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
The Forum, mostly by Jerry Trites, and sometimes
guests, on a variety of contemporary topics related to accounting and
finance. Also contributing is Don Sheehy, CPA, an expert in advanced
technology related assurance issues,
http://thinktwenty20.com/index.php/blog-issues-forum
Issues in Standard Setting by various
members of the Standards Setting group of CPA underlying Canada (first entry
to be in August), and by David Hardidge, an expert on International
Accounting Standards from Brisbane Australia focusing on explorations of the
issues underlying contemporary accounting standards setting,
http://thinktwenty20.com/index.php/home2-category/67-features/162-standards-roundup
Hey, What’s New by Gundi Jeffrey, focusing
on a random collection of news items she selects that should be interesting
to accountants.
http://thinktwenty20.com/index.php/news
So let's say in the near future Apple includes the following simple ESG
statement in their 10K:
The Apple Siri server farm in Iceland used XXX kilowatts of power last year.
The Iceland Power Company (IPC) power station that provides power to the
server farm uses only geothermal energy. As such, our carbon footprint is
YYY tons. That carbon footprint is completely offset by 10 acres of trees
we planted and maintain in the Amazon jungle. Hence, our Iceland server
farm as a zero net carbon footprint.
Let's audit the simple statement.
EY (Apples auditors) contacts the Reykjavík Iceland office and asks them to
send a confirmation letter to IPC to confirm the number of kilowatts used by
Apple and to confirm that 100% of the generating power is provided by
geothermal energy.
In the meantime, the EY auditors in San Jose would conduct the appropriate
research (maybe contact experts) to determine what is the carbon footprint
for a geothermal electric generating plant per kilowatt hour of output.
EY contacts there Lima Peru office and asked them to make a visual
confirmation of the 10 acres of trees and to check appropriate municipal
records to verify that Apple actually owns those 10 acres.
In the meantime, the EY auditors would contact some expert at nearby
Berkeley and ask: how much carbon could 10 acres of trees absorb? The expert
might say: Well, the short answer is only God knows. The expert would go on
to say, there are so many factors that it would require an extensive and
complex study to determine how much carbon a specific 10 acres of trees
would absorb over a specific year. We would need to know: the types of
trees, the maturity of the trees, the hours of sunlight that specific year,
the inches of rain that year, the percentage of nitrogen and other nutrients
in the soil, and how dense is the forest. You can't just count the number of
trees and multiply that number by the amount of carbon one tree could
absorb. If the forest is dense, then only the canopy gets full sun and
everything below the canopy is gets filtered sun to varying degrees. So,
instead of doing their own independent test, the EY auditors might obtain
detailed information from Apple as to how they calculated carbon absorption
for their 10 acres and forward that information to the EY expert and asked
the expert to determine the reasonableness of Apple's own calculations.
In the meantime, EY got the confirmation back from IPC who confirmed that
the Apple server farm did use XXX kilowatts last year. However, the power
plant did not use geothermal energy 100% of the time. There is five days of
scheduled maintenance every quarter and there are a few days each year of
unscheduled downtime. During those days, IPC uses diesel generators (with
ugly carbon footprints) to provide electricity to Apple. Material or not
material?
In the meantime, EY, San Jose, hears back from EY, Lima, that Apple doesn't
actually own the land it's renting from my land owner, there's a small
farmhouse and garage on the 10 acres, and the land is irrigated by water
pumps during part of the year and the water pumps are powered by diesel
generators (with ugly carbon footprints). Material or not material?
Closing comment: over the last few years, I have listened to accounting
professors talk about how they are teaching data analytics and using tools
such as Microsoft power BIA, Tableau, etc. If you asked the presenter how
many other accounting professors at your university are incorporating data
analytics into their classes? Sadly, the most common answer is zero. So,
what do you think the results are going to be when accounting professors are
encouraged to include ESG material in their classes?
