- Anonymous
18. The government is like a baby's alimentary canal, with a happy appetite
at one end and no responsibility at the other. Ronald Reagan
19. The inherent vice of capitalism is the unequal sharing of the blessings.
The inherent blessing of socialism is the equal sharing of misery. -Winston
Churchill
20. The only difference between a tax man and a taxidermist is that the
taxidermist leaves the skin. Mark Twain
21. The ultimate result of shielding men from the effects of folly is to fill
the world with fools. Herbert Spencer, English Philosopher (1820-1903)
22. There is no distinctly Native American criminal class, save Congress. --
Mark Twain
23. What this country needs are more unemployed politicians Edward Langley,
Artist (1928-1995)
24. A government big enough to give you everything you want, is strong enough
to take everything you have. -- Thomas Jefferson
25. We hang the petty thieves and appoint the great ones to public office. --
Aesop
FIVE BEST SENTENCES
1. You cannot legislate the poor into prosperity, by legislating the wealthy
out of prosperity.
2. What one person receives without working for, another person must work for
without receiving.
3. The government cannot give to anybody anything that the government does
not first take from somebody else.
4. You cannot multiply wealth by dividing it.
5. When half of the people get the idea that they do not have to work,
because the other half is going to take care of them, and when the other half
gets the idea that it does no good to work, because somebody else is going to
get what they work for, that is the beginning of the end of any nation!
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://faculty.trinity.edu/rjensen/ListServRoles.htm
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down) CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access.
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation.
Concerns That Academic Accounting Research is Out of Touch With Reality
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of theshift from Gemeinschaftto
Gesellschaft.Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
I have some troubles with the link as well. For me, the PDF will run in
my Windows 7 laptop but not my newer Windows 10 laptop, although this
morning the link I gave you is not working on either laptop.
It may be that you have to route to the article as described below.
Then scroll down to 2010 Volume 37 Number 1 and click on the line that
says to View Searchable PDF Text File Then scroll down to the article Page
numbers may not exactly coincide with the table of contents depending upon
the resolution of your browser.
Abstract
We critically evaluate Sprouse’s 1966 Journal of Accountancyarticle, which
prodded the FASB towards a balance-sheet approach. We highlight three errors
in this article.
First,
Sprouse confuses necessary and sufficient conditions by arguing that
good accounting systems must satisfy the balance-sheet equation. Second, Sprouse’s insinuation that financial analysts rely on
balance-sheet analysis is contradicted by contemporary and current
security-analysis textbooks, analysts’ written reports, and interviews
with analysts. Third,
and most crucially, Sprouse does not recognize that the primary role
of accounting systems is to help managers discover and exploit profit
able exchange opportunities, without which firms cannot survive
CONCLUDING OBSERVATIONS ON THE LEGACY OF THE
ASSET-LIABILITY APPROACH
Sprouse [1966] is important neither because of its
conceptual insights nor because of its unpersuasive evidence. Rather, the
article matters mainly because it shaped the FASB’s rhetoric and subsequent
standard-setting approach and today’s international standard-setting agenda.
Sprouse’s misinterpretation of Graham and Dodd’s Security Analysis
foreshadows the FASB and IASB misinterpretation of Hicks [1939]. Sprouse and
the two Boards are equally culpable in ignoring actual security-analyst
behavior when advocating their preferences, relying instead on made-up
“users” [Young 2006]. Thus, the current FASB/IASB Conceptual Framework [FASB,
2006] is justifiably seen as a direct descen dant of Sprouse [1966].
Sprouse and the two Boards ignore the implications
(or are unaware) of one of the major stylized facts of U.S. financial
reporting history – the shift from a balance-sheet approach to an
income-statement approach during 1900-1930. The shift to an income-statement
approach is usually attributed to the information needs of a massive influx
of individual investors into U.S. equity markets during this era [e.g.,
Hendriksen, 1970, pp. 51-55]. If individual equity investors are
primarily interested in balance-sheet information, then this shift should
not have occurred when it did. Sprouse and the two Boards never address this
salient historical evidence that contradicts their core as assumption of
investor information needs. More broadly, Sprouse and the two Boards ignore
the historical development of the revenue-expense approach, both in theory
and practice, which we survey in this paper. If financial accounting has
emerged over many generations to maintain consilience with the biologically
evolved human brain [Dickhaut et al., 2010], then an abrupt change to a
fair-value-based, asset-liability approach might well make financial reports
less useful to actual human readers.
Contrary to the theoretical ruminations of Sprouse,
security analysts to this day rely primarily on earnings forecasts in
valuing firms. However, today’s analysts can construct their earnings
forecasts only after adjusting for many more non-recurring items that the
FASB has introduced into the income statement. Although SFAS 130 [FASB,
1997] introduced a broader, comprehensive income concept that includes even
more non-recurring items, analysts show no interest in forecasting it or
using it in their analyses. We believe that the FASB’s shift in focus to the
balance sheet has created bigger problems than merely whether financial
analysts have to adjust for new income statement “thingamajigs” instead of
balance sheet “what-you-may-call-its.”
We claim that the lack of analyst interest in the
FASB-mandated, non-recurring items is symptomatic of a monumental mistake in
the asset-liability approach; specifically, it is misaligned with the
reasons that firms exist and the resulting demand for causaldouble-entry
accounting as an economic institution. In other words, while the
asset-liability approach is constructively rational, i.e. deduced from
assumptions that work in a theoretical model, it is unlikely to be
ecologically rational in the sense of improving firms’ survival prospects in
the complex real world [Sargent, 2008; Smith, 2008].
Net earnings and EBITDA cannot be defined since the FASB and IASB elected to
give the balance sheet priority over the income statement in financial reporting
--- "The Asset-Liability Approach: Primacy does not mean Priority,"
by Robert Bloomfield, FASRI Financial Accounting Standards Research
Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
Abstract:
Since the 1970s, the decision-usefulness has taken center stage and our
attention has been concentrated on valuation of assets and liabilities
instead of income measurement. The concept of income, once considered the
gravitational center of accounting has lost its primacy and become a
byproduct of the balance sheet derived from the measurement of assets and
liabilities.
However, we have not been equipped with robust
conceptual foundation supporting theoretically reasoned accounting
measurement. It is not only theoretically but also practically important to
renew our seemingly waned interest in the concept of income because ongoing
reforms of accounting standards cannot be successfully implemented without a
sound understanding of the concept of income.
Be that as it may, net earnings and EBITDA are all-important because
investors change their portfolios based on net earnings and its derivatives more
than anything in the balance sheet.
"Accounting Alchemy," by Robert E. Verrecchia, Accounting Horizons,
September 2013, pp. 603-618.
Verrecchia alleges that it's not that managers have a functional fixation for
earnings metrics as it is that they believe that other managers and investors
are so fixated with earnings that it because of monumental importance not
because it is inherently a great metric but because they believe deeply that the
market itself makes this index of vital importance.
. . .
In summary, my thesis is that managers project that
others are fixated on earnings—independent of any evidence in support
of, or contrary to, this phenomenon. This leads to managers resisting the
inclusion in earnings items that fail to enhance performance, such as the
amortization of Goodwill, or measures that make future performance more
volatile, such as those based on fair value. In the absence of acknowledging
PEF and attempting to grapple with it, I continue to see confrontations over
accounting regulation along the lines of recent debates about fair value
accounting, in addition to further impediments along the path to greater
transparency in financial statements.
It's a bit like requiring calculus for undergraduate accounting courses.
Calculus probably is not essential in any undergraduate accounting course in the
curriculum, but faculty are fixated that the best accounting majors are the ones
do well in calculus. Similarly, investors change their portfolios based on
earnings, eps, EBITDA, and P/E ratios when in fact those metrics are not defined
and may have a lot of misleading noise and secret manipulation
"Too Young to Have a History? Using Data Analysis Techniques to Reveal
Trends and Shifts in the Brief History of Accounting Information Systems,"
by Frank A. Badua and Ann L. Watkins, Accounting Historians Journal,
Volume 38, Number 2 December 2011 ---
http://umiss.lib.olemiss.edu:82/articles/1038689.7397/1.PDF
Hi Glen,
I have some troubles with the link as well. For me, the PDF will run in
my Windows 7 laptop but not my newer Windows 10 laptop, although this
morning the link I gave you is not working on either laptop.
It may be that you have to route to the article as described below.
Then scroll down to 2011 Volume 38 Number 2 and click on the line that
says to View Searchable PDF Text File Then scroll down to the article Page
numbers may not exactly coincide with the table of contents depending upon
the resolution of your browser.
Abstract:
Using several data-analysis techniques, this paper seeks to construct a
brief history of Accounting Information Systems (AIS). In an effort to
achieve some degree of comprehensiveness, this paper examines both AIS
research and pedagogy. It begins by documenting and classifying topical foci
of research papers in the Journal of Information Systems. It then compares
the pedagogical emphases of AIS courses as identified in past research. By
deploying multiple methods of analysis to identify patterns of hegemony or
change in the topics of AIS scholarship and teaching, this paper highlights
the use of two data-analysis techniques found to be useful in the historical
re.
search of accounting. Findings reveal signs of the assimilation of AIS
scholarship into the wider world of accounting research and strong
influences upon AIS pedagogy by oversight bodies and technological
Jensen Comment
Note that the following article has enormous implications for what is taught in
most Ph.D. programs in the social sciences, business, accounting, finance, and
other academic disciplines. Regression analysis has become the key to the
kingdom of academic research, a Ph.D. diploma, journal article publication,
tenure, and performance rewards in the Academy. Now the sky is falling, and soon
researchers skilled mostly at performing regression analysis are faced with the
problem of having to learn how to do real research.
A huge range of science projects are done
with multiple regression analysis. The results are often somewhere between
meaningless and quite damaging. ...
I hope that in the future, if I’m successful in
communicating with people about this, that there’ll be a kind of upfront
warning in New York Times articles: These data are based on multiple
regression analysis. This would be a sign that you probably shouldn’t read
the article because you’re quite likely to get non-information or
misinformation. RICHARD NISBETT is a professor of psychology and co-director
of the Culture and Cognition Program at the University of Michigan. He is
the author of Mindware: Tools for Smart Thinking; and The Geography of
Thought.
Richard Nisbett's Edge Bio Page.
THE CRUSADE AGAINST MULTIPLE REGRESSION ANALYSIS
The thing I’m most interested in right now has become a kind of crusade
against correlational statistical analysis—in particular, what’s called
multiple regression analysis. Say you want to find out whether taking
Vitamin E is associated with lower prostate cancer risk. You look at the
correlational evidence and indeed it turns out that men who take Vitamin E
have lower risk for prostate cancer. Then someone says, "Well, let’s see if
we do the actual experiment, what happens." And what happens when you do the
experiment is that Vitamin E contributes to the likelihood of prostate
cancer. How could there be differences? These happen a lot. The
correlational—the observational—evidence tells you one thing, the
experimental evidence tells you something completely different.
The thing I’m most interested in right now has
become a kind of crusade against correlational statistical analysis—in
particular, what’s called multiple regression analysis. Say you want to find
out whether taking Vitamin E is associated with lower prostate cancer risk.
You look at the correlational evidence and indeed it turns out that men who
take Vitamin E have lower risk for prostate cancer. Then someone says,
"Well, let’s see if we do the actual experiment, what happens." And what
happens when you do the experiment is that Vitamin E contributes to the
likelihood of prostate cancer. How could there be differences? These happen
a lot. The correlational—the observational—evidence tells you one thing, the
experimental evidence tells you something completely different.
In the case of health data, the big problem is
something that’s come to be called the healthy user bias, because the guy
who’s taking Vitamin E is also doing everything else right. A doctor or an
article has told him to take Vitamin E, so he does that, but he’s also the
guy who’s watching his weight and his cholesterol, gets plenty of exercise,
drinks alcohol in moderation, doesn’t smoke, has a high level of education,
and a high income. All of these things are likely to make you live longer,
to make you less subject to morbidity and mortality risks of all kinds. You
pull one thing out of that correlate and it’s going to look like Vitamin E
is terrific because it’s dragging all these other good things along with it.
This is not, by any means, limited to health
issues. A while back, I read a government report in The New York Times on
the safety of automobiles. The measure that they used was the deaths per
million drivers of each of these autos. It turns out that, for example,
there are enormously more deaths per million drivers who drive Ford F150
pickups than for people who drive Volvo station wagons. Most people’s
reaction, and certainly my initial reaction to it was, "Well, it sort of
figures—everybody knows that Volvos are safe."
Continued in article
Drawing Inferences From Very Large Data Sets
David Johnstone wrote the following:
Indeed if you hold H0 the same and keep
changing the model, you will eventually (generally soon) get a significant
result, allowing "rejection of H0 at 5%", not because H0 is
necessarily false but because you have built upon a false model (of which
there are zillions, obviously).
Granger (1998;
2003) has
reminded us that if the sample size is sufficiently large, then it's
virtually impossible not to reject almost any hypothesis.
So, if the sample is very large and the p-values associated with
the estimated coefficients in a regression model are of the order of, say,
0.10 or even 0.05, then this really bad news. Much,
much, smaller p-values are needed before we get all excited about
'statistically significant' results when the sample size is in the
thousands, or even bigger. So, the p-values reported above are
mostly pretty marginal, as far as significance is concerned. When you work
out the p-values for the other 6 models I mentioned, they range
from to 0.005 to 0.460. I've been generous in the models I selected.
Here's another set of results taken from a second, really nice, paper by
Ciecieriski et al. (2011) in the same issue of
Health Economics:
Continued in article
Jensen Comment
My research suggest that over 90% of the recent papers published in The
Accounting Review use purchased databases that provide enormous sample sizes
in those papers. Their accountics science authors keep reporting those
meaningless levels of statistical significance.
What is even worse is when meaningless statistical significance tests are
used to support decisions.
With all of this emphasis
on "Big Data", I was pleased to see
this post on the Big Data
Econometrics blog, today.
When you have a sample that runs
to the thousands (billions?), the conventional significance
levels of 10%, 5%, 1% are completely inappropriate. You need to
be thinking in terms of tiny significance levels.
I discussed this in some
detail back in April of 2011, in a post titled, "Drawing
Inferences From Very Large Data-Sets".
If you're of those (many) applied
researchers who uses large cross-sections of data, and then
sprinkles the results tables with asterisks to signal
"significance" at the 5%, 10% levels, etc., then I urge
you read that earlier post.
It's sad to encounter so many
papers and seminar presentations in which the results, in
reality, are totally insignificant!
Page 206 Like scientists today in medical and economic and
other sizeless sciences, Pearson mistook a large sample size for the definite,
substantive significance---evidence s Hayek put it, of "wholes." But it was as
Hayek said "just an illusion." Pearson's columns of sparkling asterisks, though
quantitative in appearance and as appealing a is the simple truth of the sky,
signified nothing.
pp. 250-251 The textbooks are wrong. The teaching is wrong. The
seminar you just attended is wrong. The most prestigious journal in your
scientific field is wrong.
You are searching, we know,
for ways to avoid being wrong. Science, as Jeffreys said, is mainly a series of
approximations to discovering the sources of error. Science is a systematic way
of reducing wrongs or can be. Perhaps you feel frustrated by the random
epistemology of the mainstream and don't know what to do. Perhaps you've been
sedated by significance and lulled into silence. Perhaps you sense that the
power of a Roghamsted test against a plausible Dublin alternative is
statistically speaking low but you feel oppressed by the instrumental variable
one should dare not to wield. Perhaps you feel frazzled by what Morris Altman
(2004) called the "social psychology rhetoric of fear," the deeply embedded path
dependency that keeps the abuse of significance in circulation. You want to come
out of it. But perhaps you are cowed by the prestige of Fisherian dogma. Or,
worse thought, perhaps you are cynically willing to be corrupted if it will keep
a nice job
Bob Jensen's threads on the often way analysts, particularly accountics
scientists, often cheer for statistical significance of large sample outcomes
that praise statistical significance of insignificant results such as R2
values of .0001 ---
The Cult of Statistical Significance: How Standard Error Costs Us Jobs, Justice,
and Lives ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
Those of you interested in tracking The
Accounting Review's trends in submissions, refereeing, and
acceptances'rejections should be interested in current senior editor Mark L.DeFond's
annual report at
http://aaajournals.org/doi/full/10.2308/accr-10477
This has become a huge process involving 18 editors and hundreds of referees.
TAR is still the leading accountics science journal of the American Accounting
Association. However, there are so many new specialty journals readers are apt
to find quality research in other AAA journals. TAR seemingly still does not
publish commentaries and articles without equations and has not yet caught on
the the intitiatives of the Pathways Commission for more diversification in
research in the leading AAA research journal. Virtually all TAR editors still
worship p-values in empirical submissions.
But after
writing about p-values again and again, and recently issuing a correction on
a
nearly year-old story over some erroneous
information regarding a study’s p-value (which I’d taken from the scientists
themselves and
their report), I’ve
come to think that the most fundamental problem with p-values is that no one
can really say what they are.
Last week, I
attended the inaugural
METRICS conference at Stanford, which brought
together some of the world’s leading experts on meta-science, or the study
of studies. I figured that if anyone could explain p-values in plain
English, these folks could. I was wrong.
Continued in article
Jensen Comment
Why all the fuss? Accountics scientists have a perfectly logical explanation.
P-values are numbers that are pumped out of statistical analysis software
(mostly multiple regression software) that accounting research journal editors
think indicate the degree of causality or at least suggest the degree of
causality to readers. But the joke is on the editors, because there aren't any
readers.
November 30, 2015 reply from David
Johnstone
Dear
Bob, thankyou for this interesting stuff.
A big
part of the acceptance of P-values is that they easily give the look of
something having been found. So it’s an agency problem, where the
researchers do what makes their research outcomes easier and better looking.
There
is a lot more to it of course. I note with young staff that they face enough
hurdles in the need to get papers written and published without thinking
that the very techniques that they are trying to emulate might be flawed.
Rightfully, they say, “it’s not my job to question everything that I have
been shown and to get nowhere as a result”, nor can most believe that
something so established and revered can be wrong, that is just too
unthinkable and depressing. So the bandwagon goes on, and, as Bob says, no
one cares outside as no one much reads it.
I do
however get annoyed every time I hear decision makers carry on about
“evidence based” policy, as if no one can have a clue or form a vision or
strategy without first having the backing of some junk science by a
sociologist or educationist or accounting researcher who was just twisting
the world whichever way to get significant p-values and a good “story”. This
kind of cargo-culting, which is everywhere, does great harm to good or
sincere science, as it makes it hard for an outsider to tell the difference.
One
thing that does not get much of a hearing is that the statisticians
themselves must take a lot of blame. They had the chance to vote off P
values decades ago when they had to choose between frequentist and Bayesian
logic. They split into two camps with the frequentists in the great majority
but holding the weakest ground intellectually. The numbers are moving now,
as people that were not born when de Finetti, Savage, Lindley, Kadane and
others first said that p-values were ill-conceived logically. Accounting, of
course, being largely ignorant of there being any issue, and ultimately just
political, will not be leading the battle of ideas.
January 28, 2016 reply from Paul Williams
Bob,
Thank you for this. In accounting the problem is
even worse because at least in other fields it is plausible that one can
have "scientific" concepts and categories. Archival research in accounting
can only deal with interpretive concepts and the "scientific" categories are
often constructed for the one study in question. We make a lot of s... up so
that the results are consistent with the narrative (always a neoclassical
economic one) that informs the study. Measurement? Doesn't exist. How can
one seriously believe they are engaged in scientific research when their
"measurements" are the result of GAAP? Abe Briloff described our most
prestigious research (which Greg Waymire claimed in his AAA presidential
white paper "...threatens the discipline with extinction."). as simply "low
level financial statement analysis." Any research activity that is reduced
to a template (in JAE the table numbers are nearly the same from paper to
paper) you know you are in trouble. What is the scientific value of 50
control variables, two focus independent variables (correlated with the
controls), and one dependent variable that is always different from study to
study? This one variable at a time approach can go on into infinity with the
only result being a huge pile of anecdotes that no one can organize into any
coherent explanation of what is going on. As you have so eloquently and
relentlessly pointed out accountants never replicate anything. In archival
research it is not even possible to replicate since the researcher is unable
to provide (like any good scientist in physics, chemistry, biology, etc.) a
log book providing the detailed recipe it would take to actually replicate
what the researcher has done. Without the ability to independently replicate
the exact study, the status of that study is merely an anecdote. Given the
Hunton affair, perhaps we should not be so sanguine about trusting our
colleagues. This is particularly so since the leading U.S. journals have a
clear ideological bias -- if your results aren't consistent with the
received wisdom they won't be published.
The purpose of this paper is to make a case that
the accountics science monopoly of our doctoral programs and publish ed
research is seriously flawed, especially its lack of concern about
replication and focus on simplified arti ficial worlds that differ too much
from reality to creatively discover findings of greater relevance to
teachers of accounting and practitioners of accounting. Accountics
scientists themselves became a Cargo Cult.
Jensen Comment
I'm unsure whether or not the enrollment numbers for Ph.D. programs included
students enrolled in non-AACSB accounting Ph.D. programs. For example, to my
knowledge no for-profit university business program in North America is
accredited by the AACSB. Some for-profit universities now offer accounting Ph.D.
diplomas. In my opinion, AACSB accreditation is the the single most important
factor to hiring of Ph.D. graduates in AACSB-acredited colleges and
universities. Jim Hasselback provides more information about Ph.D. program
graduations in AACSB-accredited universities ---
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf
Only about 3% of the undergraduate and graduate accounting programs offer
IFRS material, although that may be somewhat understated since virtually all
intermediate textbooks now have some IFRS material woven into mainly US GAAP
chapters.
Whites account for about 74% of the accounting employees reported in this
survey. Asians have increased to 15% with Hispanics and Blacks still lagging.