As long as I can remember (since 1981), accounting professors have been
telling accounting firm to use more technology (AI, big data, data
analytics, etc.) in auditing, however, the more technology they use, the
more non-accounting types the firms hire. That’s partly because accounting
professors do an inadequate job of teaching the technology we recommend to
the firms. The EGS trend may end up being very similar.
Glen L. Gray, PhD, CPA
Professor Emeritus
Dept. of Accounting & Information Systems
David Nazarian College of Business & Economics
California State University, Northridge
18111 Nordhoff ST
Northridge, CA 91330-8372
818.677.2461 (Dept. Office) http://www.csun.edu/~vcact00f
Tenure-track faculty play a special role in society: they train future
researchers, and they produce much of the scholarship that drives
scientific, technological, and social innovation. However, the professoriate
has never been demographically representative of the general population it
serves. For example in the United States, Black and Hispanic scholars are
underrepresented across the tenure-track, and while women's representation
has increased over time, they remain a minority in many academic fields.
Here we investigate the representativeness of faculty childhood
socioeconomic status and whether it may implicitly limit e orts to diversify
the professoriate in terms of race, gender, and geography. Using a survey of
7218 professors in PhD-granting departments in the United States across
eight disciplines in STEM, social sciences, and the humanities, we find that
the estimated median childhood household income among faculty is 23.7%
higher than the general public, and aculty are 25 times more likely to have
a parent with a PhD. Moreover, the proportion of faculty with PhD parents
nearly doubles at more prestigious universities and is stable across the
past 50years. Our results suggest that the professoriate is, and has
remained, accessible mainly to the socioeconomically privileged. This lack
of socioeconomic diversity is likely to deeply shape the type of scholarship
and scholars that faculty produce and train
Jensen Comment
One barrier in some ways is in some ways good news in my field (accounting).
There's a huge shortage of minorities in accounting firms. As a result top
minorities in these firms are often given relatively high salaries and other
incentives to stay in the firms or change firms relative to white counterparts
who are sometimes tempted to sidetrack into Ph.D. studies and faculty careers.
In other words, the competition
is very keen to tempt a top minority candidate (think African Americans or
native Americans) into accountancy Ph.D. programs. In my opinion this is
probably happening in other disciplines like computer science and engineering.
There are quite a few Asians in our accounting Ph.D. programs, but these are
often quants imported from other nations.
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Jensen Comment
For financial auditors valuation matters greatly if items being valued are
fungible or not. Non-fungible items (like site value of land) are hard to value
because of thin markets relative to valuation of replaceable inventory having
deep markets.
Jensen Comment
There are a lot of tools and tricks of the trade. I think I'd pass on using
music to teach basic accounting. It's better to put students on laptops and use
narrated Camtasia illustrations of how accounting rules and traditions work.
Researchers make hundreds of decisions about
data collection, preparation, and analysis in their research. We use a
many‐analysts approach to measure the extent and impact of these decisions.
Two published causal empirical results are replicated by seven replicators
each. We find large differences in data preparation and analysis decisions,
many of which would not likely be reported in a publication. No two
replicators reported the same sample size. Statistical significance varied
across replications, and for one of the studies the effect's sign varied as
well. The standard deviation of estimates across replications was 3–4 times
the mean reported standard error.
Jensen Comment
Accounting researchers rarely discover such problems because those researchers
rarely replicate the works of one another.
I just read A White Collar Profession: African American certified public accountants since 1921 by Theresa A. Hammond (University of North Carolina Press, 2002)
It includes a list of the first 100 African-American CPAs. Mary T. Washington was #13.
I recommend it to all accounting academics.
Barbara W. Scofield, PhD, CPA
Professor of Accountancy
Washburn University -- HC 311L
Topeka, KS 66621
785-670-1804 (office)
785-217-8877 (cell)
barbara.scofield@washburn.edu
BarbaraWScofield@gmail.com
Partnership on average remains
overwhelmingly male, with women representing only 22% of
partners in CPA firms.
Smaller firms continue to have
higher percentages of women partners than average.
A growing percentage of women
are serving as directors or non-equity partners.
Only 47% of all firms have a
formal succession planning process, and only 2% include a formal
gender component in their plans.
A total of 89% of the firms
surveyed had one or more types of modified work arrangement .
and a large majority of firms believe they are worthwhile.
Flexible work hours are the
most popular program, followed by reduced hours and
telecommuting.
Substantially more women use
modified work arrangements at the non-equity partner level.
Mentoring is the most popular advancement program among firms,
used by 45% of firms, while sponsorship is substantially behind,
used by only 12%.
Firms that used advancement
programs strongly believed that they achieved their goals.
The vast majority of
firms that have implemented diversity initiatives found them to
be successful . Gender initiatives were the most common,
followed by combined diversity and inclusion efforts and then
minority initiatives.
Jensen Comment
The article is not clear about how much there's a mixing of
international versus national statistics for the large Big Four
firms that are now all headquartered outside the USA except for
Deloitte ---
https://en.wikipedia.org/wiki/Big_Four_accounting_firms
One would not expect that women do much better
outside the USA in large accounting firms. Even in the most
progressive nations such as those in Scandinavia the proportion of
women in business executive suites is abysmal --- not what one would
expect in progressive nations.
I'm no expert on reasons for the lag in gender
equality in the executive suites. It would appear that the
initiatives to hire women in multinational CPA firms has been far
more successful than initiatives for gender equality in equity
partnerships. More than half the entry-level hires are now women
whereas less than 25% equity partners are women.
I'm not sure what happened or is still happening
with the huge gender discrimination suit by KMPG women.
PwC is lagging its big four
accounting and advisory rivals when it comes to the proportion
of female equity partners at the firm in spite of a range of
strategies designed to get more women to the top.
The percentage of female equity
partners at PwC has not improved during the past three years
while it has increased year-on-year at rival big four accounting
and advisory firms Deloitte, KPMG and EY, according to data from
the Workplace Gender Equality Agency (WGEA).
Overall, the percentage of
equity female partners is highest at Deloitte, at 24 per cent,
around 20 per cent at KPMG and EY, and at 17 per cent at PwC,
based on data supplied by the firms to WGEA as of March 31.
PwC says it has increased the
level of women being promoted to partner and made other moves to
address the gender imbalance and said there is a time lag for
these to kick into effect.
Continued in article
December 2, 2017 reply from Dennis Beresford
Bob,
I've been reading EY's excellent 2017 quality report. It
contains a large number of metrics, including several relating
to the diversity of the US audit practice. (I haven't looked at
reports for the other Big 4 firms yet but I suspect they have
similar information.)
EY reports that 24% of its audit partners are female in fiscal
2017, the same as the year before but up one percentage point
from fiscal 2015. But the numbers get more interesting at other
levels. 52% of EY's "Executive Directors," 43% of senior
managers and managers, and 47% of seniors and staff are female.
Overall, 44% of the firm's US audit professionals are female and
43% of new partners this past year were female or minorities.
And 44% of campus hires were female in the latest year - nearly
30% were minorities.
Clearly, the pipeline is being filled and the major firms like
EY are doing a pretty good job of developing outstanding talent
whatever its gender or ethnicity.
1.For
more on the possible use of licensing as a way for incumbent providers to
generate monopoly rents, see Friedman (1962)
and Meehan and Benson (2015).
2.Consider a simple example. Suppose initially there are ten candidates
for the CPA exam, six of whom pass, two who do not pass but come close, and
two who do not pass and do not come close to passing. The pass rate is 60%.
Now suppose the additional educational requirement is added and the two
people who think they are unlikely to pass the exam decide not to obtain the
additional 30 h of education. In this case, the pass rate would increase to
75% even if the eight people who still take the exam are no better prepared
for it after obtaining the additional 30 h of schooling.