About 91% of the partners are white with about 5% being Asian. Only about 3% of
the partners are black or Hispanic/Latino.
JPMorgan Chase & Co (JPM.N) will pay $1.42 billion
in cash to resolve most of a lawsuit accusing it of draining Lehman Brothers
Holdings Inc of critical liquidity in the final days before that investment
bank's September 2008 collapse.
The settlement was made public on Monday, and
requires approval by U.S. Bankruptcy Judge Shelley Chapman in Manhattan.
It resolves the bulk of an $8.6 billion lawsuit
accusing JPMorgan of exploiting its leverage as Lehman's main "clearing"
bank to siphon billions of dollars of collateral just before Lehman went
bankrupt on Sept. 15, 2008, triggering a global financial crisis.
Lehman's creditors charged that JPMorgan did not
need the collateral and extracted a windfall at their expense.
Monday's settlement also resolves Lehman's
challenges to JPMorgan's decision to close out thousands of derivatives
trades following the bankruptcy, court papers showed.
The accord would permit a further $1.496 billion to
be distributed to the creditors, including a separate $76 million deposit,
court papers showed.
Goldman Sachs Group Inc. agreed to the largest
regulatory penalty in its history, resolving U.S. and state claims stemming
from the Wall Street firm’s sale of mortgage bonds heading into the
financial crisis.
In settling with the Justice Department and a
collection of other state and federal entities for more than $5 billion,
Goldman will join a list of other big banks in moving past one of the
biggest, and most costly, legal headaches of the crisis era.
Goldman said litigation legal expenses stemming
from the accord would trim its fourth-quarter earnings by about $1.5
billion, after taxes. The firm is scheduled to report results Wednesday.
“We are pleased to have reached an agreement in
principle to resolve these matters,” Lloyd Blankfein, Goldman’s chief
executive, said in a statement.
Government officials previously won
multibillion-dollar settlements from J.P. Morgan Chase & Co., Bank of
America Corp. and Citigroup Inc. The probes examined how Wall Street sold
bonds tied to residential mortgages, and whether banks deceived investors by
misrepresenting the quality of underlying loans.
The government’s inquiry into Goldman related to
mortgage-backed securities the firm packaged and sold between 2005 and 2007,
the years when the housing market was soaring and investor demand for
related bonds was still strong.
I begin my remarks by echoing others and commending the work of the team
that has been working on this rule, including Rolaine Bancroft, Hughes
Bates, Michelle Stasny, Kayla Florio, Heather Mackintosh, Silvia Pilkerton,
Robert Errett, Max Rumyantsev, and Kathy Hsu.
Heather and Sylvia have been working on the data tagging and preparing EDGAR
to accept this new data. This is no small endeavor.
I want to give a special thank you to Paula Dubberly, who retired last year
from the SEC and is in the audience today. She has been a champion for
investors through her leadership on asset-backed securities regulation from
the development of the initial Reg AB proposal through the rules that are
being considered today.
This rule is an important step forward in completing the mandated Dodd-Frank
Act rulemakings.[1]
The financial crisis revealed investors’ inability to actually assess pools
of loans that had been sliced and diced, sometimes multiple times, by being
securitized, re-securitized, or combined in a dizzying array of complex
financial instruments. The securitization market was at the center of the
financial crisis. While securitization structures provided liquidity to
nearly every sector in the U.S. economy, they also exposed investors to
significant and non-transparent risks due to poor lending practices and poor
disclosure practices.
As we now know, offering documents failed to provide timely and complete
information for investors to assess the underlying risks of the pool of
assets.[2]
Without sufficient and accurate loan level details, analysts and investors
could not gauge the quality of the loans – and without an ability to
distinguish the good from the bad, the secondary market collapsed.
Congress responded and required the Commission to promulgate rules to
address a number of weaknesses in the securitization process.[3]
Six years after the financial crisis, the securitization markets continue to
recover. While certain asset classes have rebounded, others continue to
struggle.
The rule the Commission issues today partially addresses the Congressional
mandate. In effect, today’s rules provide investors with better information
on what is inside the securitization package. The rules today do for
investors what food and drug labeling does for consumers – provide a list of
ingredients.
This rule also addresses certain critical flaws that became apparent in the
securitization process, including a dearth of quality information and
insufficient time to make informed assessments of the underlying
investments. This rule is an important step toward providing investors with
tools and data to better understand the underlying risks and appropriately
price the securities.
There are several important and laudable aspects of today’s rule that merit
specific mentioning.
First, the rule requires the underlying loan information to be standardized
and available in a tagged XML format to ensure maximum utility in analysis.[4]
As noted in the Commission’s 2010 Proxy Plumbing Release: “If issuers
provided reportable items in interactive data format, shareholders may be
able to more easily obtain information about issuers, compare information
across different issuers, and observe how issuer-specific information
changes over time as the same issuer continues to file in an interactive
format.”[5]
The same is true for underlying loan information. Investors can unlock the
value and efficiency that standardized, machine readable data allows.
Today’s rule also improves disclosures regarding the initial offering of
securities and significantly, for the first time, requires periodic updating
regarding the loans as they perform over time. This information will
provide a more nuanced and evolving picture of the underlying assets in a
portfolio to investors.
The rule also requires that the principal executive officer of the ABS
issuer certify that the information in the prospectus or report is
accurate. These kinds of certifications provide a key control to help
ensure more oversight and accountability.
As for the privacy concerns that prompted a re-proposal, the staff has
worked hard to balance investor needs for loan level data with concerns that
the data could lead to identification of individual borrowers. I believe
the rule achieves a workable balance between these two competing needs,
while still providing invaluable public disclosure.
Finally, I believe that the new disclosure rule will provide investors with
the necessary tools to see what is “under the hood” on auto loan
securitizations. In its latest report on consumer debt and credit, the
Federal Reserve Bank of New York noted a recent spike in subprime auto
lending. As the report shows, although consumer auto debt balances have
risen across the board, the real growth has been in riskier loans.[6]
The disclosure and reporting changes that the Commission is adopting today
will help investors see the quality of the loans in a portfolio and the
performance of those loans over time.
While today’s rules are an important step forward, more work needs to be
done regarding conflicts of interest. We now know that many firms who were
structuring securitizations before the financial crisis were also betting
against those same securitizations.
In April 2010, the Commission charged the U.S broker-dealer of a large
financial services firm for its role in failing to disclose that it allowed
a client to select assets for an investment portfolio while betting that the
portfolio would ultimately lose its value. Investors in the portfolio lost
more than $1 billion.[7]
In October 2011, the Commission sued the U.S broker-dealer of a large
financial services firm for among other things, selling investment products
tied to the housing market and then, for their own trading, betting that
those assets would lose money. In effect, the firm bet against the very
investors it had solicited. An experienced collateral manager commented
internally that a particular portfolio was “horrible.” While investors lost
virtually all of their investments in the portfolio, the firm pocketed over
$160 million from bets it made against the securitization it created.[8]
The Dodd-Frank Act directed the Commission to adopt rules prohibiting
placement agents, underwriters, and sponsors from engaging in a material
conflict of interest for one year following the closing of a securitization
transaction. Those rules were required to be issued by April 2011.[9]
The Commission initially proposed these rules in September 2011, and still
has not completed them.[10]
We need to complete these rules as soon as possible, hopefully, by the end
of this year. These rules will provide investors with additional confidence
that they are not being hoodwinked by those packaging and selling those
financial instruments.
Unfortunately, the Commission has put on hold its work to provide investors
with a software engine to aid in the calculation of waterfall models.
Although the final rule provides for a preliminary prospectus at least three
business days before the first sale, this is reduced from the proposal,
which provided for a five-day period. With only three days to conduct due
diligence and make an investment determination, such a software engine could
be an important and much needed tool for investors to use in analyzing the
flow of funds. Such waterfall models can help investors assess the cash
flows from the loan level data. We should return to this important
initiative to provide investors with the mathematical logic that forms the
basis for the narrative disclosure within the prospectus.
FASB issued two proposals Tuesday that are designed
to address financial reporting issues related to retirement benefits.
Proposed Accounting Standards Update (ASU),
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
addresses a concern that the presentation of defined benefit cost on a net
basis combines elements with different predictive values. Users of financial
statements have told FASB that the service cost component of net benefit
cost is analyzed differently from other components.
Under the proposal, an employer would report the
service cost component in the same line item or items as other compensation
costs arising from services rendered by the affected employees during the
period. The other components of net benefit cost as defined in Paragraphs
715-30-35-4 and 715-60-35-9 would be presented in the income statement
separately from the service cost component and outside a subtotal of income
from operations, if one is presented.
The proposal states that if a separate line item or
items are used to present the other components of net benefit cost, that
line item or items must be appropriately described. In addition, the
proposal would allow only the service cost to be eligible for capitalization
when applicable (e.g., as a cost of internally manufactured inventory or a
self-constructed asset).
Amendments in the proposal would apply to all
employers, including not-for-profits, that offer defined benefit pension
plans, other post-retirement benefit plans, or other types of benefits
accounted for under Topic 715.
SUMMARY: When General Motors Co.'s pension
plan took a big hit in February 2015, it joined hundreds of companies facing
growing pension shortfalls as Americans keep living longer. Longevity has a
downside for those paying the bills, and the higher costs now have to be
reflected on corporate balance sheets because of new mortality estimates
released in October 2014. The new estimates won't affect many U.S.
companies, which long ago shifted their employees to defined-contribution
plans like 401(k)s, which leave workers on their own after retirement. But
they are hitting other big companies with defined-benefit plans that have to
make payments to some former employees for as long as they live.
CLASSROOM APPLICATION: Use this when covering
pension accounting.
QUESTIONS:
1. (Introductory) What are the recent changes to life-expectancy
estimates? Why do those estimates affect accounting for pensions?
2. (Advanced) How does increased longevity affect a company's
income statement and balance sheet? How are those changes calculated? What
are the appropriate journal entries?
3. (Advanced) Which companies are most likely to be affected by
these changes? Why? What companies will not be affected by the change?
4. (Advanced) Do you think these changes will cause more companies
to change their retirement options for employees? Why or why not? How could
a company change the options to lessen the impact? What benefits would those
changes bring to employers?
5. (Advanced) How have the companies mentioned in the article dealt
with the changes in life expectancy? What announcements have they made? How
have some of these companies differed?
Reviewed By: Linda Christiansen, Indiana University Southeast
When General Motors Co. ’s pension plan took a big
hit earlier this month, it joined hundreds of companies facing growing
pension shortfalls as Americans keep living longer.
Longevity has a downside for those paying the
bills, and the higher costs now have to be reflected on corporate balance
sheets because of new mortality estimates released in October.
In its first revision of mortality assumptions
since 2000, the Society of Actuaries estimated the average 65-year-old man
today will live 86.6 years, up from the 84.6 it estimated a decade and a
half ago. The average 65-year-old woman will live 88.8 years, up from 86.4.
The new estimates won’t affect many U.S. companies,
which long ago shifted their employees to defined-contribution plans like
401(k)s, which leave workers on their own after retirement. But they are
hitting other big companies with defined-benefit plans that have to make
payments to some former employees for as long as they live. The changes may
also prompt more companies to take steps to reduce the risks associated with
their pension plans, experts say.
When GM announced fourth-quarter earnings Feb. 4,
it said the mortality changes had caused the funding of its U.S. pension
plans to fall short by an additional $2.2 billion and contributed to
significant pension losses that will be filtered into its earnings over a
period of years.
Verizon Communications Inc. and AT&T Inc. recorded
big charges to earnings tied to their pension and retiree-benefit plans
partly as a result of the new estimates, and the changes could have a
significant impact across corporate America. Consulting firm Towers Watson
estimates the funding status of 400 large U.S. companies could weaken by a
total of $72 billion as a result.
The cost is another weight on pension-plan
operators already wrestling with the impact of declining interest rates.
Lower rates boost the current value of the future payments the plans have
promised to retirees because the value of future pension obligations isn’t
discounted back to the present as dramatically. That raises the current
value of pension obligations, making pension plans more underfunded.
Continued in article
Jensen Comment
The biggest disaster of longevity will be on entitlement programs like Medicare
and Medicaid.
These programs are not sustainable.
GE is moving its entire headquarters from Connecticut (known for unfriendly
heavy business taxes) to Massachusetts (another blue state noted for high
taxes). However, there's generally a tax break in such huge moves of giant
corporations.
"Controversial tax break lured GE to Boston," by Greg Ryan, Biz
Journals, January 21, 2016 ---
http://m.bizjournals.com/atlanta/news/2016/01/21/controversial-tax-break-lured-ge-to-boston.html
General Electric, a conglomerate on a scale rarely
seen in American business, is many things. It’s an energy company. It’s a
life sciences company. It’s a software development firm as well as a
financial services firm and manufacturer.
But it’s the last of those identities that can win
the company (NYSE: GE) a controversial tax break in Massachusetts, the state
it will soon call home instead of Atlanta.
GE confirmed to sister publication the Boston
Business Journal that it expects to receive a discount from the state on its
corporate income taxes, one reserved for just three types of firms: defense
contractors, mutual fund companies and manufacturers. Under the tax break,
only the firm's sales in Massachusetts — not its property or payroll in the
state, as is also included for other types of companies — are used to
calculate how much of its U.S. income will go to the Bay State.
It’s one more perk on top of the $145 million
incentive package announced last week by the state and city, one that many
of GE's future neighbors in the Seaport, from LogMeIn to
PricewaterhouseCoopers, do not have. It’s also another way for GE, who has
built a reputation as an expert tax avoider, to minimize its tax bill.
Continued in article
Jensen Comment
When I did some consulting with General Electric on FAS 133 KPMG was the
long-time independent auditor. I assume this is still the case such that KPMG
will probably be relocating hundreds of auditors to Boston.
When Caterpillar threatened to leave Peoria, Illinois uncorked all the tax
breaks imaginable to keep Caterpillar from leaving. Illinois also extended
similar tax breaks to Sears. Connecticut must not have been willing to match the
GE tax break offers from Massachusetts.
Auditor refuses to give Commodity Futures Trading
Commission clean bill of health because of what it says is significant error
on the books.
The Commodity Futures Trading Commission is
fighting with its outside auditor, which is refusing to give the agency a
clean bill of health because of what it says is a significant error on the
CFTC’s books.
The auditor, KPMG LLP, says the CFTC understated
its obligations by about $212 million in fiscal 2014 and $194 million in
fiscal 2015, according to a KPMG opinion included in the CFTC’s 2015
financial report. The agency hasn’t properly accounted for its future costs
of leasing office space, KPMG said.
The auditor issued only a “qualified” opinion,
indicating its judgment that the CFTC’s financial statements for fiscal
2015, which ended Sept. 30, were flawed. The CFTC has a material weakness in
its internal controls as a result, KPMG said.
The CFTC said it “does not concur” with KPMG’s
position, but in a letter also included in the 2015 financial report, the
agency acknowledged it was “reasonably possible” KPMG was correct. The CFTC
said the Government Accountability Office, the congressional watchdog
agency, is investigating the matter.
A CFTC spokesman said the agency believes the
dispute is a technical accounting issue and is waiting for the GAO to weigh
in before the CFTC acts to address it. A KPMG spokesman declined to comment
on the matter, citing client confidentiality.
Jensen Comment
This is a good article for debate either in class or as homework essay
requirement.
I certainly do not agree that they are "stupid" requirements.
Certainly they should be given cost versus benefit considerations in various
contexts, but the author makes declarative statements that I do not necessarily
accept as true in all contexts.
I certainly doubt that financial analysts tend to agree that
these disclosure requirements are "stupid."
Xinghua Gao Governors State University - College of Business
Yonghong Jia Governors State University - College of Business and Public
Administration
Abstract
We investigate whether the positive contracting
effects of corporate social responsibility (CSR) affect debtholders' demand
for accounting conservatism to monitor debt contracts. We find that firms
reputed for superior CSR performance report less conservatively than firms
that score low on CSR performance. The impact of CSR reputation on
conservatism is more pronounced in situations where operating uncertainty
renders formal contracting and enforcement difficult. Both public and
private debtholders demonstrate similar demand for conservatism
unconditionally; however they respond differently to borrowers' CSR
reputations — public debtholders reduce demand for conservatism while
private lenders do not. We further find that the lesser demand for
conservatism manifests in a lower likelihood of covenant violation by CSR
firms and this CSR effect is only significant for firms relying on public
debt. The overall evidence suggests that borrowers' CSR reputations, by
constraining managerial opportunism and mitigating contractual hazard,
reduce debtholders' demand for conservatism-facilitated covenant violations.
Shizuki Saito University of Tokyo
Yoshitaka Fukui Aoyama Gakuin University
Abstract
Although there are many aspects to be considered
for a full understanding of hedge accounting as an exceptional rule to fair
value accounting, we focus on: what rationale exists behind the dichotomy of
fair value and cash flow hedges; and whether it is justifiable on a solid
theoretical foundation of accounting measurement.
Furthermore, in order to fully understand the
theoretical as well as practical significance of hedge accounting, we should
broaden our perspective beyond the scope of a usual measurement-oriented
argument in the accounting literature. To be more concrete, we will argue
that reexamining the meaning of being risk-free from a viewpoint of
multiperiod dynamic optimization is absolutely necessary, albeit not
sufficient, to comprehend the essence of hedging.
Narisa Tianjing Dai University of International Business and Economics -
Business School
Clinton Free UNSW Australia Business School, School of Accounting
Abstract
This article is concerned with the way
that interview data is used in accounting research. We tabulate 510
interview-based research articles in major accounting journals published in
the 15 year period 2000-2014 and examine patterns in relation to that
interview data is may be drawn upon to support research claims.
Specifically, we focus on three polemic issues faced by researchers: (1)
data sufficiency; (2) the role of quotes; and (3) the content of method
sections in research articles. Across this period, we find several trends
including an increase in the number of block quotations used in published
articles, an increase in the length of method sections and an increased
reliance on coding and qualitative software. We offer some general guidance
for enhancing the use of interview data in accounting research.
Sonia Mudel University of Delhi, Delhi School of Economics, Department of
Commerce, Students
Abstract
The concept of corporate governance
and creative accounting has come into picture after the big accounting
scandals (Enron, WorldCom, Satyam computers etc.).Corporate governance
represents the manner in which a company is directed and controlled and this
aspect is closely related to creative accounting practices, ownership
structure, board of director’s structure, they all can encourage or
discourage creative accounting practices. Corporate governance is a current
issue with great impact on creative accounting. This paper is based on how
corporate governance seen as possible solution to reduce creative accounting
practices. Occurrence of creative accounting is related to weakness of
corporate governance. The paper is structured as follow, at first some
definitions of creative accounting and corporate governance after
introduction. After that motivators of creative accounting, consequence of
creative accounting , techniques of creative accounting , solution to these
techniques, theories of corporate governance are bring into attention to
identify the nature , existence and incidences. After that relation between
corporate governance and creative accounting is shown. The paper continues
with a review of some code of conduct of corporate governance like SOX Act,
Cadbury committee, Blue Ribbon committee, and concludes by suggesting some
solutions and recommendations for this problem of creative accounting.
Kalmen H. Datt University of New South Wales (UNSW)
Alfred Tran Australian National University
Binh Tran-Nam University of New South Wales (UNSW) - School of Taxation and
Business Law
Abstract
This paper is concerned with the ranking of
academic tax journals. The project started as a response to the former
federal government’s Research Quality Framework (RQF). The RQF has now been
replaced by the Excellence in Research for Australia (ERA) initiative which,
in many ways, is not unlike the RQF. As part of the ERA initiative, the
Australian Research Council (ARC), the Australian Business Deans Council (ABDC)
and the Council of Australian Law Deans (CALD) all have released their lists
of journal rankings. These lists include tax journals. The ranking of tax
journals by the ARC and the ABDC are broadly similar.
The ARC’s and the ABDC’s ranking of tax journals
are controversial and are not supported by Australian tax academics. There
are omissions and inconsistencies. Most importantly, their ranking
methodologies appear to be ad hoc, so it is virtually impossible to assess
their validity. Most of the ranking problems seem to arise from the facts
that tax research is multidisciplinary and tax issues tend to be
country-specific. Thus, treating tax as a sub-discipline of accounting,
finance or law and ranking tax journals with accounting, finance and law
journals will invariably produce unsatisfactory and inconsistent results.
This scoping paper is part of an ongoing project on
ranking of tax journals conducted by university researchers with different
disciplinary backgrounds. Its principal aim is to derive an objective,
rigorous and practical framework for ranking tax journals. The approach
takes into account the multidisciplinary and country-specific nature of tax
research. The methodology involves a mixture of surveys of tax academics’
perceptions of the quality of tax journals and assessment of impact based on
citations. The proposed framework will be implemented with a view to
generating a reliable and defensible ranking that would be accepted by the
majority of tax researchers in Australasia.
China is moving to rein in its fast-growing and
innovative online finance sector, which offers a glimpse of how the rest of
the world may someday handle money but has seen a number of high-profile
abuses.
Chinese Internet companies have transformed the
average smartphone into a platform for cashless transactions, bank
transfers, loans and investments far beyond what is common in the U.S. With
many skipping credit cards entirely, Chinese people buy money-market funds,
split a restaurant check and pay for services ranging from taxis to takeout
food all within the same phone app.
Last year, nearly a quarter of China’s population—a
number bigger than the total U.S. population—made payments online. Data
provider Euromonitor International estimates that China’s mobile payments
this year will total $213 billion, compared with $163.5 billion for the U.S.
The biggest payment service, an affiliate of e-commerce giant Alibaba Group
Holding Ltd. called Alipay, has 400 million users.
“These numbers are phenomenal when compared to
other payment providers that operate globally,” said Ng Zhi Ying of
Forrester Research Inc.
Author
Richard L. Kaplan, University of Illinois College of Law
Abstract:
On the occasion of Medicare’s 50th anniversary,
this Article examines the evolution of this essential program from its
enactment in 1965 through implementation of the Affordable Care Act. Persons
who are, or soon will be, newly enrolled in Medicare may be especially
interested in the first part of this Article, which addresses the coverages,
exclusions, and costs of Medicare’s constituent parts and concludes (on pp.
20-21) with seven critical questions that every new beneficiary must
consider before enrolling. The Article then proffers policy recommendations
to better align Medicare with current models of health insurance and provide
more appropriate coverage of long-term care expenses.
Wall Street Analysts' S&P 500 Predicted Gains vs. Actual Gains 2001-2015
---- Begs the question where is the value in these
strategists' forecasts?
"Strategists: Full of Bull," by Salil Mehta, business statistics professor
at Georgetown University, Statistical Ideas Blog, January 2016 ---
http://statisticalideas.blogspot.com/2016/01/strategists-full-of-bull.html
8 jaw-dropping tax havens of the super rich
---
http://www.businessinsider.com/8-jaw-dropping-tax-havens-of-the-super-rich-2016-1
Jensen Comment
These havens will undoubtedly become more popular after the 2016 election if
Democrats gain a majority in the USA Senate and/or House of Representatives.
Without more legislative support for raising taxes on high income USA residents
the outcome of the presidential election is not as relevant as candidates want
us to believe.
Recent data produced by Treasury’s Office of Tax
Analysis shows that not only is the income tax very progressive, but so too
is the overall tax system when we include payroll taxes, corporate income
taxes, and various excise taxes.
Treasury’s data for 2015 [found here] allows us to
look at two simple ways of measuring the progressivity of the tax code: the
share of the total tax burden borne by families at each level of income;
and, the average tax rates paid by families at each level of income.
The Treasury data is comprehensive, in that it
includes all roughly 167 million families (rather than just the 145 million
income tax filers) and it uses a broader “cash” measure of income that
includes government transfers in addition to wages, salaries, and investment
income. Treasury divides the population into deciles, or ten equal groups of
16.7 million families.
HOUSE SPEAKER Paul Ryan and other Republican
congressional leaders are being pilloried by GOP activists for pushing
through a $1.15 trillion spending bill laden with pork and a bewildering
array of tax credits (including one for plug-in motorcycles). This junks up
an already mind-numbingly complex tax code even more. “This is what we get
from a Republican-controlled Congress?” they angrily ask.
Alas, with Barack Obama still in the White House, a
divided GOP in the House (which gave Democrats bargaining leverage, since
their votes were needed for passage) and the specter of a government
shutdown if no bill was passed (a fight the GOP wouldn’t win in the court of
public opinion, given the fact that Congress is far more unpopular than the
President), an ugly piece of legislation was unavoidable.
However, there are three gems in this legislative
garbage dump.
One has been widely covered: Removing the
four-decades-old ban on oil exports, a relic from an era when it was thought
we were running out of the stuff because the price was going up so much. The
rapid rise in petroleum prices wasn’t a result of the Arab oil
embargo–imposed because we supported Israel during the Yom Kippur War–or of
a looming oil shortage. It was a result of the weak dollar. We saw the same
phenomenon in the early 2000s, when a weak greenback sent the price of oil
from around $25 a barrel to over $100. Repealing this prohibition will help
our beleaguered producers land new markets.
The second gem concerns the horrors of ObamaCare.
The ban on subsidies for insurance companies that lose money on policies
sold on the ObamaCare exchanges has been extended. The start date for the
Cadillac tax on “overly rich” health insurance plans has been postponed
until 2020, and the medical device tax has been suspended for two years.
These are a nice start to dismantling this monstrosity and replacing it with
a system under which patients are truly in charge, not third-party
payers–government, employers and insurers.
The final gem is one that would appeal to
theologians who debate how many angels can dance on the head of a pin.
Making certain tax credits permanent, such as those for research and
development, will enable more sweeping tax cuts and tax code simplification
in 2017. As the Wall Street Journal noted, “Under Congress’s bizarre budget
rules, reducing the tax base now will make it easier for Congress to cut tax
rates more deeply … in 2017 …. About $560 billion in ‘extenders’ that expire
on paper will be baked into the budget baseline and so won’t require
offsetting ‘pay-fors’ to finance lower tax rates. Mr. Ryan is thinking
ahead.”
Jensen Comment
Of course the 800-lb gorilla causing most of the damage is the massive
convenience and product choices in online shopping. For example, why go to a
mall for tennis shoes, sweaters, shorts, dresses, and trousers when more styles
and size availability are available on Amazon with free delivery in a couple of
days and an amazingly simple free return policy? I hate to admit how much we
open boxes, trying things out, and return what we don't quite like.
The food court in the Concord Mall in the NH State Capitol has gone dark with
every other store being empty. The anchor stores of JC Penney, Sears, and Bon
Ton are like empty tombs.
But there are other causes of the decline in malls. Malls became hangouts for
teen gangs and drug dealers. A huge mall not far from our former house in San
Antonio closed down not long after the bad publicity of a couple of murders
taking place in a huge two-story mall that was already notorious for car theft
and hijackings. Other malls in San Antonio have since shut down for similar
reasons.
Malls are now targets for every assembly of protesters imaginable like the
attempts of Black Lives Matter protesters to disrupt shopping at Mall of America
in Minneapolis.
Although the risk is small in the USA relative to Africa, the publicity over
terror attacks in malls is certainly not helping the survival of malls.
AICPA, CIMA RECOGNIZE THREE PROFESSORS FOR MANAGEMENT ACCOUNTING RESEARCH ON
VALUING EMPLOYEE STOCK OPTIONS ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=153746&utm_source=MailerMailer&utm_medium=email&utm_content=AICPA%2C+CIMA+RECOGNIZE+THREE+PROFESSORS+FOR+MANAGEMENT+ACCOUNTING&utm_campaign=Double+Entries+newsletter+22(01)
The American Institute of CPAs (AICPA) and the
Chartered Institute of Management Accountants (CIMA) have recognized three
professors for research into the impact of corporate employee compensation
programs with the Greatest Potential Impact on Management Accounting
Practice Award.
The AICPA and CIMA, under the banner of their
Chartered Global Management Accountant® (CGMA®)(CGMA®) designation,
sponsored the award presented to Anne Farrell associate professor of
accounting, Farmer School of Business, Miami University, Oxford, Ohio; Susan
Krische, associate professor of accounting and taxation, Kogod School of
Business, American University, Washington, D.C.; and Karen L. Sedatole,
professor of accounting, Eli Broad College of Business, Michigan State
University, Lansing, MI. Their paper, “Employees’ Subjective Valuations of
Their Stock Options: Evidence on the Distribution of Valuations and the Use
of Simple Anchors” explores the benefits of educating employees on how to
better understand the value of employee stock options received as part of
their compensation.
Wim A Van der Stede, CIMA Professor of Financial
Management, Head of Department of Accounting, London School of Economics,
presented the award at the 2015 AAA Management Accounting Section’s mid-year
meeting in Dallas, and includes a $2,000 stipend.
“Many employees don’t fully understand the value of
stock options as part of their compensation package. As a result of the
research conducted by these professors, HR professionals can now justify
creating education programs that will eventually make compensation and
employee motivation an easier task,” said Van der Stede. “Academic research
like this is crucial to helping management accountants maximize value for
their organizations so that they in turn can achieve greater and sustainable
success.”
Anne M. Farrell Miami University Farmer School of Business - Department
of Accountancy
Susan D. Krische American University - Kogod School of Business
Karen L. Sedatole Michigan State University - Eli Broad College of Business
Abstract
Although prior research presents employees’
subjective valuations of their stock options as being either below or above
firms’ opportunity cost of issuing options, we examine subjective valuations
in terms of their distribution around cost. We argue that variation of
subjective valuations within this distribution is at least partly
attributable to employees’ failure to fully incorporate the time-value
component of options and their tendency to, instead, anchor on
readily-available components of option value. Using both “real-world” and
experiment data, we show that a significant proportion of both employees (30
percent) and experiment participants (47 percent) anchor on three
readily-available values, two of which lie below cost (zero value, intrinsic
value) and one of which lies above (stock price). We further find that a
stock option education program aimed at mitigating the tendency to disregard
the time-value component leads to a significant change in valuations (in
terms of both median values and dispersion) and lower reliance on simple
anchors. Education in the form of cognitive feedback has a greater effect on
subjective valuations of additional options with differing characteristics
as compared to education in the form of outcome feedback on the original
option holdings.
Jensen Comment
Use of stock option compensation declined dramatically when FAS 123R required
the booking of such options by employers on vesting dates rather than settlement
dates ---
http:/www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
"How to “Excel” at Options Valuation," by
Charles P. Baril, Luis Betancourt, and John W. Briggs, Journal of
Accountancy, December 2005 ---
http://www.aicpa.org/pubs/jofa/dec2005/baril.htm This is one of the best articles for accounting
educators on issues of option valuation!
Research shows that employees value options at a
small fraction of their Black-Scholes value, because of the possibility
that they will expire underwater. ---
http://www.cfo.com/article.cfm/3014835
Deloitte & Touche (USA) has updated its book
of guidance on FASB Statement No. 123(R) Share-Based Payment:
A Roadmap to Applying the Fair Value Guidance to Share-Based Payment
Awards (PDF 2220k). This second edition
reflects all authoritative guidance on FAS 123(R) issued as of 28 April
2006. It includes over 60 new questions and answers, particularly in the
areas of earnings per share, income tax accounting, and liability
classification. Our interpretations incorporate the views in SEC Staff
Accounting Bulletin Topic 14 "Share-Based Payment" (SAB 107), as well as
subsequent clarifications of EITF Topic No. D-98 "Classification and
Measurement of Redeemable Securities" (dealing with mezzanine equity
treatment). The publication contains other resource materials, including
a GAAP accounting and disclosure checklist. Note that while FAS 123 is
similar to
IFRS 2 Share-based Payment, there are
some measurement differences that are
Described Here.
In your illustration, the option is
granted "at-the-money" such that there is zero intrinsic value to
the company or the employee receives the contractual right (which
may be in advance of both the vesting and exercise dates). The
entire $2 total value is all time value on the grant date. Something
of value (i.e., all time value and no intrinsic value) has been
granted to the employee in lieu of higher wages even if the option's
resale is restricted. This is the entire basis for the FAS 123R
requirement that the option be booked as an expense on the date of
granting the contractual right. Something of value was transferred
from the corporation to the employee on the grant date. Of course
there's an enormous problem of estimating time value on the grant
date since the Black-Scholes model is known to be lousy when applied
to employee stock options (since employees tend to be more risk
averse regarding the tanking of time value).
I'm not at all clear why you, Tom,
are arguing that FAS 123R makes an error (sausage) for not requiring
a deduction for intrinsic value present value at the grant date.
Firstly, the future intrinsic value is a great unknown and is
generally, in my viewpoint, too uncertain to book at the date
options are granted. Secondly, it's the employee who is bearing the
financial risk of that intrinsic value which starts at zero when the
option is granted.
The corporation (actually
shareholders) will lose opportunity value if the granted option
eventually gains in intrinsic value. But at the same time, the
corporation (and its shareholders not receiving stock options) gain
opportunity value if the gain in intrinsic value arises from the
added efficiency, creativity, and motivation of employee to create
this intrinsic value for his or her options. In other words,
shareholders did not really lose the entire entire intrinsic value
of the option on the exercise date. They in fact gained because
shareholders can sell their own shares for higher values if they
owned the shares on the date the employee options were first granted
in lieu of wages.
My point is that the intrinsic value
of an employee option that arises between the option's grant and
exercise dates is not entirely an opportunity loss to shareholders
equal to the intrinsic value on the exercise date. Shareholders who
held shares between the grant and exercise dates gained to the
extent that the intrinsic value arising from the marginal efforts of
employees to increase the intrinsic value of their options.
What's not clear to me is why the
corporation gets any tax break for dealing in its own stock or stock
options. Employees, on the other hand, should have to pay a
compensation tax, and it seems to me that they owe this tax on the
date that they are entitled to sell the option (which may in fact be
the exercise date but may also be in advance of the exercise date).
Some might argue that an employee using a cash basis for tax
accounting purposes does not owe the tax until cash is received, but
the tax code requires that employees owe taxes on the date value is
received irrespective of cash timing such as if employees are given
inventory in lieu of wages.
There are of course fine points that
must be worked out in the tax code. If each Apple employee receives
a free iPad for personal use but is not allowed to resell that iPad
for ten years when it is worth virtually zero, the employee should
probably be taxed on the date the iPad is received rather than ten
years from the grant date. That's because the employee is receiving
the benefits of use before the iPad can be sold for cash. There is
no benefit of use in a stock option, however, before the option can
be turned into cash (ignoring its possible and questionable use as
loan collateral).
Hence, I think an employee stock
option is fundamentally different from inventory grants in terms of
tax obligations. Employers should get tax deductions for inventory
grants, and employees should be taxed for value received on the
grant dates. Corporations should not get tax losses/gains for and
dealings in their own shares or share options, but employees should
be taxed for value received on the date they have the right to
convert their stock option contracts into cash. If they do not sell
on that date, the contracts become investments taxable on the basis
of the difference between ultimate sales value and the value on the
date for which they paid an initial compensation tax.
Bob Jensen
Teaching Case from The Wall Street Journal Accounting Weekly Review
on April 22, 2011
SUMMARY: GE
granted two million stock options valued at $7.4 million to CEO
Jeffrey Immelt one year ago in March 2010. The company now has
stipulated that the options will only "...vest if the company
successfully boosts its industrial businesses and delivers
shareholder returns...that are as good or better than those of the
Standard & Poor's 500-stock index...The move underscores [in part]
shareholders' increasing clout regarding matters of executive
compensation. GE's decision comes ahead of the company's annual
meeting next week, when shareholders will cast a nonbinding vote on
GE's pay practices."
CLASSROOM
APPLICATION: The article is excellent for discussing corporate
governance, the annual meeting of shareholders, the proxy process,
the incentive value of stock option plans, and the accounting and
valuation components of these plans.
QUESTIONS:
1. (Introductory) What are executive stock options? What is
the business purpose of awarding options?
3. (Advanced) The article states that "GE says" the options
granted to Mr. Immelt were valued at $7.4 million in March 2010. How
is this value determined? Where does "GE state" the value of these
options?
5. (Introductory) What is the Institutional Shareholder
Services (ISS)? What was their initial recommendation to
shareholders about the grant of options to Mr. Immelt?
6. (Advanced) Access the filing by GE on the SEC web site
at
http://www.sec.gov/Archives/edgar/data/40545/000119312511091124/ddefa14a.htm
after the company's communication to shareholders that it disagreed
with the ISS recommendation. Read the points made by GE, and
particularly scroll down to the fourth item regard the option
valuation model used by GE versus the one used by ISS. What are the
concerns? How does the option pricing formula help to assess the
compensation given to Jeffrey Immelt?
Reviewed By: Judy Beckman, University of Rhode Island
Responding to
shareholder criticism, General Electric Co. agreed to put new
conditions on two million stock options granted to Chief Executive
Jeff Immelt a year ago.
The options, which
GE says were valued at $7.4 million when granted in March 2010, will
now only vest if the company successfully boosts its industrial
businesses and delivers shareholder returns, including stock
appreciation and dividends, that are as good or better than those of
the Standard & Poor's 500-stock index.
"Some shareholders
have expressed the view that additional performance conditions
should be applied to Mr. Immelt's 2010 stock option award," GE said
in a filing with the Securities and Exchange Commission.
The move underscores
the pressure on Mr. Immelt to get the company growing again, as well
as shareholders' increasing clout regarding matters of executive
compensation. GE's decision comes ahead of the company's annual
meeting next week, when shareholders will cast a nonbinding vote on
GE's pay practices.
The options grant
was unusual for GE, which last granted Mr. Immelt options in 2002
and afterward shifted to equity awards based on measurable
performance targets. The company said the 2010 award was intended to
"increase the equity-based portion of his compensation" and to
express confidence in the CEO.
Institutional
Shareholder Services, which advises mutual funds and other
shareholders about how to vote on corporate matters, criticized the
grant for not being sufficiently pegged to GE's performance.
In light of the new
conditions, ISS dropped its objections and recommended that
shareholders vote to support GE's pay practices.
Under the new terms,
50% of the options will vest only if the company pulls in cumulative
industrial cash flow from operating activities of at least $55
billion between the start of 2011 and the end of 2014. The other
half will vest only if GE's total shareholder return is equal to or
better than that of the S&P 500 over the same period.
Mr. Immelt is one of
just 10 CEOs who got more than one million options last
year—including two who received bigger grants than his, according to
an analysis of the latest proxy statements by Hay Group for The Wall
Street Journal. The consultancy looked at 320 CEOs of major U.S.
corporations, of whom 232 received option awards in 2010.
From the CFO Journal's Morning Ledger on January 13, 2016
Suit says Fiat Chrysler falsified sales reporting
An Illinois dealer sued Fiat Chrysler
Automobiles NV, accusing the fastest-growing of the major auto
makers of manipulating new-vehicle sales reporting in the U.S. Fiat Chrysler
employed a program that used “strong-arm” tactics to get dealers to falsify
sales reports to benefit the auto maker by creating “the appearance that
[Fiat Chrysler’s] performance is better than, in reality, it actually is,”
the suit claims.
From the CFO Journal's Morning Ledger on January 13, 2016
PC sales drop to historic lows
Sales of personal computers fell in the final quarter
of 2015 to their lowest level since 2007, the year Apple Inc.
introduced the iPhone. The forces aligned against the PC industry amounted
to a triple whammy: an economic slowdown in China, a strong U.S. dollar that
made computers more costly in Europe, and the inexorable growth of
smartphones and other mobile devices.
Jensen Comment
But don't feel sorry for Michael Dell as PC sales drop.
Computer mogul Dell stands to reap billions from FCC auction
Billionaire Michael Dell has been scooping up local TV
stations across the country in recent years. Now, he stands to make as much
as $4 billion from a Federal Communications Commission effort to buy back
those airwaves. In more than a dozen deals since 2011, a company controlled
by Mr. Dell’s investment fund has spent about $80 million on independent TV
stations. Those stations collectively broadcast over airwaves that could be
valued at as much as $4.2 billion.
Jensen Comment
There are many variations of the Socratic Method, but all variations entail
having students prepared for class if they are to meet in a Socratic Method
class. This is because the students are supposed to derive answers among
themselves.
Where the variations come in are the extent to which instructors eventually
lecture a bit and eventually give preferred answers. Of course in some
instances, such as Harvard-style cases, there are no definitive answers ---
which often makes such cases more like real life.
January 14, 2016 reply from Tad Miller
Good morning,
I have typically been smart enough to stay out of
these conversations but I can’t help myself on this topic.
I use a modified Socratic method with a great deal
of success when I teach auditing; but I had to learn to be realistic.
It is difficult for students to respond when the
spotlight is shining on them and 45 other students are staring at them (that
is true for most of us). Even if they actually know the answer, recall can
be difficult under those circumstances.
An underlying assumption of mine is that people
learn better and perform at a higher level in a positive environment. I want
my class to be fun. I don’t lower my standards or expectations to have fun.
In fact, I expect students to be better prepared than when I used to
lecture.
Here is what I have learned
The student I initially call on seldom answers
correctly.
Some other student can typically answer the
question.
The best discussions often occur as we discuss why
a response was not correct.
Humans have a very limited attention span. I
believe it generally accepted that people cannot pay attention for more than
10 minutes.
Each time I post a question, it brings students
back to the class and causes them to re-engage. At least until they learn
that I am not calling on them. This constant re-engagement is very valuable.
But the biggest benefit is the energy, enthusiasm
and fun it brings to the classroom. If you, the teacher work at it, you can
have fun with wrong answers without ridiculing people.
Nothing is more fun than when I make a mistake. I
encourage my students to have a little fun when the old guy in the front of
the room says something backwards.
Once you create an environment where it is OK to be
wrong, participation can be fun. I am not condoning poor preparation, but it
is OK to be wrong.
You need to give students permission to be wrong.
You need to give students permission to show some enthusiasm during class.
You need to let students know you want to create a fun environment.
Reflect for a moment on the other classes in which
your students are enrolled. Many teachers stifle enthusiasm and fun. You
will need to create an environment where it is OK to be enthusiastic and
have a little. This will be unexpected and new for many of your students.
My thoughts,
Tad
January 14, 2015 reply from Steve Markoff
So many great points you made here Tad ... allow me to expand on a couple of
them with my experience:
Regarding the initial student being able to answer the question - if they
could answer it, then there would be no need for you. We always learn more
from incorrect replies.
Regarding incorrect responses - I assiduously avoid saying that a response
is correct or incorrect. From my experience, if you focus on the
correctness, people will not want to respond unless they are 100% sure of
their answer. If a wrong answer is given, I take that and start talking
about it, or working with it, until the class discovers that it is NOT
correct.
I also have learned that if you allow a student "off the hook" merely
because they didn't have the correct answer, then they will not benefit from
the Socratic process nor will the rest of the class. The same happens when
you simply move from the incorrect response from Student #1 to a correct
response from Student #2. The class benefits more from the Socratic process
when the questions lead them to unfold and discover the answer.
So, by example, after the first incorrect answer, I will frequently stay
with the first student, and move back a step in the thinking process, and
then perhaps back another step. I might at that point call for assistance
from another student on the new point (2 steps back), but then, we return to
the first student to continue moving forward. This is important as some
students will discover that they can quickly "call off the dogs" just by
blurting out any wrong answer, knowing that you will then leave them alone
and move on to someone else.
I've learned that the nature of your questions makes a big difference in the
willingness of the students to get involved. It is very clear when a
question is meant to find out if you don't know it. I think it is much
better to use questions to TEACH and not just to ASSESS. Therefore, many of
my questions are actually teaching points, rephrased carefully. These are
less threatening.