3.These
data were collected from state-level statute and administrative codes, Jacob
and Murray (2006),
as well as from National Association of State Boards of Accountancy (NASBA)
(2008)
and Wisconsin Institute of Certified Public Accountants (WICPA) (2017).
4.The
dependent variable is specified in natural log form in order to obtain
estimated coefficients that can be interpreted as percentage changes.
5.States
the reduced their requirement from 150/150 to 120/150 before 2006 are:
Georgia, Hawaii, Iowa, Idaho, Montana, North Carolina, New Jersey,
Pennsylvania, Rohde Island, and South Carolina. See Jacob and Murray (2006)
for additional details.
6.States
that have a 150/150 requirement throughout the data period are: Alabama,
Arkansas, Illinois, Indiana, Kansas, Louisiana, Missouri, Mississippi, North
Dakota, Nebraska, Nevada, Ohio, Oklahoma, Oregon, South Dakota, Tennessee,
Texas, Utah, Washington, and Wyoming. See Tables 11 and 12 in
Appendix 1 for full list of states included in estimating Tables 4 and 5 results.
7.Another
issue with using the number of accounting degrees granted in year t as a
control for the number of candidates sitting in year t is that many
candidates do not sit for the CPA exam in their year of college graduation.
Soileau et al. (2017)
report the mean age of candidates for their dataset was 29.45.
8.Although the theoretical basis for including Xit in
(3)
or (4)
is weak, we estimated the models with Xit included.
The results were nearly identical to those reported below and are available
upon request.
9.These
pass rate synthetic control results for every treated state are omitted here
for brevity, but are available by request from the authors.
10.The estimation using multiple treated units was done using the
synth_runner package (Galiani and Quistorff 2017),
which advances on the single treated until setup to estimate effects for
multiple treated units within the same estimation procedure.
11.The
estimation was performed for New York and California, but optimization
procedures did not produce synthetic results for these states.
12.The same is true of Virginia; those results
appear in the appendix.
13. Abadie et al. (2010)
suggest using placebo units with pre-treatment RMSPE’s anywhere from 2 to 10
times the treated unit. We elect to use pre-treatment RMSPE’s at or below
Florida and New Hampshire’s. When we use even the 2x threshold, the sample
of placebos does not change for New Hampshire. These limited RMSPE placebo
results are available upon request for treatments contained in the appendix.
14.The authors searched the NASBA website that contained the New
Hampshire pre-policy-change announcement but could not find a similar
document for Delaware.
15.These results are available on request from the authors.
March 3, 2021 reply from Tom Selling
Thanks for sending this around. I have now read the portion that is
publicly available. Without challenging the findings in any way, I want to
call attention to a subtlety that the authors of the study may have
overlooked: the level of competence of CPA exam takers actually affects the
level of difficulty of the exam questions over time. If competency levels
decrease, the questions on the CPA exam will, by design, become easier.
Therefore, it may not be possible to determine the effect of a reduction in
required hours on CPA competency.
I’m not sure if this phenomenon is well-known. I only learned it from
serving on the financial accounting subcommittee of the AICPA’s exam team.
Two of the things we did was to screen questions before they are tested; and
based on the results of testing, to decide whether to add the question to
the inventory.
When someone takes the CPA exam, the candidate is presented with two sets of
MCQs: test questions, and actual questions. Of course, the candidate has
no idea which is which. Part of the criteria for a test question to go live
is the distribution of responses. But, the critical metric of a
question’s acceptability is the correlation of responses for that question
to the scores of the candidates on the other questions. Basically, a
question with a high positive correlation is a good question. For example,
a question about derivative financial instruments could be very difficult,
and very relevant, but if there is not a very high positive correlation, the
question is rejected. This will automatically occur, no matter how
important as an indicator of professional competency, or indicator of
overall intelligence, or well-constructed the question might be. During my
time, it was difficult, if not impossible to add questions about derivative
financial instruments to the CPA exam that were anything more than extremely
rudimentary.