I too have learned that students must know that it is okay to be wrong, but
they also must know, SOMETIMES THE HARD WAY, that it is NEVER okay to be
unprepared. Peer pressure often takes care of that, as they do not want to
feel embarrassed in front of others.
I "cold call" so that virtually EVERYONE is called on EVERY class. They
KNOW that they cannot hide or escape.
For Socratic teaching, I think it's important that you start right in with
it on Day 1. No Kumbaya Lovefest or Reading of the Syllabus or Glorified
Bullshit Session. I spend a minimum amount of time -- 30 minutes TOPS,
covering the most important elements on the syllabus and administrative
matters, but then I leave a good 45 minutes for Socratic questioning. For
example, in Cost, I begin with an Income Statement which they give me the
numbers. I fire all kinds of questions. We then proceed to find out how
the Cost of Goods Sold was arrived at and the flow of costs from Raw
Materials, Work in Process, Finished goods and Cost of Goods. This is all
material that SHOULD BE review from their Managerial Accounting course --
so, it give them a chance to see what the Socratic process feels like with
material that is review in nature, before we start tackling new material.
January 12, 2016 reply from Wright McEwan in
Australia
Word of the year "Ghost, Verb as in Ghosting" which
I understood to mean ïnserting a fictitious person onto a payment list of
some sort. Kind regards,
Mac
January 12, 2016 reply from Bob Jensen
Hi Mac.
Ghosting also arises when three co-authors get their names on three
papers, two papers for which their contribution is negligible.
Thanks, Bob
January 12, 2016 reply from Paul Williams
Bob,
Once again we agree. I reviewed a paper for an accounting journal recently
that tracked changes in The Accounting Review over an extended period of
time and one of the notable trends has been the increase in the number of
co-authors. The way department heads and deans count publication performance
explains how Jesus fed the multitudes. If this is "one" _______________,
then this is ___/___/___/___/___/ five.
Any second grader will tell you if the first line
is one then so is the second one (except for the spaces created by how I
divided the line), but according to my department head the first line is
one, but the second one is five. It is actually one divided into fifths.
Most studies in economics dealing with faculty "productivity" measure it in
terms of equivalent articles. Many papers published in accounting journals
today with 3 or 4 authors are no more complex to do than papers written by
just one or two authors in the past.
At least in the sciences the order of authors is
based on assessments of how much contribution was made so place in the list
is important. In accounting it is usually always alphabetical implying that
each author's contribution was equal. Now we have reached a state where we
have begun to game what is largely already a game in the first place.
When will accounting publish its first paper with
5,300+ authors as the recent physics paper that included every employee at
CERN?
Paul
January 12, 2016 reply from Robin Alexander
Another case of “what is measured is gamed.” in my
experience at two institutions the only thing that mattered was number of
articles and some weight for “prestige” journals. No concern whatsoever for
topic or quality. I had a colleague with an enviable record but just about
all papers were co-authored. Reminds me of a possibly apocryphal story about
a factory’s productivity under the Soviet system: A factory that produced
nails was measured by weight of output, so they made one huge nail. The
measure was changed as a result to number of nails. As you can guess, the
factory produced very many tiny nails.
I was always amazed at how little accounting
faculty seemed interested in what they were researching. They viewed journal
articles as a product and tried to maximize output. Perhaps an unfortunate
byproduct of being in Business. This was so different from my experience in
a good math department where the faculty were passionately interested in
their subjects.
An accounting change issued early Wednesday, London
time, will require companies outside the U.S. to add substantial amounts of
leases to their balance sheets, a move which could make some companies
appear more leveraged than they do now.
The new rule issued by the London-based
International Accounting Standards Board, together with a parallel rule for
U.S. companies enacted last fall, is expected to add $3.3 trillion in leases
to corporate balance sheets world-wide, the IASB said.
The idea is to give investors a clearer, fuller
picture of companies’ obligations when they lease items ranging from real
estate to office equipment. Some companies have assumed tens of billions of
dollars in lease-payment obligations that are akin to debt. But under
current rules, those leases aren’t carried on the companies’ balance sheets.
They are disclosed only in the footnotes to the companies’ financial
statements.
. . .
The Financial Accounting Standards Board, which
sets accounting rules for U.S. companies, issued a U.S. version of the
lease-accounting rule in November, and the U.S. rule is expected to be
formally issued in February, a FASB spokeswoman said. Both the global and
the U.S. rules will take effect in 2019.
While the global and U.S. rules will put leases on
the balance sheet, the two regulations have
some differences. The global rule, for
instance, will cause companies to have higher operating income than they
would under the U.S. rule. That is because the U.S. rule assesses lease
costs against the company’s operating income, while the global rule
allocates a portion of those costs to financing income.
http://r.smartbrief.com/resp/gBhNBYbWhBCNxqePCidKtxCicNTVMx?format=standard
The International Accounting
Standards Board's forthcoming model for lease accounting will make companies
with material off-balance sheet leases look more profitable compared with
the Financial Accounting Standards Board's model, according to an IASB
comparison.
Companies will amortize leased assets differently under the two models.
"Accordingly, the IASB expects the carrying amount of lease assets, as well
as reported equity, to be higher under the FASB model than under the IASB
model, although those effects are not expected to be significant for most
entities," the IASB found.
Compliance Week/Accounting & Auditing Update blog
(3/20)
Teaching Case on Lease
Accounting
From The Wall Street Journal Weekly Accounting Review on November 17,
2014
SUMMARY: For hundreds of years companies have treated most lease
payments as operating expenses, like rent, and not put them on their balance
sheets. Under new accounting standards they would report the leases they
hold on their balance sheets as liabilities-equal to the net present value
of all future lease payments, which in some cases run for 20 or 30 years.
That little-known and seemingly benign change in accounting rules could cost
millions of jobs and billions in lost economic growth. Most business owners
and their employees have no idea what may be coming. The agencies that
establish accounting standards in the U.S., Europe and Asia have a proposal,
now gaining momentum, to change how companies present leased property and
equipment on their financial statements. If it is implemented, the effect
would be dramatic.
CLASSROOM APPLICATION: This opinion piece provides good information
regarding current and proposed accounting rules for leases, as well as the
problems that could result from the proposed changes.
QUESTIONS:
1. (Introductory) What are the current accounting rules for leases?
What are the proposed changes to those rules?
2. (Advanced) What are the benefits of the proposed rules? What are
the potential problems associated with those changes?
3. (Advanced) Who is proposing the changes to lease accounting
rules? Why does this group have authority?
4. (Advanced) Who wrote this article? Is it a news story or an
opinion piece? How do these writers have knowledge to comment on this issue?
Do you respect or trust what they are saying?
Reviewed By: Linda Christiansen, Indiana University Southeast
Just as it seems the U.S. economy might be turning
a corner, a little-known and seemingly benign change in accounting rules
could cost millions of jobs and billions in lost economic growth. Most
business owners and their employees have no idea what may be coming.
The agencies that establish accounting standards in
the U.S., Europe and Asia have a proposal, now gaining momentum, to change
how companies present leased property and equipment on their financial
statements. If it is implemented, the effect would be dramatic.
For hundreds of years companies have treated most
lease payments as operating expenses, like rent, and not put them on their
balance sheets. Under new accounting standards they would report the leases
they hold on their balance sheets as liabilities—equal to the net present
value of all future lease payments, which in some cases run for 20 or 30
years.
IHS Global Insight has estimated that the new rule
would add $2 trillion to the liabilities on companies’ balance sheets, while
also adding $2 trillion in “assets” (the right to use the property or
equipment). The U.S. Financial Accounting Standards Board (FASB) says this
will “provide users of financial statements with a complete and
understandable picture of an entity’s leasing activities.” That’s the
supposed benefit. But the costs are extraordinary.
An economic analysis by Chang and Adams Consulting
for several leading nonprofit and commercial organizations found that the
changes—first proposed in 2010 by the FASB and the London-based
International Accounting Standards Board (IASB)—would raise the cost of
capital for lessees, in the process destroying 190,000 U.S. jobs and
shrinking the economy by $27.5 billion annually. And that was the best-case
scenario. At worst, the cost would be 3.3 million lost jobs and an economic
hit of over $400 billion a year, indefinitely.
Businesses of all sizes have long-term loans from
banks and other financial institutions. Those loans typically contain
covenants allowing the bank to demand immediate repayment when liabilities
grow unusually quickly, upsetting, for instance, the ratio of the company’s
debt-to-equity agreed upon at the time of the loan. Because the new
accounting rules would fabricate trillions in new debt, they would trigger
widespread violations of these covenants. Banks could then pull the loan,
demand higher interest, or require new collateral and guarantees.
Some have proposed a five-year transition to the
new rules. But this won’t solve the problem, because many business loans are
for much longer terms. Pushing the effective date of the rules into the
future merely delays the impact.
The additional burdens associated with constantly
tracking and remeasuring the “fair value” of leases of every kind, from a
business’s office space to the photocopier down the hall, will hit
businesses, and their employees and consumers, directly in the pocketbook.
According to some critics, the accounting-rule change would distort the
financial condition of businesses by accelerating expenses over a short
timeline rather than reflect expenses over the life of a lease.
Many private parties have sent public comment
letters to the FASB urging it and the IASB to conduct field tests to see how
much it would really cost lessees and tenants to do all the work the new
leasing rules would require. Congress has asked the FASB for a rigorous
cost-benefit analysis and field testing to objectively assess the risks of
the accounting changes. Neither has been undertaken. Yet all indications are
that the U.S. and international accounting-standards boards are going ahead
with only minor revisions to their proposal, which may be finalized next
year.
In 1973 the Securities and Exchange Commission
formally outsourced the job of writing accounting rules to the FASB. While
the SEC is authorized to seek help from private standard-setting bodies on
this issue, the Sarbanes-Oxley Act of 2002 explicitly reminded the SEC that
these quasi-government agencies can only “assist the Commission” in
fulfilling the SEC’s own responsibility to establish accounting standards
for publicly held companies.
Continued in article
Teaching Case on Pending Lease
Accounting Rule Changes
From The Wall Street Journal Accounting Weekly Review on September 5,
2014
SUMMARY: U.S. and international accounting-rule makers are edging
closer to completing a decade-long effort to overhaul lease accounting
rules. The rules, which could be issued in 2015, threaten to bring roughly
$2 trillion of off-balance-sheet leases onto corporate books. But adding
assets and liabilities for store leases, airplanes and the like could force
companies to renegotiate the terms of their loans with lenders. Banks and
lenders often require companies to maintain covenants, such as a specific
debt-to-equity ratio, fixed-asset ratio or earnings metric, which could all
be thrown out of whack by such a significant accounting change.
CLASSROOM APPLICATION: This is an interesting article about the
changes to lease accounting because it highlights an important ripple
effect: calculations for debt covenants will be affected. This is important
to note for students that any change to accounting rules can change the
financial statements and any corresponding financial statement analysis
calculations. These ripple effects can cause problems for the firms and
should be anticipated and addressed.
QUESTIONS:
1. (Introductory) What changes have been proposed for accounting
for leases? Why are rule-makers working on these changes?
2. (Advanced) What are some of the ripple effects resulting from
the changes to the lease rules? More specifically, what is the impact on
calculations for debt covenants?
3. (Advanced) How should lenders react? Should they adjust their
calculations? How should they approach enforcing existing contract
requirements?
Reviewed By: Linda Christiansen, Indiana University Southeast
Percentage of global companies with bank-debt
covenants potentially affected by lease accounting changes
U.S. and international accounting-rule makers are
edging closer to completing a decadelong effort to overhaul lease accounting
rules. The rules, which could be issued next year, threaten to bring roughly
$2 trillion of off-balance-sheet leases onto corporate books.
But adding assets and liabilities for store leases,
airplanes and the like could force companies to renegotiate the terms of
their loans with lenders. Banks and lenders often require companies to
maintain covenants, such as a specific debt-to-equity ratio, fixed-asset
ratio or earnings metric, which could all be thrown out of whack by such a
significant accounting change.
Some 50% of global companies have business loans
with debt covenants that could require them to repay a loan if they break
any covenants, according to a survey of more than 2,000 directors and
C-level executives by accounting firm Grant Thornton International Ltd. But
only about 8% of those companies currently believe that putting leases on
their balance sheet will affect their compliance with bank covenants.
"Many companies are in for a big surprise when this
comes out and they have to go to the bank," said Ed Nusbaum, chief executive
of Grant Thornton International. "They need to start talking to their
bankers."
In North America, about 75% of the executives
polled said their loans could be recalled if they break this type of
covenant, but less than 5% of executives thought the lease accounting change
would affect them.
The American Bankers Association has been pushing
rule makers to build a long transition period into the new rules, so that
they wouldn't take effect until at least 2018.
"There has to be a huge amount of education for
loan officers, who have to start figuring out what the right ratios are and
what they will have to adjust," said Michael Gullette, vice president of
accounting and financial management at the ABA.
• The FASB decided that repurchase options
exercisable at fair value would not preclude sale accounting for sale and
leaseback transaction s involving non - specialized underlying assets that
are readily available in the marketplace .
• The FASB decided that l essees that are not
public business entities could make an accounting policy election to use the
risk - free rate for the initial and subsequent measurement of lease
liabilities. This is consistent with the Board’s 2013 proposal.
• The Board affirmed its 2013 proposal to eliminate
today’s accounting model for leveraged leases but decided that leveraged
leases that exist at transition would be grandfathered.
• The Board also affirmed its 2013 proposal for
lessees and lessors to account for related party leases on the basis of the
legally enforceable terms and conditions of the lease .
Overview
The Financial Accounting Standards Board (FASB
or Board ) continued to redeliberate its 2013 joint proposal 1 t o put
most leases on lessees’ balance sheets . At last week’s FASB - only
meeting, the Board made more decisions to clarify the proposed guidance
on the accounting for sale and leaseback transactions. The Board also
affirmed its 2013 proposed decisions about the discount rate for lessee
entities that are not public business entities (PBE) , the accounting
for leveraged leases and the accounting for related party leasing
transactions. The Board’s latest decisions, like all decisions to date,
are tentative. No. 201 4 - 333 September 2014 To the Point FASB —
proposed guidance
The banking industry’s least-favorite accounting
rule is being scrapped.
Accounting rule-makers on Tuesday changed a
provision that in recent years has resulted in huge—and often
head-scratching—swings in bank earnings. James Dimon, J.P. Morgan Chase &
Co.’s chief executive, has called the rule “one of the more ridiculous
concepts that’s ever been invented in accounting.”
Analysts and accounting experts also have
criticized the rule—which requires banks to record big, counterintuitive
gains and losses known as “debt-valuation adjustments,” or DVAs—for yanking
earnings up and down from quarter to quarter regardless of how the banks’
operations are performing. They say the result of Tuesday’s change will be a
cleaner presentation of earnings, possibly as soon as the fourth-quarter
reports, which the banks will issue later this month.
“It does make the results more understandable,”
said Mark LaMonte, chief credit officer of the financial institutions group
at Moody’s Investors Service.
The problem stems from a 2007 accounting rule that
allowed banks to use market prices to value some of their debt.
That required the banks to record losses when the
debt was considered safer and rose in value and to log gains when the debt
was considered riskier and declined in value. The rationale for that odd
scenario was that lower market prices make it cheaper for banks to
repurchase their own debt, so the banks’ earnings should reflect the profits
or losses they would get if they did so.
Banks initially loved the rule—and the industry
pushed for it for years—because it helped them manage the accounting around
a form of their own debt that they sold to retail investors, called
structured notes. Indeed, the rule didn’t apply to all bank debt, only the
bonds the firms chose at the time the securities were issued.
But after the financial crisis, when the value of
bank debt began to gyrate, the rule became a major headache as the resulting
gains and losses regularly distorted earnings by hundreds of millions of
dollars or more each quarter.
For example, in the first quarter of 2012, Morgan
Stanley ’s earnings were hurt by nearly $1.5 billion in losses tied to the
rule. Just two quarters earlier, in the third quarter of 2011, the bank had
a gain of $2.1 billion from the rule.
FASB issued a new standard Tuesday designed to
improve the recognition and measurement of financial instruments through
targeted changes to existing GAAP. Public and private companies,
not-for-profits, and employee benefit plans that hold financial assets or
owe financial liabilities are affected by the standard.
The new guidance is contained in Accounting
Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities. The standard: Requires equity investments (except those that
are accounted for under the equity method of accounting or result in
consolidation of the investee) to be measured at fair value with changes in
fair value recognized in net income.
Requires public business entities to use the
exit price notion when measuring the fair value of financial instruments
for disclosure purposes.
Requires separate presentation of financial
assets and financial liabilities by measurement category and form of
financial asset (i.e., securities or loans and receivables) on the
balance sheet or the accompanying notes to the financial statements.
Eliminates the requirement to disclose the fair
value of financial instruments measured at amortized cost for
organizations that are not public business entities.
Eliminates the requirement for public business
entities to disclose the methods and significant assumptions used to
estimate the fair value required to be disclosed for financial
instruments measured at amortized cost on the balance sheet.
Requires a reporting organization to present
separately in other comprehensive income the portion of the total change
in the fair value of a liability resulting from a change in the
instrument-specific credit risk (also referred to as “own credit”) when
the organization has elected to measure the liability at fair value in
accordance with the fair value option for financial instruments.
“The new standard is intended to provide users of
financial statements with more useful information on the recognition,
measurement, presentation, and disclosure of financial instruments,” FASB
Chairman Russell Golden said in a statement. “It improves the accounting
model to better meet the requirements of today’s complex economic
environment.” FASB also is continuing to work on a standard on the
impairment of financial instruments.
Originally, the financial instruments project was a
convergence effort with the International Accounting Standards Board (IASB),
but the boards came to different conclusions on some issues and the IASB
issued IFRS 9, Financial Instruments, in July 2014.
Continued in article
Jensen Comment
The biggest problem of fair value accounting is the value of the assets such as
operating assets in use is so far different from exit values that exit values
are often more misleading than helpful in financial reporting. This is why exit
value is usually required only for non-operating assets such as financial
instruments or for non-going concerns awaiting liquidation.
But fair value accounting for financial instruments in going concerns is
controversial since when the unrealized fluctuations in exit values such as
security market prices are combined with realized earnings from operations. This
combining of unrealized with realized revenues create havoc with earnings
reporting and derivatives of earnings reporting such as eps and P/E ratios.
Net earnings and EBITDA cannot be defined since
the FASB and IASB elected to give the balance sheet priority over the income
statement in financial reporting --- "The Asset-Liability Approach: Primacy does not mean Priority,"
by Robert Bloomfield, FASRI Financial Accounting Standards Research
Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
Abstract:
Since the 1970s, the decision-usefulness has taken center stage and our
attention has been concentrated on valuation of assets and liabilities
instead of income measurement. The concept of income, once considered the
gravitational center of accounting has lost its primacy and become a
byproduct of the balance sheet derived from the measurement of assets and
liabilities.
However, we have not been equipped with robust
conceptual foundation supporting theoretically reasoned accounting
measurement. It is not only theoretically but also practically important to
renew our seemingly waned interest in the concept of income because ongoing
reforms of accounting standards cannot be successfully implemented without a
sound understanding of the concept of income.
Be that as it may, net earnings and EBITDA are all-important because
investors change their portfolios based on net earnings and its derivatives more
than anything in the balance sheet.
"Accounting Alchemy," by Robert E. Verrecchia, Accounting Horizons,
September 2013, pp. 603-618.
Verrecchia alleges that it's not that managers have a functional fixation for
earnings metrics as it is that they believe that other managers and investors
are so fixated with earnings that it because of monumental importance not
because it is inherently a great metric but because they believe deeply that the
market itself makes this index of vital importance.
. . .
In summary, my thesis is that managers project that
others are fixated on earnings—independent of any evidence in support
of, or contrary to, this phenomenon. This leads to managers resisting the
inclusion in earnings items that fail to enhance performance, such as the
amortization of Goodwill, or measures that make future performance more
volatile, such as those based on fair value. In the absence of acknowledging
PEF and attempting to grapple with it, I continue to see confrontations over
accounting regulation along the lines of recent debates about fair value
accounting, in addition to further impediments along the path to greater
transparency in financial statements.
It's a bit like requiring calculus for
undergraduate accounting courses. Calculus probably is not essential in any
undergraduate accounting course in the curriculum, but faculty are fixated that
the best accounting majors are the ones do well in calculus. Similarly,
investors change their portfolios based on earnings, eps, EBITDA, and P/E ratios
when in fact those metrics are not defined and may have a lot of misleading
noise and secret manipulation
A $1 trillion U.S. pension gap is dividing two
longtime allies: Democrats and unions.
Left-leaning politicians from Rhode Island to
California are increasingly supporting more aggressive overhauls of
government pension benefits despite opposition from labor officials,
traditionally one of the Democratic Party’s biggest policy and electoral
supporters.
The erosion of Democratic backing for conventional
retirement benefits prized by teachers, firefighters and police officers is
a sign of how strained government budgets are as obligations for 24 million
public workers and retirees continue to mount.
Illinois has the worst funded (public worker)
pension plans in the nation. Those plans are a mere 42% funded in aggregate.
That bleak estimate understates the problem because
it assumes 8% annualized returns going forward. Those returns are not going
to happen.
I expect 0-2% returns at best, and most likely
negative real returns for seven to ten years.
. . .
Corrupt politicians in bed with union officials
have hollowed out the state beyond repair. Let's not pretend otherwise.
Illinois needs a fresh start:
1.Bankruptcies at the municipal level 2.A new
constitution that allows pension cuts at the state level 3.Right to work
laws 4.End of collective bargaining of government employees 5.End of
prevailing wage laws 6.Tax reform, especially property tax reform 7.Workers'
compensation reform 8.Unemployment insurance reform
Until we see those changes, the state will lay on
the death-bed slowly bleeding workers and businesses in a fate worse than
death by bankruptcy or default.
Continued in article
Jensen Comment
Recently Illinois had two governors in prison at one time. That's just the tip
of the iceberg of corruption in Illinois, especially former public officials in
Chicago. One has since been released.
Massachusetts
Kentucky
Illinois
Connecticut
New Jersey
ABOVE WATER STATES: 5 BEST TAXPAYER
SURPLUSES
South Dakota
Utah
Wyoming
North Dakota
Alaska
STATES WITH THE HIGHEST TAXPAYER
BURDEN
New Jersey (Highest)
Connecticut
Illinois
Kentucky
Massachusetts
Hawaii
California
New York
Michigan
Delaware
Pennsylvania
Louisiana
Vermont
. . .
While the financial condition of
most states appears to have improved as a result of a change in how
unfunded pension debt is calculated, the financial condition of four of
the five worst states, identified as "Sinkhole States" (New Jersey,
Connecticut, Illinois, and Kentucky), continued to deteriorate.
Massachusetts is the only sinkhole state that improved from its 2013
Taxpayer Burden during 2014, but only by a modest $600 per taxpayer.
The survey of over 1,700 accountants from around
the world by CareersinAudit.com found that 20 percent of respondents believe
that 10-20 percent of their peers have helped clients create a set of
accounts that are “deliberately misleading,” while a further 10 percent
believe that more than a quarter of their peers have been acting
unethically, and 5 percent believe that half of the profession is not acting
with integrity over client accounts.
Furthermore, the report added, 49 percent of
auditors, analysts, controllers, CFOs, partners and others who replied knew
of a specific instance where a colleague had been pressured to ignore an
adjustment that should not have been made to a set of accounts.
If a New Yorker wins the epic $1.5 billion
Powerball jackpot, the instant fat cat will actually be the biggest winner —
and the biggest loser.
Thanks to crushing taxes, a Powerball winner in New
York City would bring home the smallest prize of any other U.S. locale,
experts say.
“If you’re unlucky enough to win in New York, this
is the most expensive state in the U.S. to win the lottery,” said David
Selig, a federal tax practitioner who runs Selig & Associates.
“Between the federal and state taxes, you lose more
than 50 cents on the dollar. And then there are city taxes, too.”
Don’t start fretting too much ahead of Wednesday’s
drawing — a New York City winner still wouldn’t have to worry about that
rent bill ever again unless they bought, say, the Empire State Building.
Continued in article
Jensen Comment
What you take home for lottery winnings as stated above probably understates the
tax bit. But the calculation is complicated by the fact that state and local
taxes are deductible when computing the Federal income tax, thereby, mitigating
the Federal tax bite somewhat.
A slightly better article is shown below.
Of the 44
states participating in Powerball,
seven–Florida, New Hampshire, Tennessee, Texas, South Dakota, Washington
and Wyoming—don’t have a state income tax. Two
others, Pennsylvania and California, exempt lottery winnings from their
income taxes, although California requires that you buy the winning ticket
in-state. (Delaware used to exempt winnings, but no longer does. Washington,
D.C., which also participates, does tax lottery winnings.)
Should a resident of one of those nine states that
don’t tax lottery winnings be the sole jackpot winner and opt for the lump
sum, he or she will fork over around $368.3 million to Uncle Sam—$42.8
million more than he or she would have owed in 2012 on an $930 million lump.
Bottom line: If a lucky resident of one of these states is the sole
winner of the $1.5 billion jackpot and takes the lump payment, he’ll get to
keep $561.7 million. Not so shabby, although it won’t get you on theForbes 400list of the richest Americans, which in
2015 required a minimum net worth (after imputed taxes) of $1.7
billion.
Yes, I know. That tax bite might sound too high
since only 25% is withheld from the winner’s check for federal tax. (That’s
if you supply a Social
Security
number; the
IRS
requires 28% withholding if you don’t provide a
valid tax ID.) But what is withheld is different from what you’ll
ultimately owe and believe me, 39.6% is the top federal rate in
2016 on ordinary
income and gambling winnings are taxed as ordinary income. (Don’t think
about shorting the Internal Revenue Service on this one. Both you and the
Internal Revenue Service will receive a
Form W-2G
reporting your full winnings.) So set aside some cash
above the amount withheld to pay Uncle Sam his additional 14.6% cut (for the
confused: 25% withheld plus 14.6% equals a 39.6% share for the U.S.
Treasury) unless you want the IRS to start attaching your bank accounts.
(Even worse, if you owe the IRS you can now
lose your passport and be kept from flying to that island refuge you bought to
escape all those newly rediscovered friends and relatives.)
As for state and local income tax, since California
doesn’t impose its highest in the nation 13.3% state income tax on lottery
winnings, the Big
Apple (NYC) has the distinction of
taking the biggest bite out of its own Powerball winners. New York City
residents get hit with an
8.82% top state tax
on income over around $2 million per couple and a 3.88% city levy on income
over $500,000, for a combined top 12.7% rate. Their only consolation:
State and local taxes are deductible from federal taxable income.
Unfortunately, as part of the
fiscal cliff deal, a sneaky provision that gives a
haircut to the value of deductions claimed by the better off came back.
Bottom line: according to
calculations by Gerald T. Prante and Austin John
of the Lynchburg College
School of Business and Economics, if a New York
City resident wins the jackpot, he or she will end up paying at a top 48.5%
combined federal, state and city rate, up from 43.3% in 2012, for a whopping
total tax bill of $451 million, and a
take home pot of $479 million. (To see your
state’s top lottery tax bite in the professors’ paper, go to table 1 and
look under S-Corp income. Why S Corp? Because neither S Corp income nor
lottery winnings are subject to the 3.8% tax on investment income that is
part of Obamacare. Yes, it’s complicated, which is why getting expert
financial advice is one of the
10 steps you should take after winning the lottery.)
Some curious readers have asked if a New York City
winner could simply move to a state without an income tax before claiming
his or her prize and thereby escape the hefty New York tax. The answer is
that such a move might help a little. New York states in Publication 140-W
that the winnings on any tickets bought in a lottery run by the New York
State Division of Lottery—and that includes Powerball—are New York state
source income, taxable by New York, whether you are a resident or not. If
you bought the ticket in New York state, the state will take its cut out
before paying you your winnings. That means, for example, if you’re a
Pennsylvania resident who works in New York (as some do) you should never
buy your tickets at work. Instead, buy them at your home in Pennsylvania,
since it doesn’t tax lottery winnings. New York City, however, does not have
a tax on nonresidents. So if you aren’t a resident of the city and happen to
buy your ticket while visiting the Big Apple, you won’t have to pay the
extra 3.88%. What is unclear, however, is whether a New York City resident
who wins a big jackpot can move from the city, take annuity payments, and
avoid the city tax on them; tax experts says the city might assert that it
still has a right to its cut, since the winner was a resident at the time of
his big score.
Continued in article
Jensen Comment
It's somewhat misleading to state that New Hampshire does not have a state
income tax. This is technically true on most income items like wages, capital
gains, rental income, Social Security, and other retirement income, but New
Hampshire does have a tax on cash dividends and cash interest received apart
from tax-exempt retirement income payments. Thus it may be better in New
Hampshire to have put most retirement savings into a retirement income plan like
TIAA-CREF or rental property. Of course there are factors other than tax
when allocating savings between retirement plans and investment portfolios such
as the control lost on portfolio management and liquidity discretion of
retirement plans.
In 2011 New Hampshire repealed its state taxation of lottery winnings in New
Hampshire.
When managing personal portfolios there are other tax factors to consider.
For example, in most states like New Hampshire and states having income taxes,
interest received on in-state tax exempt bonds may be exempt relative to
out-of-state tax exempt bonds. For example, interest on bonds of a Massachusetts
school district are exempt to a Massachusetts resident whereas interest on a New
York school district are taxable to a Massachusetts resident.
Barney
Frank stated this is a reason that a large share of his savings was invested
in Massachusetts municipal bonds.
Most of my investment savings apart from my TIAA retirement annuities are
invested in a Vanguard tax-exempt mutual fund that gives me a checkbook for
liquidity. However, since only a miniscule portion of that fund is in New
Hampshire bonds I must pay a NH cash dividends tax on most of the cash income
from that fund apart from the $5,000 exemption in the NH cash interest and
dividends tax. In other words Vanguard sends me an IRS 1099 statement plus a
table showing the percentage of my yearly dividends that came from NH bonds. The
NH part is usually less than one percent. I could save a little by investing
more in NH municipal bonds, but in truth the NH cash dividends and interest tax
is so low it's not worth the trouble unless I win over a billion dollars in a
lottery. And yes, I am in the current $1.5 lottery with two tickets that each
cost two bucks. Now that's a wasted four bucks that only brought me a day dreams
this morning.
Last September, at a law firm overlooking San
Francisco Bay, Andrew Penney, a managing director at Rothschild & Co., gave
a talk on how the world’s wealthy elite can avoid paying taxes.
His message was clear: You can help your clients
move their fortunes to the United States, free of taxes and hidden from
their governments.
Some are calling it the new Switzerland.
After years of lambasting other countries for
helping rich Americans hide their money offshore, the U.S. is emerging as a
leading tax and secrecy haven for rich foreigners. By resisting new global
disclosure standards, the U.S. is creating a hot new market, becoming the
go-to place to stash foreign wealth. Everyone from London lawyers to Swiss
trust companies is getting in on the act, helping the world’s rich move
accounts from places like the Bahamas and the British Virgin Islands to
Nevada, Wyoming, and South Dakota.
“How ironic—no, how perverse—that the USA, which
has been so sanctimonious in its condemnation of Swiss banks, has become the
banking secrecy jurisdiction du jour,” wrote Peter A. Cotorceanu, a lawyer
at Anaford AG, a Zurich law firm, in a recent legal journal. “That ‘giant
sucking sound’ you hear? It is the sound of money rushing to the USA.”
Rothschild, the centuries-old European financial
institution, has opened a trust company in Reno, Nev., a few blocks from the
Harrah’s and Eldorado casinos. It is now moving the fortunes of wealthy
foreign clients out of offshore havens such as Bermuda, subject to the new
international disclosure requirements, and into Rothschild-run trusts in
Nevada, which are exempt.
The U.S. “is effectively the biggest tax haven in
the world” —Andrew Penney, Rothschild & Co.
The firm says its Reno operation caters to
international families attracted to the stability of the U.S. and that
customers must prove they comply with their home countries’ tax laws. Its
trusts, moreover, have “not been set up with a view to exploiting that the
U.S. has not signed up” for international reporting standards, said
Rothschild spokeswoman Emma Rees.
Others are also jumping in: Geneva-based Cisa Trust
Co. SA, which advises wealthy Latin Americans, is applying to open in
Pierre, S.D., to “serve the needs of our foreign clients,” said John J. Ryan
Jr., Cisa’s president.
Trident Trust Co., one of the world’s biggest
providers of offshore trusts, moved dozens of accounts out of Switzerland,
Grand Cayman, and other locales and into Sioux Falls, S.D., in December,
ahead of a Jan. 1 disclosure deadline.
“Cayman was slammed in December, closing things
that people were withdrawing,” said Alice Rokahr, the president of Trident
in South Dakota, one of several states promoting low taxes and
confidentiality in their trust laws. “I was surprised at how many were
coming across that were formerly Swiss bank accounts, but they want out of
Switzerland.” Why the Wealthy Are Moving Their Money Into the U.S.
Rokahr and other advisers said there is a
legitimate need for secrecy. Confidential accounts that hide wealth, whether
in the U.S., Switzerland, or elsewhere, protect against kidnappings or
extortion in their owners’ home countries. The rich also often feel safer
parking their money in the U.S. rather than some other location perceived as
less-sure.
“I do not hear anybody saying, ‘I want to avoid
taxes,’ ” Rokahr said. “These are people who are legitimately concerned with
their own health and welfare.”
Two state laws are to blame for the system's
financial struggles. Proposition 21, passed in 1984, allowed CalPERS fund
managers to move its investments from safe and predictable bonds to risky
and volatile stocks and hedge funds to try to generate a higher return. SB
400, passed in 1999, increased pension payouts by 50% for California Highway
Patrol employees, a move quickly replicated at other state agencies and
local governments.
In the midst of a bull market such as the late '90s
tech bubble, perhaps that seemed fine. But it was irresponsible. At the top
of a market cycle, a healthy pension system should be overfunded — and then
should hold onto the excess to ride out bear markets. CalPERS didn't do
that, and so market corrections suddenly become an existential threat.
CalPERS actuaries rely on earning a 7.5% annual
return on investment to meet the current and future pension obligations to
1.8 million participants. But current stock market conditions make achieving
that goal much harder — if not impossible — over the next several years. And
that will leave taxpayers on the hook for billions.
Continued in article
Jensen Comment
CalPERS is a victim of the Fed's zero-interest policy that destroyed the ability
to earn a return on safe investments. The only way to earn a return is to take
on financial risk.
January 6, 2016 inquiry from Barbara Scofield
The dissent of R. Harold Schroeder to
Update 2016-01—Financial
Instruments—Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities" includes this acknowledgement of
accounting research:
"The Board based its decision on the faulty belief that the location of the
information does not determine its decision usefulness. In an environment
in which timing can be ignored, there may be some theoretical merit to this
view. However, there have been numerous academic studies demonstrating that
location does matter . . ." (page 177)
He goes on to make the point that items recognized in financial statements
are more likely to be part of earnings release disclosures that precede
financial statement filings by weeks.
Does anyone have a cite to literature review on this accounting research on
disclosure vs. recognition or a good source for citations on it?
Barbara W. Scofield, PhD, CPA
Professor of Accountancy
Washburn University -- HC 311L
Topeka, KS 66621
January 7. 2016 reply from Bob Jensen
Hi Barbara,
Probably the highest volume of studies of potential interest are
behavioral accounting studies of disclosure. Personally, I don't have much
interest in such studies because they seldom can be extrapolated and
generalized due to dependencies upon particular contexts and samples. For
example, it's common to use students as experimental subjects in experiments
that are detached from real-world settings. Even when real-world decision
makers are used the settings are most likely to specific and contextual for
generalization.
And the older behavioral studies did not employ the technologies of today
for doing financial statement analysis, e.g. XBRL.
Be that as it may the largest volume of empirical research on disclosure
is probably in the behavioral area. For example, search on the word
"disclosure" at
http://maaw.info/BehavioralIssuesArticles.htm
Note that there are separate sections to search on the basis of A-B, C-D,
etc.
Much depends these days on technology such as hypertext links, XBRL, etc.
An early study that recognized how financial statement analysis changed with
hypertext hot links is the following study:
"Web-based financial statements: Hypertext links to footnotes and
their effect on decisions," by R.B. Dull, A. W. Graham, and A. A.
Baldwin. 2003. International Journal of Accounting Information
Systems 4(3): 185-203. The important thing to consider is how technology
changes the importance of how and where disclosures are made in financial
statements, books, articles, etc. The most important thing is that it is
disclosed somewhere and then hyperlinked all over the place.
My random searchings for you this morning uncovered a few articles worth
pursuing.
"Standardization of accounting forms and methods," by H.C. Bentley,
Journal of Accountancy, February 1912,
February, pp.109-121.
Jensen Comment
Relative to 1912 standardization of what is disclosed may be more important
in the 21st Century relative to reduced importance of standardization in how
it is disclosed as long as hypertexting is extensive.
"The Effect of Financial Statement Classification of Hybrid Financial
Instruments on Financial Analysts' Stock Price Judgments," by Patrick E.
Hopkins, Journal of Accounting Research, 1996, Vol. 34, Studies on
Recognition, Measurement, and Disclosure Issues in Accounting, pp. 33-50
Behn, B. K., N. B. Nichols and D. L. Street. 2002. The predictive ability
of geographic segment disclosures by U.S. companies: SFAS No. 131 vs. SFAS
No. 14. Journal of International Accounting Research (1): 31-44.
Anecdotal Case
'Cutting the clutter. Five tips for streamlining annual reports," by N.
Amato, Journal of Accountancy, February, 2014, pp. 28-30. http://www.journalofaccountancy.com/issues/2014/feb/20138627.html#sthash.obmxmGH8.dpuf
Jensen Comment
Much depends upon the purpose of the documents. Cutting the clutter may be
of great importance to documents to be taken up in a meeting such as a
meeting of the Board of Directors or a management meeting. However, I'm less
concerned about clutter in general purpose reporting such as 10-K filings
since these can now be searched via technology like XBRL.
My point is that technology alters many of the conclusions of research
before the technology existed or more current research that ignored the
technology. This is especially relevant in the area of disclosure since
technology enables efficient searching of great volumes of disclosure. The
problem is that with massive disclosures there are increased risks of
varying degrees of validity about what is disclosed.
Bob Jensen
Barbara also made the following inquiry
He goes on to make the point that items recognized in financial statements
are more likely to be part of earnings release disclosures that precede
financial statement filings by weeks.
Does anyone have a cite to literature review on this accounting research on
disclosure vs. recognition or a good source for citations on it?
Jensen Comment
Hi Again Barbara,
I suspect there is considerable study of this topic both in accounting
and finance journals.
One study of possible interest is the following:
"Accounting earnings announcements and differential predisclosure
information," by T. Anderson, Abacus , 1992, 28(2): 121-132.
Abacus
Volume 51, Issue
4
December 2015
Not a Free Journal
This is a fraud explanation for the (stolen) books! However, while the truck driver was taking a lunch
break, the truck was stolen. One week later the truck was found... but the four
years of financial documents were gone.
"This May Be The Greatest "Explanation" Ever For Cooking The Company's
Books," by Tyler Durden, Zero Hedge, December 29, 2015 ---
http://www.zerohedge.com/news/2015-12-29/may-be-greatest-explanation-ever-cooking-companys-books
At the recent AICPA-sponsored mega-conference on
SEC and PCAOB developments (see KPMG’s summary,
here), the SEC staff, and even its chair, devoted
a significant amount of bandwidth to non-GAAP measures of financial
performance. Some see this as part of the ongoing damage control efforts
necessitated by unintended consequences of rules issued in 2003,
which set forth very rigorous (it was thought) conditions for when a non-GAAP
measure of performance could be made kosher. But, issuers have treated the
rules more like safe harbor than a set of constraints. In other words, so
long as one can satisfy the letter of the Commission’s requirements, the
thinking goes that the rules render the SEC staff powerless to object.
Actually, I’m of two minds on non-GAAP numbers, and
how the SEC should regulate them. On the
charitable side, GAAP is so
full of warts, that it is not surprising when GAAP is downplayed in favor of
more useful variants. One doesn’t need to delve too deeply to appreciate
this.
Let’s take one of the most rudimentary accounting
topics: depreciation of long-lived assets. If given a choice when valuing a
company, most analysts would prefer to know EBITDA — easily the most
ubiquitous non-GAAP measure — than reported net income. This is mainly
because simplistic rules and management discretion combine to make
depreciation an arbitrary and capricious predictor of the amount of cash it
will take to replace used-up capacity. With regards to the former, GAAP
doesn’t adjust the historic cost basis of depreciation for inflation — much
less does it attempt to measure the current costs of the specific assets
that are used to produce goods and services. And with regards to the games
that self-interest management can play, estimation of useful lives, choice
of depreciation methods and the timing of impairment recognition are the
low-hanging fruit of earnings management.
Consequently, EBITDA has evolved as a GAAP
workaround; and I for one am glad to know when issuers provide it, rather
than each analyst having to separately make their own educated guesses.
Free
cash flow is usually the key variable in
valuation models, and many analysts start the process of estimating free
cash flow with reported EBITDA. As a first approximation of the value of a
firm’s equity, they might use an appropriate EBITDA multiplier and subtract
the value of the debt. A slightly more sophisticated analysis would
separately estimate future capital expenditures and apply a multiplier to
the resulting estimate of free cash flows; even more sophisticated models
forecast multiple years and weight each year by the cost of capital.
But, on the
cynical side, I recognize
that any non-GAAP number is freer to be abused by management than a GAAP
number. Non-GAAP numbers are outside the scope of the auditor’s report,
subject to the whims of management with regard to the manner of calculation,
and can be turned on and off like a water faucet.
One particularly noxious example that the SEC
Division of Corporation Finance staff took note of at the conference was
surely inspired by the drop in energy prices — and was the impetus for this
post. Certain issuers in the oil and gas industry, being eager to mute the
negative spin from cratering revenues and profits, recently devised an
“adjustment” to GAAP revenues by substituting “normalized” oil and gas
prices for actual prices. At first blush, a measure of “normalized”
revenues would seem to be misleading, but to be fair as I can be, these
issuers may have been inspired to draw parallels to the worst rule ever
created by the SEC.
Oil Price Volatility is So Inconvenient
Prior to 2010, oil and gas companies were required
to disclose their quantities of “proven” reserves (in physical quantities as
well as dollars) based on energy prices on the balance sheet date. That
seems logical enough, yet the SEC saw fit to
change the base price from a single-day closing
price to a 12-month average price:
“Some [commenters] believed that reliance on a
single-day spot price is subject to significant volatility and results
in frequent adjustment of reserves. These commenters expressed the view
that variations in single-day prices provide temporary alterations in
reserve quantities that are not meaningful [I hate that word] or may
lead investors to incorrect conclusions, do not represent the general
price trend, and do not provide a meaningful [I still hate it] basis for
determination of reserve or enterprise value.”
I have already picked apart this blatant kowtow to
Big Oil in a contemporaneous
post. I mention it here to put into context the
attempt by oil and gas companies to engineer their new species of a non-GAAP
performance measure, and the political pressure that today’s SEC
staff surely have faced when determining whether or not to give Big Oil a
pass.
I’m happy to report that the SEC staff didn’t
fold. Here is how
KPMG reported it
Continued in article
Net earnings and EBITDA cannot be defined since the FASB and IASB elected to
give the balance sheet priority over the income statement in financial reporting
--- "The Asset-Liability Approach: Primacy does not mean Priority,"
by Robert Bloomfield, FASRI Financial Accounting Standards Research
Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/
Abstract:
Since the 1970s, the decision-usefulness has taken center stage and our
attention has been concentrated on valuation of assets and liabilities
instead of income measurement. The concept of income, once considered the
gravitational center of accounting has lost its primacy and become a
byproduct of the balance sheet derived from the measurement of assets and
liabilities.
However, we have not been equipped with robust
conceptual foundation supporting theoretically reasoned accounting
measurement. It is not only theoretically but also practically important to
renew our seemingly waned interest in the concept of income because ongoing
reforms of accounting standards cannot be successfully implemented without a
sound understanding of the concept of income.
Be that as it may, net earnings and EBITDA are all-important because
investors change their portfolios based on net earnings and its derivatives more
than anything in the balance sheet.
"Accounting Alchemy," by Robert E. Verrecchia, Accounting Horizons,
September 2013, pp. 603-618.
Verrecchia alleges that it's not that managers have a functional fixation for
earnings metrics as it is that they believe that other managers and investors
are so fixated with earnings that it because of monumental importance not
because it is inherently a great metric but because they believe deeply that the
market itself makes this index of vital importance.
. . .
In summary, my thesis is that managers project that
others are fixated on earnings—independent of any evidence in support
of, or contrary to, this phenomenon. This leads to managers resisting the
inclusion in earnings items that fail to enhance performance, such as the
amortization of Goodwill, or measures that make future performance more
volatile, such as those based on fair value. In the absence of acknowledging
PEF and attempting to grapple with it, I continue to see confrontations over
accounting regulation along the lines of recent debates about fair value
accounting, in addition to further impediments along the path to greater
transparency in financial statements.
It's a bit like requiring calculus for undergraduate accounting courses.
Calculus probably is not essential in any undergraduate accounting course in the
curriculum, but faculty are fixated that the best accounting majors are the ones
do well in calculus. Similarly, investors change their portfolios based on
earnings, eps, EBITDA, and P/E ratios when in fact those metrics are not defined
and may have a lot of misleading noise and secret manipulation
Nikki Nguyen left a $50,000-a-year job at Boeing Co. in 2006 to pursue a law
degree at Thomas Jefferson School of Law in San Diego, her sister's
successful career as a corporate attorney providing a glimpse of the
possibilities she imagined ahead of her.
Instead, she struggled for more than a year to find a job after she
graduated and watched her student loan debt of over $180,000 balloon.
Nguyen, 34, is among 12 former Thomas Jefferson students who are suing the
university in a California court, accusing it of inflating its graduates'
employment figures and salaries to attract students. "They weren't
transparent," said Nguyen, whose case is scheduled to go to trial in March.
"People who have a dream of law school should go into it with their eyes
wide open." ...
Nguyen's lawsuit is among more than a dozen similar ones filed in recent
years against law schools, including Golden Gate University School of Law in
San Francisco and the University of San Francisco School of Law. Though most
of the suits have been dismissed, critics say they point to a need for
greater regulation and transparency for law schools, so prospective students
know their employment prospects, the debt they will incur and even their
chances of successfully passing the bar.
"Schools are setting up a lot of people to fail," said Kyle McEntee,
executive director of Law School Transparency, a nonprofit legal education
policy group that had no involvement with the lawsuits.
Thomas Jefferson reported post-graduation employment figures that exceeded
70 percent and topped 90 percent in 2010, but did not disclose that those
figures included part-time and non-legal work such as a pool cleaner and a
sales clerk at Victoria's Secret and were based on a small sample of
graduates, according to Nguyen's lawsuit and her attorney, Brian Procel. The
lawsuit further alleges that the school routinely reported unemployed
students as employed and shredded surveys and other documents that reflected
a more accurate employment picture. ...
The lawsuits against Golden Gate University and the University of San
Francisco also alleged the schools were misrepresenting their post-graduate
employment figures. The Golden Gate lawsuit was settled, with each of the
five plaintiffs receiving $8,000, according to a May 2015 court filing. The
case against the University of San Francisco was dismissed in May. ...
Nguyen said she now owes more than $200,000. Though she works in a
paralegal-type position and lives with her sister, she said she has not been
able to touch the principal on her loan
Jensen Comment
Community land trusts are most frequently used to preserve scenic and historic
land amidst a world of developers. Community land trust housing, on the other
hand, is used to provide affordable land for building of single and multi-family
dwellings amidst soaring or highly fluctuating land values ---
http://community-wealth.org/strategies/panel/clts/index.html
The concept was used long before Bernie Sanders became mayor of Burlington in
1981. When I returned to Stanford for two years in a think tank I rented two
houses south of the campus on land owned by Stanford University. The land was
developed for employee housing (mostly faculty housing) where an employee could
lease a lot for $1 per year for 99 years. The employee then built a house that
could be lived in or rented to somebody affiliated with Stanford, although
building a house solely for the purpose of rental income was discouraged.
The Stanford leased lots had advantages and disadvantages. In
times of soaring land values such as land values in the early days when property
east of san Francisco Bay became known as Silicon Valley, Staford employees
could build or buy residences that they otherwise could not afford in the
vicinity of Stanford University.
However, the drawback is that Stanford employees who owned these
properties could not share in the explosion of real estate values near Stanford
where a house built for $50,000 in 1975 might sell for $10 million on the open
market but not on Stanford leased lots where residence ownership is restricted
to Stanford employees.
The same thing happens with the Burlington-area land trusts
commenced by Bernie Sanders. Home owners cannot lose or gain in land values on
lots that they only rent from a land trust. Owers who instead purchased land on
the open market for their houses can either lose or gain immensely on changes in
land values in Vermont.
In nearby New Hampshire I have a friend who paid $10,000 in 1978
for four acres of land with great mountain views. Recently that land alone is
valued for tax purposes at over $400,000. The bad news is that real estate taes
must be paid annually on the value of that land. The good news is that
eventually the owner or the owner's estate will have a very nice capital gain
that would not have been possible if the land was only rented from a land trust.
Land trusts with cheap lot rental prices become better deals
when the lots are already very expensive such as lots next to the Stanford
University campus since the 1970s. Not only are the lots made affordable with
the land trust but they protect home owners from property taxes on the value of
those high-priced lots. Land trust lots are somewhat of a good deal in a soaring
real estate market in that the value of those rented lots are shielded from
property taxes. This is a good deal for people who plan to spend a lifetime in
one home.
But land trusts are less of a good deal for home owners not
planning to live more than, say, ten years in a soaring real estate market. The
reason may be restrictions of sales of the homes (such as only being able to
sell to Stanford University employees) and loss of the capital gains on the land
in that soaring real estate market.
The property tax shielding is less of an advantage to Stanford
employees who live for decades on leased lots from Stanford University because
of California's Proposition 13 ---
https://en.wikipedia.org/wiki/California_Proposition_13_(1978)
However, residents of Vermont have no such shield from property tax increases,
thereby, making rented community trust lots a better deal from a property tax
perspective (the good news). But increase in property taxes co hand-in-hand with
increases in potential capital gains (the bad news).
We’ve been there before. The movie “The Big Short”
explains how and why the financial services industry helped to bring down
our economy during 2007-2008. Banks took home mortgage loans that were made
based on shaky credit and pooled them into a basket of mortgage-backed
securities (MBS) that were backed by the homes. These were sold to
unsuspecting investors including other financial institutions (think Lehman
Brothers) that wanted to receive a steady stream of cash flows from mortgage
payments. Little did they know the underlying assets were all-too-often
worthless because they were based on subprime loans. So the investors hedged
their bets by finding a sucker to buy off the MBS through a collateralized
debt obligation (CDO). Now, as the movie portrays, these investors grew
nervous as some prognosticators preached doom and gloom causing the
investors to approach other financial institutions (think AIG) to hedge
their risk by betting against the very instruments they bought by acquiring
credit default swaps (CDS). Confused! Go see the movie it cleverly explains
the process.
That was in the early 2000s as the stock market was
booming and financial institutions became greedy wanting higher and higher
returns on their investments even if it meant purchasing risky investments.
Of course, some weren’t aware of the risk and some figured another financial
institution would bail them out, as did JPMorgan Chase that bought out the
failing Bear Stearns. Lehman wasn’t as lucky as the government drew a line
in the sand as more and more financial institutions teetered on the edge of
disaster.
Well, as the great Yogi Berra said: “It’s déjà vu
all over again.” Along comes the “bespoke tranche opportunity”, which allows
investors to place wagers on the outcome of various loans, bonds, and
securities in which they are not directly invested. “The “bespoke” version
flips that CDO business dynamic around. An investor tells a bank what
specific mixture of derivatives bets it wants to make, and the bank builds a
customized product with just one tranche that meets the investor’s needs.
Bespoke CDOs are a relatively new instrument in the
financial world. They allow investors to target very specific risk/return
profiles for their investment strategies or hedging requirements. In
reality, the arranger demands a good deal of input into the selection of the
reference portfolio. Most investment managers control their risks by buying
and selling protection on a single-name CDS or by linking losses to a
corporate credit index like the CDX or iTraxx; therefore, they usually avoid
taking positions in CDSs that cannot readily be traded.
A logical question is why would investment managers
tread lightly in an area similar to one that has burned them before? The
answer is that interest rates have been kept low by the Federal Reserve so
investment banks are becoming impatient with not being able to make what
they deem to be enough profit off corporate and Treasury bonds, and
therefore have started playing in the “financially structured product” game.
Continued in article
IRS Scandal Day 979
The case against the IRS for targeting
conservatives isn’t over after all. On Tuesday a federal judge in Ohio
certified a class-action lawsuit against the IRS by conservative groups
whose applications for tax-exempt status were slow-rolled between 2010 and
2013
The Internal Revenue Service appears to have violated a court order once
again requiring the preservation of evidence needed by investigators looking
into questionable practices at the agency. In a case sure to stir up
memories of the Lois Lerner investigation, which saw IRS Commissioner John
Koskinen dragged before Congress for multiple hearings, the agency destroyed
a computer hard drive belonging to an IRS official connected to the subject
of a Congressional query.
Earlier this year, the IRS was ordered by a federal judge to preserve
documents – including electronic documents – that were possibly related to
an ongoing dispute between the agency and Microsoft. ...
The computer hard drive the IRS destroyed belonged to Samuel Maruca, who
oversaw the transfer pricing section at the agency’s Large Business and
International division. ...
The revelation that the agency had destroyed a hard drive that Congressional
investigators viewed as central to an ongoing inquiry infuriated House
Oversight and Investigations Committee Chairman Jason Chaffetz (R-Utah).
SUMMARY: Dividend-paying
stocks have been lifted since the financial crisis by investors hungry for
steady income in a low-yield environment. But as energy prices tumble,
commodity-linked companies face a dilemma: cut dividends and risk investors
dumping their stock, or continue to pay dividends and risk even thinner cash
reserves if the rout deepens. Dividend yields of energy companies in the S&P
500 are about 3.6% compared with 2.2% for the broader market.
CLASSROOM
APPLICATION: This
article would be appropriate for use when covering dividends in a financial
accounting class.
QUESTIONS:
1. (Introductory) What are the dividend trends discussed in the
article? What are the reasons for these trends?
2. (Advanced) When does a dividend become a legal liability of the
company? Do these companies with so-called "dividend-paying stocks" have a
legal obligation to pay dividends each year?
3. (Advanced) What is dividend yield? How is it calculated? What does
it say about a company?
4. (Advanced) What are the trends for dividend yields of energy
companies in the S&P 500? Why? What does that mean for investors in the
industry?
Reviewed By: Linda Christiansen, Indiana University Southeast
In the midst of the worst commodity slump in years,
investors still want their dividends.
That was illustrated as energy firm Oneok Inc. said
Monday it was committed in 2016 to sustaining the dividend at its unit that
processes and transports natural gas. Oneok’s shares soared $2.92, or 15%,
to $21.85, making the Tulsa, Okla., company the day’s biggest gainer in the
S&P 500. Oneok’s shares are down 56% so far this year.
Dividend-paying stocks have been lifted since the
financial crisis by investors hungry for steady income in a low-yield
environment. But as energy prices tumble, commodity-linked companies face a
dilemma: cut dividends and risk investors dumping their stock, or continue
to pay dividends and risk even thinner cash reserves if the rout deepens.
Dividend yields of energy companies in the S&P 500
are about 3.6% compared with 2.2% for the broader market, according to the
latest available data from S&P Dow Jones Indices.
Energy companies in the S&P 500 have cut about $6.2
billion in dividends this year, the highest number of companies in a single
sector in the S&P 500 to have reduced their dividend this year, according to
Howard Silverblatt, senior index analyst at the firm.
“I would have looked to sell the stock” if Oneok
announced a dividend cut, said Phil Blancato, chief executive of New
York-based Ladenburg Thalmann Asset Management, which manages about $2.2
billion.
Oneok’s dividend outlook was based on U.S.
crude-oil futures prices of $40 and $45 a barrel next year. U.S. crude-oil
futures settled Monday at $34.74 a barrel, down 35% so far this year.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 8, 2016
TOPICS: Advanced
Financial Accounting, business combinations, FASB, Financial Accounting
SUMMARY: The
FASB issued a proposed Accounting Statement Update (ASU) that would clarify
the definition of a business in ASC 805 and provide a framework that an
entity can use to determine whether a set of activities and assets
(collectively, a "set") constitutes a business. The FASB issued the proposed
ASU in response to stakeholder feedback indicating that the definition of a
business in ASC 805 is too broad and that too many transactions are
qualifying as business combinations even though many of these transactions
may more closely resemble asset acquisitions. Because the current definition
has been interpreted broadly, it can be inefficient and costly to analyze
transactions and entities may not be able to use "reasonable judgment." The
proposed amendments would make application of the guidance more consistent
and cost-efficient.
CLASSROOM
APPLICATION: This
is an excellent update to use in a financial accounting class when
discussing business combinations and asset acquisitions.
QUESTIONS:
1. (Introductory) What is FASB? What is its purpose?
2. (Advanced) What are business combinations? How do they differ from
asset acquisitions?
3. (Advanced) In general, why is FASB involved in defining business?
What is FASB proposing regarding the definition? What changes is it
proposing? Why are the changes thought to be necessary by some parties?
4. (Advanced) What is a business combination? How would these
proposed changes affect business combinations?
5. (Advanced) The article discusses how this particular rule is
interpreted. How much room for interpretation should these rules have?
Should rules be written more strictly? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
The FASB issued a proposed Accounting Statement
Update¹ (ASU) that would clarify the definition of a business in ASC 805²
and provide a framework that an entity can use to determine whether a set of
activities and assets (collectively, a “set”) constitutes a business.
The FASB issued the proposed ASU on November 23,
2015, in response to stakeholder feedback indicating that the definition of
a business in ASC 805 is too broad and that too many transactions are
qualifying as business combinations even though many of these transactions
may more closely resemble asset acquisitions. Because the current definition
has been interpreted broadly, it can be inefficient and costly to analyze
transactions and entities may not be able to use “reasonable judgment.” The
proposed amendments would make application of the guidance more consistent
and cost-efficient.
Significance of the Proposal
An entity uses the definition of a business in ASC
805 in determining whether to account for a transaction as an asset
acquisition or a business combination. This distinction is important because
the accounting for an asset acquisition significantly differs from the
accounting for a business combination. For example, the acquirer’s
transaction costs are capitalized in an asset acquisition but are expensed
in a business combinations. Another difference is that in a business
combination, the assets acquired are recognized at fair value and goodwill
is recognized; in an asset acquisition, however, the cost of the acquisition
is allocated to the assets acquired on a relative fair value basis and no
goodwill is recognized.
The FASB considered addressing the concern about
the definition of a business more directly by attempting to reduce or
eliminate differences between the accounting for business combinations and
that for asset acquisitions. However, to respond to stakeholder concerns in
a timely fashion, the FASB decided to begin this project by clarifying the
definition of a business.
Challenges Related to Applying the Current
Definition of a Business
The definition of a business would remain unchanged
under the proposed ASU. ASC 805 defines a business as:
An integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing a return
in the form of dividends, lower costs, or other economic benefits directly
to investors or other owners, members, or participants.
The current implementation guidance in ASC
805-10-55-4 states that a “business consists of inputs and processes applied
to those inputs that have the ability to create outputs.” A business has
three elements—inputs, processes and outputs. All businesses have inputs and
processes, and most have outputs, but outputs are not required for a set to
be a business. Further, ASC 805-10-55-5 states that “all of the inputs or
processes that the seller used” in operating the set do not need to be part
of the transaction “if market participants are capable of acquiring the
[set] and continuing to produce outputs, for example, by integrating the
[acquired set] with their own inputs and processes.”
The current implementation guidance does not
specify the minimum inputs and processes required for a set to meet the
definition of a business, which has led some to interpret the definition of
a business broadly. Some have said that a set may qualify as a business even
if no processes are acquired when revenue-generating activities continue
after an acquisition or if a market participant would be capable of
integrating the acquired set with its own processes. For example, some
believe that the acquisition of real estate with an in-place lease meets the
definition of a business because a market participant is capable of
acquiring an input (a building with a lease) and combining it with its own
processes (processes to collect rent and maintain the building) to continue
generating outputs (rental income). Others have said that the presence of
any process can give rise to a business, regardless of the significance of
that process.
SUMMARY: A
master's degree may be a hot ticket in the accounting profession. The number
of such degrees granted for the 2013-14 academic year shot up 31%, even as
the total number of accounting degrees leveled off after years of torrid
growth. Master's degrees in accounting earned in 2013-14 totaled 27,359, up
from 20,843 a year earlier. By contrast, the number of bachelor's degrees in
accounting fell 11% to 54,423. One factor in the rising number of master's
degrees may be a 2014 requirement that certified public accountants complete
150 hours of academic work for certification.
CLASSROOM
APPLICATION: This
is a valuable article to share with our accounting students regarding
current trends in accounting education and accounting careers.
QUESTIONS:
1. (Introductory) What are the statistics regarding trends in
accounting bachelor and master degree enrollments?
2. (Advanced) Why might more students be completing masters degrees?
Why could masters degrees be an attractive option for students?
3. (Advanced) What is the trend regarding demand for accountants?
What are the reasons for these trends? Do you expect these trends to
continue or reverse? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Increase in master’s degrees in accounting awarded
for the 2013-14 academic year
A master’s degree may be a hot ticket in the
accounting profession.
The number of such degrees granted for the 2013-14
academic year shot up 31%, even as the total number of accounting degrees
leveled off after years of torrid growth, according to the American
Institute of CPAs.
Master’s degrees in accounting earned in 2013-14
totaled 27,359, up from 20,843 a year earlier. By contrast, the number of
bachelor’s degrees in accounting fell 11% to 54,423.
One factor in the rising number of master’s degrees
may be a 2014 requirement that certified public accountants complete 150
hours of academic work for certification. “More students are recognizing
that, in most cases, the additional academic work needed to acquire the
technical competence and develop the skills required by today’s CPA is best
obtained at the graduate level,” said Joanne Fiore, AICPA’s vice president
for professional media, pathways and inclusion.
The group has “seen continuous growth” in master’s
degrees awarded and in accounting degrees awarded overall since the late
1990s, she said.
The supply of accountants is likely to grow.
Enrollment in accounting programs topped 250,000 in 2013-14, including those
leading to bachelor’s, Ph.D and various master’s degrees.
The AICPA also reported a 23% increase in
public-university enrollments in master’s programs in accounting and a 50%
increase at private schools.
By contrast, enrollments in bachelor of accounting
programs increased 12% at private universities and decreased 22% at public
ones.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 8, 2016
SUMMARY: Congress's
recent tax bill contains surprising presents: permanent extensions of tax
benefits for individuals that have long been temporary. The Protecting
Americans from Tax Hikes Act of 2015, or PATH, includes the state and local
sales-tax deduction, educator-expense deduction, mass-transit benefits, the
American Opportunity tax credit, and 529 plan expanded benefits.
CLASSROOM
APPLICATION: This
article and the related articles provide a good update for tax classes.
QUESTIONS:
1. (Introductory) What is the Protecting Americans from Tax Hikes Act
and what is its status?
2. (Advanced) What is an IRA charitable transfer? How does the act
affect these types of transfers? What are the specific requirements of the
transfer?
3. (Advanced) What does the state and local sales-tax deduction allow
taxpayers to do? In what locations is this most attractive? Why?
4. (Advanced) What do the educator-expense deduction and mass-transit
benefits allow? How are taxpayers benefited? What is the current status of
those benefits?
5. (Advanced) What is the American Opportunity tax credit? What are
the tax benefits? Are you or your parents eligible for this credit?
6. (Advanced) What is a 529 plan? How do 529 plans benefit taxpayers?
Have you or your parents used a 529 plan?
Reviewed By: Linda Christiansen, Indiana University Southeast
Congress’s Christmas-tree tax bill contains
surprising presents: permanent extensions of tax benefits for individuals
that have long been temporary. The Protecting Americans from Tax Hikes Act
of 2015, or PATH, has been passed by both the House and Senate and is
expected to be signed into law by President Barack Obama.
The bill will end a frustrating cycle for millions
of taxpayers. In the past, lawmakers have enacted popular temporary
provisions, such as deductions for schoolteachers’ supplies or state sales
taxes, and then left taxpayers hanging until the last minute as to whether
the provisions would be renewed.
For example, the provision allowing IRA charitable
transfers—a highly popular measure that helps charities and lowers taxes for
many older Americans—has been renewed five times since 2006, with four of
them coming after Thanksgiving. The nadir was 2012, when the break wasn’t
re-enacted until early in 2013, and many donors were confused by rules for
making retroactive 2012 gifts.
The bill doesn’t permanently extend all popular
breaks. Tax relief for mortgage-debt forgiveness, “bonus” depreciation, and
a credit for alternative-fuel vehicles expire in 2016.
Here are notable benefits slated to become
permanent:
Continued in article
Listing of Taxpayer Gifts
IRA charitable transfers.
State and local sales-tax deduction.
Educator-expense deduction.
Mass-transit benefits.
American Opportunity tax credit.
529 plan expanded benefits.
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 8, 2016
SUMMARY: Slowing
growth in China and other emerging markets has dragged metals prices into a
deep downturn, just a few years after mining companies and their investors
bet billions on a so-called supercycle, the seemingly never-ending growth in
demand for commodities. The big mines cost so much to build and extract
minerals so efficiently that mothballing them is unthinkable-running them
generates cash to pay down debts, and huge mines are expensive to simply
maintain while idle. But as a result, their scale means they are helping
miners dig themselves even deeper into the price trough by adding to a glut.
CLASSROOM
APPLICATION: This
article offers an example of companies managing the challenges of high fixed
costs with a decline in demand.
QUESTIONS:
1. (Introductory) What are supermines? What are the facts regarding
the metal commodity glut?
2. (Advanced) What is cost behavior? What are the types of cost
behavior?
3. (Advanced) What are examples of the fixed, variable, and mixed
costs required for supermines? Which of these types of costs are more
prominent?
4. (Advanced) What is operating leverage? What is the relative degree
of operating leverage of these mines - low, moderate, or high? How does
operating leverage affect profitability when demand is high? When demand is
low?
5. (Advanced) How does cost behavior analysis affect the supermine
management's decision making? How do the various types of costs affect the
decision whether to continue with the drop in demand?
6. (Advanced) What is a sunk cost? What are some examples of sunk
costs in the building and operating a mine? How should sunk costs be
considered in the decision whether to keep a mine open during the metal
glut?
Reviewed By: Linda Christiansen, Indiana University Southeast
CERRO VERDE, Peru—In this volcanic desert, a dusty moonscape patrolled by
bats, snakes and guanacos, America’s biggest miner is piling on to the new
force in industrial resources: supermines. It’s a strategy that could be
driving miners into the ground.
Freeport-McMoRan Inc. is completing a yearslong $4.6 billion expansion
that will triple production at its Cerro Verde copper mine, turning a
once-tiny, unprofitable state mine into one of the world’s top five copper
producers.
As Cerro Verde’s towering concrete concentrators grind out copper to be
made into pipes and wires in Asia, it will add to production coming from
newly built giant mines around the world, in a wave of supply that is
compounding the woes of the depressed mining sector.
Slowing growth in China and other emerging markets has dragged metals
prices into a deep downturn, just a few years after mining companies and
their investors bet billions on a so-called supercycle, the seemingly
never-ending growth in demand for commodities.
Back then, miners awash in cheap money set out to build the biggest mines
in history, extracting iron ore in Australia, Brazil and West Africa, and
copper from Chile, Peru, Indonesia, Arizona, Mongolia and the Democratic
Republic of Congo. They also expanded production of minerals such as zinc,
nickel and bauxite, which is mined to make aluminum.
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 15, 2016
SUMMARY: At
the end of Congress enacted permanent extensions of several popular
provisions, including the American Opportunity tax credit, a
higher-education benefit; the IRA charitable transfer provision for people
70 1/2 and older; certain mass-transit benefits; a child tax credit; and the
ability to deduct state sales taxes instead of income tax on the federal
return. The article includes the following changes: ACA penalty tax,
inflation adjustments for tax brackets and investment rates, mileage
deductions, and estate and gift tax exemptions.
CLASSROOM
APPLICATION: This
is a good update for an individual tax class.
QUESTIONS:
1. (Introductory) When did Congress pass the most recent tax
legislation? What provisions were included?
2. (Advanced) What is the Affordable Care Act? What is the penalty
tax? Why is a tax involved with the ACA? What are the changes for 2016?
3. (Advanced) How do tax brackets and investments change each year?
Why? How does that affect tax planning for individuals?
4. (Advanced) What is the mileage deduction? How is it calculated?
Why was it changed for 2016?
5. (Advanced) What are the changes in estate and gift taxes for 2016?
How will that affect tax planning? How many people are usually affected?
6. (Advanced) What is the marriage penalty? Why does the tax code
provide for a marriage penalty? Who is affected?
Reviewed By: Linda Christiansen, Indiana University Southeast
Income-tax rates have not changed, but tax brackets
are adjusted for inflation.
A new year usually brings
tax changes, and 2016 is no exception.
The good news is that last
month, in the nick of time, Congress enacted
permanent extensions of several popular
provisions, including the American Opportunity
tax credit, a higher-education benefit; the IRA
charitable transfer provision for people 70 1/2
and older; certain mass-transit benefits; a
child tax credit; and the ability to deduct
state sales taxes instead of income tax on the
federal return.
No longer will people
using these benefits have to bite their nails
waiting for lawmakers to re-enact
them—especially if a provision has already
expired, as happened several times over the past
decade.
Here are other changes
to be aware of:
Affordable Care
Act penalty tax. For people who don’t
have ACA-approved health insurance, the payment
is rising steeply once again. Such taxpayers
often owe a “shared responsibility payment” that
is either a flat assessment or a percentage of
income, whichever is higher. Roberton Williams, a tax specialist with the Tax Policy Center in Washington, says the
percentage method will apply to virtually all
higher-income households and even many single
filers earning above $40,000.
In 2016, the flat assessment more than doubles. It
is now $695 per individual, up from $325 last year, with a maximum of $2,085
per household. The percentage-of-income payment rises to 2.5% of income from
2% last year, with a projected maximum of about $13,400 per household.
Members of some groups aren’t subject to the
payment, including certain religious groups and people covered by Medicare
or Medicaid. The Tax Policy Center has posted an ACA penalty calculator on
its website.
Continued in article
Teaching Case: Ford's losses that were being smoothed in from previous
years that now no longer have to be under the new accounting method.
From The Wall Street Journal Accounting Weekly Review in January 15, 2016
SUMMARY: Ford
Motor Co. is changing how it accounts for pension plans, a move that should
boost company earnings while making profitability in Europe more likely and
giving a clearer picture of the automotive group's underlying performance.
Ford is shifting to "mark-to-market" accounting for pension and
retiree-benefit plans. That means the auto maker will recognize gains and
losses from the plans in the earnings of years when they occur, instead of
its current practice of gradually "smoothing" them into its results over a
number of years. The mark-to-market ?change requires revisions to earnings
dating to 2011. The change sweeps away billions of dollars in pension-plan
losses from previous years that Ford had yet to factor in to future results,
and allows the auto maker to approach coming years with a cleaner slate.
CLASSROOM
APPLICATION: This
article is excellent to use as an example for pension accounting, as well as
for a discussion of mark-to-market accounting.
QUESTIONS:
1. (Introductory) What are the details of Ford's announcement? What
change is the company making?
2. (Advanced) What is pension accounting? How can it affect a
company's financial statements?
3. (Advanced) What is mark-to-market? What is the reason behind it?
4. (Advanced) How will Ford's accounting changes affect each of its
financial statements and results?
5. (Advanced) What are Ford's reasons for these changes? Should the
company make these changes? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
Ford Motor Co. is changing how it accounts for
pension plans, a move that should boost company earnings while making
profitability in Europe more likely and giving a clearer picture of the
automotive group’s underlying performance.
The change would put Ford’s results on a more equal
footing with General Motors Co. and Fiat Chrysler Automobiles NV’s U.S.
division, which had past pension losses wiped away in bankruptcy.
Ford said Thursday it is shifting to
“mark-to-market” accounting for pension and retiree-benefit plans. That
means the auto maker will recognize gains and losses from the plans in the
earnings of years when they occur, instead of its current practice of
gradually “smoothing” them into its results over a number of years.
The mark-to-marketchange requires revisions to
earnings dating to 2011. It will provide a “much better transparent view of
the operating performance of the business,” Chief Financial Officer Bob
Shanks said in an interview.
The change sweeps away billions of dollars in
pension-plan losses from previous years that Ford had yet to factor in to
future results, and allows the auto maker to approach coming years with a
cleaner slate. Investors tend to largely ignore a company’s historical
financial performance once it is too far in the past, instead focusing on
future earnings potential.
The move also strips the pension losses out of
Ford’s core automotive operating units, giving those units’ earnings a lift.
The effect might be most significant in Europe, where the revisions will
move the company from a loss to a profit for the first nine months of 2015,
putting it in a stronger position to book its first full-year European
operating profit since 2010.
Ford said the move won’t immediately affect the
bonuses for company officers tied to the auto maker hitting certain
financial benchmarks because it will use pre-revised 2015 results for those
calculations. Hourly employees represented by the United Auto Workers,
however, will get bigger profit-sharing bonuses for 2015, because their
payouts will be tied to the revised North American results.
Shares in Ford fell Thursday after the
announcement. The company’s stock closed at $12.70 on the New York Stock
Exchange, off 3.1%.
Ford is following the course of dozens of other
companies that have shifted their pension plans to mark-to-market
accounting, including Verizon Communications Inc., AT&T Inc. and Honeywell
International Inc.
The move is optional, and most companies with large
defined-benefit pension plans, which promise to pay specified amounts to
retirees, still use smoothing to account for their pension-plan results in
their overall earnings.
Ford has taken several steps in past years to
lessen its pension risk, including $11 billion in contributions since 2012
to help fund its plans. “Because we’re nearly finished with that
strategy…we’re at that point where we can make this change,” Mr. Shanks
said.
Ford expects the change to boost its2015 pretax
income,excluding special items, by $1.5 billion. Most of the $1.5 billion
consists of losses that were being smoothed
in from previous years that now no longer have to be under the new
accounting method.
As part of the change, Ford books its pension gains
and losses centrally, instead of in the results of its operating units.
Ford’s pretax operating earnings received a $1.2 billion boost from the
change in the first nine months of 2015, coming in at $8.2 billion. The
operating-profit margin at its automotive business rose to 7.1% from the
previously reported 5.9%.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 15, 2016
SUMMARY: PricewaterhouseCoopers
agreed to pay $55 million to settle a class-action lawsuit accusing it of
misleading investors in feeder funds that funneled their cash to Bernard
Madoff. Investors in Fairfield Greenwich Ltd. accused PwC affiliates of
negligence in connection with their work auditing Fairfield's funds, which
invested with Mr. Madoff. According to the investors, PwC units auditing the
Fairfield funds in the years before Mr. Madoff's fraud was exposed wrongly
gave them a clean bill of health and failed to uncover that the funds'
investments with Mr. Madoff were based on phony transactions.
CLASSROOM
APPLICATION: This
is a great article to use when discussing auditor exposure to liability for
client or client-related fraudulent activities.
QUESTIONS:
1. (Introductory) What are the facts of this case? Who are the
parties? What area of law is involved?
2. (Advanced) What is PwC? What is its business? What is the size of
the firm?
3. (Advanced) What are the details of the settlement? Why did the
parties settle?
4. (Advanced) What are the rules regarding auditor responsibility to
detect fraud? Why is that the standard?
5. (Advanced) How could an auditor of a fund be liable for the losses
of Madoff's investors? What did the plaintiffs say PWC should have found?
Reviewed By: Linda Christiansen, Indiana University Southeast
PricewaterhouseCoopers agreed to pay $55
million to settle a class-action lawsuit accusing it of misleading
investors in feeder funds that funneled their cash to Bernard Madoff.
The cash deal, filed Wednesday in a Manhattan
federal court, heads off a trial that would have begun this week in
which investors in Fairfield Greenwich Ltd. were set to accuse PwC
affiliates of negligence in connection with their work auditing
Fairfield’s funds, which invested with Mr. Madoff.
Investors have asked a federal judge to
schedule a hearing in the spring to consider the deal, reached with
PwC’s Canadian and Dutch units as well as with PricewaterhouseCoopers
International Ltd.
About 2,960 investors in Fairfield-managed
funds lost more than $3.2 billion in the 2008 collapse of Mr. Madoff’s
Ponzi scheme, investor attorney David Barrett of Boies, Schiller &
Flexner LLP said Thursday. With this week’s settlement, they will be
able to boost their litigation recoveries to at least $235 million,
although another $30 million could be available depending on the outcome
of other legal proceedings.
“We believe that this recovery of $235 million
for the Fairfield investors is the largest recovery that has been
obtained on behalf of any group of Madoff feeder fund investors,” Mr.
Barrett said.
According to the investors, PwC units auditing
the Fairfield funds in the years before Mr. Madoff’s fraud was exposed
wrongly gave them a clean bill of health and failed to uncover that the
funds’ investments with Mr. Madoff were based on phony transactions.
The settlement doesn’t include an admission of
guilt, and PwC continues to deny the allegations.
“We believe strongly that our audit work
complied with professional standards, but we pursued a settlement to
avoid the uncertainties and unrecoverable legal costs of a lengthy jury
trial. At no time was Madoff a firm client,” a PwC Canada spokesman said
Thursday, adding that the deal will have “no impact” on the firm’s
services.
The PwC deal, if approved by the court, will
wrap up Fairfield investor litigation that has been pending for more
than seven years. Prior settlements have brought in $210.25 million.
Court papers show the investors’
attorneys---lawyers at Boies Schiller as well as Wolf Popper LLP and
Lovell Stewart Halebian Jacobson LLP---intend to seek approval for
payment of up to 30% of the settlement proceeds, court papers show. If
$265.25 million, the full amount of settlement proceeds, is available
for distribution, that could see the firms share in a payout of nearly
$80 million. They also intend to seek reimbursement of up to $2.5
million in expenses related to the PwC litigation.
Lawsuits from investors who sue auditors for
their alleged negligence tend to settle to avoid a trial. An exception
was last fall’s trial at which a state court jury found auditor Ernst &
Young liable for the losses sustained by another Madoff feeder fund,
FutureSelect Portfolio Management Inc., upon the collapse of Mr.
Madoff’s fraud. Ernst & Young denies wrongdoing.
SUMMARY: As
the Internet of Things (IoT) blurs the line between products and services,
taxation may have a bigger impact than many expect. The IoT generally refers
to a suite of technologies and processes that allows data to be tracked,
analyzed, shared and acted upon through ubiquitous connectivity. Companies
are taxed differently depending on whether they sell a product or service,
and taxed as a regulated utility if what they sell is deemed to be
"telecommunications." As a result, what was a relatively straightforward
process can become one riddled with complexity.
CLASSROOM
APPLICATION: This
is a good article for corporate taxation and business tax-planning classes.
QUESTIONS:
1. (Introductory) What is the Internet of Things? Why is it becoming
more important and common in recent years?
2. (Advanced) What are the tax issues surrounding the Internet of
Things? Why are tax issues and tax planning different for these types of
business offerings than for more traditional products and services?
3. (Advanced) How are services taxed differently that products? Why
are they? How does this affect businesses engaged in the Internet of Things?
What tax issues exist, and what tax planning should a business consider?
4. (Advanced) What is telecommunications? How does it relate to the
Internet of Things? How could a company not realize there are new issues
related to changes in their traditional products and services?
Reviewed By: Linda Christiansen, Indiana University Southeast
As the Internet of Things (IoT) blurs the line
between products and services, taxation may have a bigger impact than many
expect. The IoT generally refers to a suite of technologies and processes
that allows data to be tracked, analyzed, shared and acted upon through
ubiquitous connectivity.
A wide range of companies that sell products as
diverse as cars, appliances, industrial equipment and medical devices are
discovering new ways to generate value by adopting an IoT strategy and
embedding sensors and communications capabilities in their products. Some of
these organizations are starting to charge subscription-type fees for these
“connected” services, ranging from monitoring to music streaming.
“The little-discussed consequences of such business
model transformations are taxation issues, which have the potential to
blindside companies that are unprepared,” says Paul Sallomi, vice chairman
and global Technology, Media and Telecommunications industry leader,
Deloitte LLP. Indeed, companies are taxed differently depending on whether
they sell a product or service, and taxed as a regulated utility if what
they sell is deemed to be “telecommunications.” As a result, what was a
relatively straightforward process can become one riddled with complexity.
“No company wants tax issues to determine what it
sells to customers. Nevertheless, as the IoT blurs the line between products
and services, taxation may have a bigger impact than many expect,” adds Mr.
Sallomi.
Services Are Taxed Differently Than Products
Companies regularly invent new ways to add value to
traditional products, including enhancing connectivity. This type of
business model transformation often makes product companies look more like
service providers. Consider a company that manufactures Internet-enabled
routers, which often are equipped with communications, video and
audio-conferencing capabilities, as well as security protocols and a variety
of commercial applications. In the past, the company sold a piece of
tangible personal property for a fixed price. Today, that same company sells
monthly connectivity services either bundled or separately—which might, but
not always, include the cost of the router.
“As these types of services become an increasingly
important value-add element to the equipment, manufacturers could find
themselves in a different type of business,” says Jim Nason, U.S. Tax
Telecommunications sector leader, Deloitte Tax LLP. “The organization may
have transformed convincingly into a service business—or more specifically
into a telecommunications business. These are the kinds of determinations
regulatory and taxing authorities will make when auditing companies that
generate increased revenue streams from service and communications-type
offerings,” observes Mr. Nason.
From a global perspective, economies have become
increasingly service-based, and taxation has become considerably more
complicated, especially when those services are delivered via the Internet.
For example, services are generally taxed where they are provided, which is
a simple determination if the business is a tailor or dry cleaner. But the
service could be a streaming music station that the customer consumes while
on a road trip across the United States. Further, it might be a service that
needs to accommodate a consumption-based model, similar to the “pay for what
you use” model used by utilities.
Even answering the question “what is the service?”
can be less than straightforward than in the past, particularly when
multiple value propositions are packaged into a single offering. “That’s an
important question to answer because taxing authorities across the U.S. are
in the process of rethinking their tax rules to ensure they are receiving a
fair share of the revenues from bundled, technologically advanced services,”
says Mr. Sallomi.
Telecommunications Taxes Are Among the Most
Complicated
One of the hallmarks of the IoT is taking “dumb”
products and turning them into devices with interconnected, thinking
capabilities that have the ability to communicate. In the case of monthly
subscription plans, the service can start to sound similar to what phone
companies offer, which can present several challenges. For example, there
are significant administrative and technology-related costs associated with
calculating, tracking and collecting telecom-related taxes, fees and
surcharges. Some non-telecom companies may be ill-equipped to perform these
activities, and some may not recognize the potential tax issues.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 15, 2016
SUMMARY: Despite
a proposal in President Obama's 2016 budget to prevent Roth conversions of
after-tax dollars in an IRA - which would have mostly eliminated the
so-called Backdoor Roth IRA - it looks like the strategy for high-income
earners to get money into a Roth IRA will survive one more year. The door
remains open once again in 2016 for higher income individuals to make a
contribution to an after-tax IRA, and subsequently convert it to get the
dollars into a Roth IRA.
CLASSROOM
APPLICATION: This
article is a good update for individual taxation regarding tax planning for
Roth IRAs.
QUESTIONS:
1. (Introductory) What is a Roth IRA? What are the benefits of a Roth
IRA? What other options are available for investing taxpayers?
2. (Advanced) Who is eligible to invest in a Roth IRA? What taxpayers
are excluded? Why are they excluded?
3. (Advanced) What is is a backdoor Roth IRA? How is it done? Who
would want to do this?
4. (Advanced) What limitations exist for backdoor Roth IRAs? Why?
5. (Advanced) Why are backdoor Roth IRAs allowed? What could Congress
do to limit them? How would that affect taxpayers?
6. (Advanced) Should backdoor Roth IRAs be eliminated? Why or why
not?
Reviewed By: Linda Christiansen, Indiana University Southeast
In the end, with the mid-December
passage of the Protecting Americans from Tax Hikes Act
of 2015–the so-called tax-extenders legislation–Congress
once again retroactively re-enacted a number of popular
individual tax-planning provisions, from the state and
local sales tax deduction, to the American Opportunity
Tax Credit for college, to the
rules permitting qualified charitable distributions
directly from an IRA to a charity
for those over age 70½.
But notably absent from the
legislation was any kind of crackdown on the backdoor
Roth strategy itself. Accordingly, the door remains open
once again in 2016 for higher income individuals to make
a contribution to an aftertax IRA, and subsequently
convert it to get the dollars into a Roth IRA.
Of course, the two biggest
caveats to the backdoor Roth still remain: For those who
have other IRAs as well, the
IRA aggregation rule will
severely limit the benefit of the strategy; and it’s
still important to allow some time to pass between the
IRA contribution and subsequent conversion to
avoid running afoul of the step transaction doctrine.
In addition, there is still a
risk that Congress could intervene with legislation
during 2016, and eliminate the backdoor Roth IRA with
the president’s prior crackdown proposal. As we saw last
fall with Congress’ elimination of the popular
file-and-suspend and restricted application claiming
strategies for Social Security,
when something is viewed as
“abusive” or a “loophole,” the door can be shut quickly.
In fact, if Congress were to enact a law eliminating the
backdoor Roth IRA, it wouldn’t be surprising if it was
done retroactively to the beginning of 2016.
Still, the odds of significant
tax legislation in an election year is not very high–and
at worst, a rule change would simply mean winding the
Roth conversion dollars and recharacterizing them
back to the original nondeductible IRA. So the
coast looks clear for the backdoor Roth IRA strategy for
at least one more year, along with other popular
after-tax Roth conversion strategies (e.g.,
splitting the after-tax dollars from a 401(k) plan for
conversion).
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 22, 2016
SUMMARY: U.S.
airlines are expected to report strong fourth-quarter financial results and
record annual profits. But investors may fret over a byproduct of that
success: rising labor costs. As fuel prices have plunged, employee pay and
benefits have returned as airlines' biggest expense item.
CLASSROOM
APPLICATION: This
article can be used in a small case study regarding managing costs using
cost behavior tools and analysis.
QUESTIONS:
1. (Introductory) What is the financial condition of the airline
industry? What has the industry experienced in the past decade? How have the
financial conditions changed recently?
2. (Advanced) What is cost behavior? What are the various types of
costs? How do they differ? How does planning and analysis work differently
for each?
3. (Advanced) What is the cost behavior of each of the airline
expense categories: fuel, labor, planes and equipment, etc? Which of these
categories is changing? How do increases and decreases in those categories
affect the financial statements?
4. (Advanced) How should airline management use managerial or cost
accounting tools to analyze for planning and budgeting? What should
management anticipate?
Reviewed By: Linda Christiansen, Indiana University Southeast
U.S. airlines are expected to report strong
fourth-quarter financial results and record annual profits. But investors
may fret over a byproduct of that success: rising labor costs.
As fuel prices have plunged, employee pay and
benefits have returned as airlines’ biggest expense item. Because the
industry—which not too long ago was mired in red ink—appears to be minting
money now, its pilots, flight attendants, mechanics and other workers are
demanding to be rewarded for aiding in its turnaround. They also want to
recoup concessions they made when companies went through bankruptcy-court
protection.
Delta Air Lines Inc. kicks off the airline
reporting season Tuesday, with others announcing results over the next few
weeks. Deutsche Bank estimates that aggregate pretax profit for the U.S.
carriers in the fourth quarter soared 44% from a year earlier to $5.2
billion, thanks largely to oil’s fall to a 12-year low, which has slashed
fuel tabs.
Deutsche Bank also estimates, though, that industry
wage costs rose 11%, or $909 million, in the latest period, after a
year-over-year increase of $964 million in the third quarter. “We are
expecting this cost line to experience above- average growth over the next
several years as union contracts are renegotiated,” Deutsche Bank said.
Credit Suisse expects 2016 to be the seventh
consecutive year of industry profitability, marking the longest positive
cycle in U.S. airline history. But, in a research note, it also observed
that in the last extended up-cycle in the late 1990s, “generous labor
contracts led to rising wage expenses that weighed heavily on industry
profitability after the cycle turned in 2001.”
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 22, 2016
SUMMARY: An
accounting change issued by the London-based International Accounting
Standards Board will require companies outside the U.S. to add substantial
amounts of leases to their balance sheets. Together with a parallel rule for
U.S. companies enacted last fall, the change is expected to add $3.3
trillion in leases to corporate balance sheets world-wide. The reasoning
behind the rule is to give investors a clearer, fuller picture of companies'
obligations when they lease items ranging from real estate to office
equipment. Some companies have assumed tens of billions of dollars in
lease-payment obligations that are akin to debt. But under current rules,
those leases aren't carried on the companies' balance sheets. They are
disclosed only in the footnotes to the companies' financial statements.
CLASSROOM
APPLICATION: These
articles offer IFRS lease accounting updates for financial accounting
classes.
QUESTIONS:
1. (Introductory) What is lease accounting? How are each of the
financial statements affected by leases?
2. (Advanced) What is the IASB? What is its main task? What is its
area of authority? What is its counterpart in the U.S.?
3. (Introductory) What changes did IASB make to lease accounting? How
does this differ from the previous accounting treatment for leases?
4. (Advanced) How does the IASB's lease rule compare with the U.S.
rule? It is good for the rules to differ, or is it better to be the same or
similar? Why?
5. (Advanced) How will a company's financial statements be affected
by these changes in lease accounting? What types of companies will have
improved financial results? Companies in what situations will have less
favorable financial results under the new rules?
6. (Advanced) The article states rating firms, analysts, and
investors have long adjusted corporate numbers to take into account
companies' lease obligations. What does that mean? What adjustments would
that require? How will this change in lease accounting affect the actions of
these rating firms and investors?
7. (Advanced) How will cash flows be affected by the rule change?
Why?
8. (Advanced) What problems could result from the change? Should the
rule have been changed? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
An accounting change issued early Wednesday, London
time, will require companies outside the U.S. to add substantial amounts of
leases to their balance sheets, a move which could make some companies
appear more leveraged than they do now.
The new rule issued by the London-based
International Accounting Standards Board, together with a parallel rule for
U.S. companies enacted last fall, is expected to add $3.3 trillion in leases
to corporate balance sheets world-wide, the IASB said.
The idea is to give investors a clearer, fuller
picture of companies’ obligations when they lease items ranging from real
estate to office equipment. Some companies have assumed tens of billions of
dollars in lease-payment obligations that are akin to debt. But under
current rules, those leases aren’t carried on the companies’ balance sheets.
They are disclosed only in the footnotes to the companies’ financial
statements.
“The new standard will provide much-needed
transparency on companies’ lease assets and liabilities, meaning that
off-balance-sheet lease financing is no longer lurking in the shadows,” IASB
Chairman Hans Hoogervorst said.
The new lease rules are expected to have the
biggest effect on companies that use lease financing heavily, such as
airlines, as well as retail and restaurant chains.
Ratings firms, analysts and major investors have
long been aware of leases’ impact, and they have factored in leases to
companies’ official balance-sheet numbers to get a truer portrait of their
obligations. The new rule will make that effect more evident, and it will
also make it easier to compare companies whether they finance by leasing or
borrowing funds, the IASB said.
The IASB’s move applies to all companies that
follow the global accounting-rule system known as the International
Financial Reporting Standards or IFRS, which have been adopted in more than
100 countries, though not in the U.S.
“We support the IASB’s efforts,” said Leo van der
Tas, global IFRS services leader for the Big Four accounting firm Ernst &
Young. The new rule “will promote greater consistency in accounting for
leases,” he said.
The Financial Accounting Standards Board, which
sets accounting rules for U.S. companies, issued a U.S. version of the
lease-accounting rule in November, and the U.S. rule is expected to be
formally issued in February, a FASB spokeswoman said. Both the global and
the U.S. rules will take effect in 2019.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 22, 2016
SUMMARY: The
U.S. government's audit-industry regulator barred a Hong Kong firm from
auditing U.S.-traded companies after it allegedly refused to cooperate in
the regulator's investigation of its work for a Chinese company. The Hong
Kong affiliate of accounting firm PKF and three of its employees agreed to
the bar in a settlement with the Public Company Accounting Oversight Board.
They didn't admit or deny wrongdoing, and they can reapply after three years
to be allowed to audit U.S. companies. The case represents the latest
skirmish in U.S. regulators' attempts to oversee auditing and accounting of
U.S.-traded Chinese companies.
CLASSROOM
APPLICATION: Many
large and regional accounting firms have an international presence or
affiliates. This is an interesting look at some of the issues involved. It
also shows the difficulty of having accurately audited financial statements
when investing in other countries or doing business internationally.
QUESTIONS:
1. (Introductory) What is the PCAOB? What is its function and areas
of authority?
2. (Advanced) What is PKF? What are the details of the case presented
in the article? What did the PCAOB do regarding a Hong Kong accounting firm?
Why?
3. (Advanced) What ramifications does this ruling have on the firm in
Hong Kong? What does it have on PKF?
4. (Advanced) What issues does this case show regarding investing
internationally? How does this decision affect investors? How can investors
or business access accurate information? How should this impact their
investment and business decisions?
Reviewed By: Linda Christiansen, Indiana University Southeas
The U.S. government’s audit-industry regulator on
Wednesday barred a Hong Kong firm from auditing U.S.-traded companies after
it allegedly refused to cooperate in the regulator’s investigation of its
work for a Chinese company.
The Hong Kong affiliate of accounting firm PKF and
three of its employees agreed to the bar in a settlement with the Public
Company Accounting Oversight Board. They didn’t admit or deny wrongdoing,
and they can reapply after three years to be allowed to audit U.S.
companies.
A PKF spokesman couldn’t immediately be reached for
comment.
The case represents the latest skirmish in U.S.
regulators’ attempts to oversee auditing and accounting of U.S.-traded
Chinese companies. Many such companies have had accounting questions raised
about them in recent years, but regulators have often faced obstacles in
investigating the companies and obtaining access to the information their
auditors possess about them.
The PCAOB says it was investigating PKF’s audits of
an unidentified Chinese company, but PKF refused the board’s requests to
speak to a representative of the audit firm.
According to the PCAOB, PKF contended the board
needed to get the approval of Chinese officials first to speak to anyone at
PKF, under a 2013 agreement that had partly resolved earlier disputes about
U.S. regulators’ access to audit documents involving Chinese companies.
But the PCAOB says that agreement didn’t justify
PKF’s refusal to cooperate. The 2013 agreement was prompted by China-based
accounting firms’ reluctance to hand over audit documents to U.S.
regulators. The firms had contended their auditors could be jailed if they
cooperated because Beijing considers such audit documents about Chinese
companies as akin to state secrets.
In 2015, the Chinese affiliates of the Big Four
accounting firms paid a total of $2 million, without admitting or denying
wrongdoing, in a settlement with the U.S. Securities and Exchange Commission
over their past refusal to turn over documents.
The PCAOB oversees auditing of all companies traded
on U.S. markets, even if the auditor or the company are based outside the
U.S. A refusal to cooperate “frustrates the PCAOB’s ability to protect
investors,” PCAOB Chairman James Doty said.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 22, 2016
TOPICS: Corporate
Taxation, International Taxation
SUMMARY: Senators
asked the administration to consider invoking Section 891 of the Internal
Revenue Code, a sanction that has been used rarely, if ever, in its 80-year
history. It lets the president double U.S. taxes on foreign individuals and
corporations from countries that he deems have subjected U.S. citizens and
companies to "discriminatory or extraterritorial taxes." The move escalates
a confrontation that has been brewing between U.S. and European Union
officials over investigations that question tax deals between European
countries and U.S. companies, including Apple Inc. and Starbucks Corp.
CLASSROOM
APPLICATION: This
is an interesting article to use for corporate accounting classes to show
the possible use of Section 891.
QUESTIONS:
1. (Introductory) What is Section 891? In what situations can it be
used?
2. (Advanced) Why is Section 891 rarely used? How is it implemented?
Why are these unusual steps required?
3. (Introductory) Why are some senators requesting implementation of
Section 891? What are the facts of the confrontation? Who is involved? How
is the U.S. impacted?
4. (Advanced) Do you think Section 891 should be implemented? Why or
why not? What are the advantages and disadvantages?
Reviewed By: Linda Christiansen, Indiana University Southeast
WASHINGTON—Four high-ranking U.S. senators asked
the Obama administration to consider retaliatory double taxes on European
countries in response to their investigations of tax breaks for U.S.-based
companies.
The move escalates a confrontation that has been
brewing between U.S. and European Union officials over investigations that
question tax deals between European countries and U.S. companies, including
Apple Inc. and Starbucks Corp.
In a letter sent Friday to Treasury Secretary Jacob
Lew, Senators Orrin Hatch (R., Utah), Ron Wyden (D., Ore.), Chuck Schumer
(D., N.Y.) and Rob Portman (R., Ohio) said they were alarmed by European
regulators’ actions. They asked the administration to consider invoking
Section 891 of the Internal Revenue Code, a sanction that has been used
rarely, if ever, in its 80-year history. It lets the president double U.S.
taxes on foreign individuals and corporations from countries that he deems
have subjected U.S. citizens and companies to “discriminatory or
extraterritorial taxes.”
The senators allege EU authorities appear to be
disproportionately targeting U.S. companies as they try to end special tax
breaks, echoing testimony in December from Robert Stack, the Treasury’s top
international tax lawyer. Earlier this week the European Commission ordered
Belgium to recoup about $700 million in taxes that it said distorted
competition. That investigation, however, wasn’t limited to U.S.-based
companies.
Itai Grinberg, a law professor at Georgetown
University and former Treasury lawyer, wrote an article this week in Tax
Notes International suggesting that the U.S. “remind our friends in the
European Commission” about Section 891, which he wrote has never been
applied. Section 891, Mr. Grinberg wrote, gives the U.S. a “plausible source
of leverage” for the Treasury Department.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review in January 22, 2016
SUMMARY: Companies
eager to buy back their shares following recent drops in the Dow may be
forced to curb their enthusiasm - at least for the moment. With earnings
season revving up, a big slice of companies are in blackout periods, during
which time they are customarily limited in what they can say or do,
including initiating new share repurchases. Therefore, many of the share
buybacks taking place are being executed through what are often known as
10b5-1 programs, which allow corporations to buy back shares via prearranged
transactions.
CLASSROOM
APPLICATION: This
article offers reasons for and examples of stock buybacks under 10b5-1
programs.
QUESTIONS:
1. (Introductory) What is a stock buyback? Why do some companies
choose to participate in stock buybacks?
2. (Advanced) How do stock buybacks affect a company's financial
statements? How is the transaction entered into the company's financial
records? What accounts are affected?
3. (Advanced) How is a business affected by the stock buyback? How
does it affect the company's stock price? How does it affect the company's
strategies and options for growth?
4. (Advanced) What is a 10b5-1 program? How does it differ from other
buyback methods?
5. (Advanced) What are the current market conditions favoring 10b5-1
programs? Why are they favorable under these conditions?
Reviewed By: Linda Christiansen, Indiana University Southeast
Companies eager to buy back their shares following
Friday’s 391-point drop in the Dow may be forced to curb their enthusiasm—at
least for the moment.
With earnings season revving up, a big slice of
companies are in blackout periods, during which time they are customarily
limited in what they can say or do, including initiating new share
repurchases.
Therefore, many of the share buybacks taking place
are being executed through what are often known as 10b5-1 programs, which
allow corporations to buy back shares via prearranged transactions.
Plenty of companies have such programs in place.
Generally, the lower the share price of the issuing company, the more stock
the company will buy under the 10b5-1, said Robert Leonard, head of
specialty equity transactions at Citigroup Inc. That means the worse the
selloff, the more repurchases. “We are seeing an increased activity on the
desk,” said Mr. Leonard.
In a report to clients last month, Goldman Sachs
Group Inc.’s securities division projected that share buyback executions
would total $701 billion in 2015, versus $672 billion in 2014. Some of last
year’s rise in buybacks took place following the August pull back across
markets globally, Mr. Leonard said.
That doesn’t mean companies are necessarily
prescient about timing the market. The same Goldman Sachs report showed
buybacks totaling just $155 billion in 2009, the nadir of the financial
crisis. The year before the crisis, 2007, share buyback executions totaled
$760 billion.
General Motors Co. last week said it plans to boost
its current buyback program by 80% and extend it through 2017. Domino’s
Pizza Inc.’s finance chief, Jeffrey Lawrence told investors at a
presentation last week that it is “in the market executing an accelerated
share repurchase” of $600 million, which will be completed by the end of the
first quarter, according to a transcript.
The real test of whether companies see their shares
as bargains will come after fourth-quarter results are reported. “Once those
earnings releases are out, companies can go into the market to buy shares,”
Mr. Leonard said.
1. My tax papers were left in the shed and my rat ate them –
(seriously?!)
2. I’m not a paperwork-oriented person – I always relied
on my sister to complete my returns but we have now fallen out
3. My accountant has been ill
4. My dog ate my return – (didn’t work in school, won’t work now)
5. I will be abroad on deadline day with no internet access so will
be unable to file
6. My laptop broke, so did my washing machine – (believe it or not,
you do not need a functioning washing machine to file a tax return)
7. My niece had moved in – she made the house so untidy I could not
find my log-in details to complete my return online
8. My husband ran over my laptop
9. I had an argument with my wife and went to Italy for 5 years
10. I had a cold which took a long time to go
Yes, these excuses were actually used in appeals against HMRC
penalties for late returns. All 10 were declined on the basis that they
were either untrue or not good enough reasons.
- See more at: http://economia.icaew.com/news/january-2016/worst-late-tax-return-excuses#sthash.nCydW7L6.dpuf
1.
My tax papers were left in the shed and my rat ate them – (seriously?!)
2.
I’m not a paperwork-oriented person – I always relied on my sister to
complete my returns but we have now fallen out
3.
My accountant has been ill
4.
My dog ate my return – (didn’t work in school, won’t work now)
5. I
will be abroad on deadline day with no internet access so will be unable to
file
6.
My laptop broke, so did my washing machine – (believe it or not, you do not
need a functioning washing machine to file a tax return)
7.
My niece had moved in – she made the house so untidy I could not find my
log-in details to complete my return online
8.
My husband ran over my laptop
9. I
had an argument with my wife and went to Italy for 5 years
10.
I had a cold which took a long time to go
Yes,
these excuses were actually used in appeals against HMRC penalties for late
returns. All 10 were declined on the basis that they were either untrue or
not good enough reasons.
For me the entertainment value of a lottery chance
increases dramatically now that the Playboy Mansion is for sale. I wonder if it
comes "furnished?" Bob Jensen
Into a
Belfast pub comes Paddy Murphy, looking like he’d just been run over by a
train. His arm
is in a sling, his nose is broken, his face is cut and bruised and he's walking
with a limp "What happened to
you?" asks Sean, the bartender.
" Jamie O'Conner and me had a fight," says Paddy. "That little
sh*t,
O'Conner," says Sean, "he couldn't do that to you. He must have had something
in his hand." "That
he did," says Paddy, "a shovel is what he had, and
a terrible lickin' he gave me with it."
” Well," says Sean, "you should have defended yourself,didn't
you have something in your hand?" "That
I did," said Paddy."Mrs.
O'Conner's breast, and a thing ofbeauty
it was, but useless in a fight."
An
Irishman who had a little too much to drink is driving home from
the city one night and, of course his car is weaving violently all over the
road.
A cop
pulls him over. "So,"
says the cop to the driver, "where
have ya been?" " Why,
I've been to the pub of course,"slurs
the drunk.
” Well," says the cop, "it looks like you've had quitea
few to drink this evening."
"I did all
right," the drunk says with a smile. ”Did
you know," say's the cop, standing straight andfolding
his arms across his chest,"that
a few intersections back, your wife fell out of your car?"
"Oh, thanks heavens," sighs the drunk. "For a
minute there, I thought I'd gone deaf."
Brenda
O'Malley is home making dinner, as usual,when Tim
Finnegan arrives at her door.
"Brenda, may I come in?" he asks."I've somethin'
to tell ya". "Of
course you can come in, you're always welcome, Tim.But where
is my husband?”
”That's what I'm here to be telling ya, Brenda. "there was an accident down at
the Guinness brewery…" "Oh,
God no!" cries Brenda. "Please don't tell me."
"I must, Brenda. Your husband Shamusis
dead and gone.I'm sorry."
Finally, she looked up at Tim. "How
did it happen, Tim?"
"It was
terrible, Brenda. He fell into a vatof Guinness
Stoutand drowned."
"Oh
my dear Jesus! But you must tell me truth, Tim.Did
he at least go quickly?"
"Well,
Brenda... No. In fact,He
got out three times to pee.”
Mary
Clancy goes up to Father O'Grady afterhis Sunday morning
service, and she's in tears. He
says, "So what's bothering you, Mary my dear?" She
says, "Oh, Father, I've got terrible news.My
husband passed away last night." The
priest says, "Oh, Mary, that's terrible.Tell
me Mary, did he have any last requests?" She
says, "That he did, Father."
The priest
says, "What did he ask, Mary? " She
says, He said,'Please Mary,
put down that damn gun...'
************************************
AND THE BEST FOR LAST
Adrunk
staggers into a Catholic Church, enters
a confessional booth, sits down, but says nothing.
The Priest coughs a few times to get his attention
but the drunk continues to sit there.
Finally, the Priest pounds three times on the wall.
The drunk mumbles, "ain't no use knockin',there's no
paper on this side either!"
Forwarded by Paula
Arkansas Kit Joins the Marines
I was restless at first because you get to stay in bed till nearly 6 a.m. But
I am getting so I like to sleep late. Tell Walt and Elmer all you do before
breakfast is smooth your cot, and shine some things. No hogs to slop, feed to
pitch, mash to mix, wood to split, fire to lay. Practically nothing.
Men got to shave but it is not so bad, there's warm water.
Breakfast is strong on trimmings like fruit juice, cereal, eggs, bacon, etc.,
but kind of weak on chops, potatoes, ham, steak, fried eggplant, pie and other
regular food, but tell Walt and Elmer you can always sit by the two city boys
that live on coffee. Their food, plus yours, holds you until noon when you get
fed again. It's no wonder these city boys can't walk much.
We go on 'route marches,' which the platoon sergeant says are long walks to
harden us. If he thinks so, it's not my place to tell him different. A 'route
march' is about as far as to our mailbox at home. Then the city guys get sore
feet and we all ride back in trucks.
The sergeant is like a school teacher. He nags a lot. The Captain is like the
school board. Majors and colonels just ride around and frown. They don't bother
you none.
This next will kill Walt and Elmer with laughing. I keep getting medals for
shooting. I don't know why. The bulls-eye is near as big as a chipmunk head and
don't move, and it ain't shooting at you like the Higgett boys at home. All you
got to do is lie there all comfortable and hit it. You don't even load your own
cartridges. They come in boxes.
Then we have what they call hand-to-hand combat training. You get to wrestle
with them city boys. I have to be real careful though, they break real easy. It
ain't like fighting with that ole bull at home. I'm about the best they got in
this except for that Tug Jordan from over in Silver Lake . I only beat him once.
He joined up the same time as me, but I'm only 5'6' and 130 pounds and he's 6'8'
and near 300 pounds dry.
) has
reminded us that if the sample size is sufficiently large, then it's
virtually impossible not to reject almost any hypothesis.
So, if the sample is very large and the p-values associated with
the estimated coefficients in a regression model are of the order of, say,
0.10 or even 0.05, then this really bad news. Much,
much, smaller p-values are needed before we get all excited about
'statistically significant' results when the sample size is in the
thousands, or even bigger. So, the p-values reported above are
mostly pretty marginal, as far as significance is concerned. When you work
out the p-values for the other 6 models I mentioned, they range
from to 0.005 to 0.460. I've been generous in the models I selected.