There is some merit to this approach, but it could also work to dumb down
the exam. Specifically, if 120 hours becomes ubiquitous, and that
actually reduces candidate competency, you might not be able to detect that
from exam scores – because of built-in mechanisms to dumb down the exam.
Tom
Video:
Scenarios of Higher Education for Year 2020 (and beyond)---
http://www.youtube.com/watch?v=5gU3FjxY2uQ
The above great video, among other things, discusses how "badges" of academic
education and training accomplishment may become more important in the job
market than tradition transcript credits awarded by colleges. Universities may
teach the courses (such as free MOOCs) whereas private sector companies may
award the "badges" or "credits" or "certificates." The new term for such awards
is a
"microcredential."
Credential (Certificate,
Badge, License, and Apprenticeship) Count Approaches 1 Million ---
Click Here
For example, credentials for computer programming skills are becoming more
popular. Some certificates supplement college diplomas, whereas others are
earned by students who did not enroll in college.
The Academic Resource Hub is a database of hand-curated content from the
AICPA, accounting firms, academics and winning submissions from the AICPA's
teaching awards designed to help accounting educators prepare students for
the rapidly-evolving demands of the profession.
Signing up for the ARH will give you access to resources related to topics
like data analytics, cybersecurity and much more. Our resources cover a wide
range of class levels and will help you easily incorporate new ideas into
your syllabus.
This resource is *intended for accounting educators and professionals for
use in academic instruction, research or guidance and requires
registration as an accounting educator or professional on
ThisWaytoCPA.com to access.
Accounting history, as the history of accounting
and the consideration of accounting in history, provides insight into an
understanding of accounting in the past, for the present, and into the
future. Whist often viewed as a routine, rule driven practice, the
accounting history discipline recognises accounting as having a much wider
pervasiveness as social practice and even moral practice. As social practice
accounting affects individual, organisational and societal behaviour. This
collection of articles demonstrates the importance of looking at history to
provide context and illustrates that understandings of the past lead to
comprehension of the present and foresight for the future. The articles in
this special issue, international in essence, epitomise the diversity of the
accounting history field in exploring accounting in diverse organisations,
in investigating accounting in its wider context and in employing different
theoretical approaches. In considering the accounting phenomenon that
occurred, there is additionally the insight of that which did not occur, the
relevance of past events and non-events as an ingredient to better
understanding the present and to potentially reshaping the future.
Mount Holyoke College pulls rug out from under faculty parents in announcing
closure of its campus childcare center ---
Click Here
Usually the argument against a campus childcare center focuses on liability
risk/cost. The reasons in the above article focus on things other than
liability. I find the "place to park offspring" argument distasteful. However,
the liability issue has always been worrisome for colleges. Often daycare
operators operate at the extremes of pocket size. Some (like family homes) have
small pockets that frustrate attorneys seeking to sue; Some have deep pockets
such as when the State of Vermont provides day care centers for all eligible
children, thereby passing the liability risk on to taxpayers. However, the K-12
schools in all states have liability risks such that taxpayers cannot avoid such
risks for older children.
Update: Under pressure, Mount Holyoke delayed closure of the campus
childcare center for one year.
Long-term care
has been a troubled insurance product for well over a decade, causing
financial pain to many insurers and their customers. Now, one executive’s
plan to make money where others have failed has backfired.
Serious pricing
mistakes loomed from the start. For policyholders, this has meant double-
and even triple-digit premium-rate increases over the years. Insurers have
collectively taken tens of billions of dollars of charges against earnings
as they bolstered their reserves.
The
difficult situation in long-term care provided an opening five years ago for
Philip Falcone, a former hedge-fund manager looking for redemption. Mr.
Falcone had admitted wrongdoing in 2013 for borrowing
$113 million from his hedge fund to pay his taxes,
even as investors weren’t allowed to withdraw their money. He agreed to an
$18 million civil settlement with the Securities and Exchange Commission
that included a five-year ban from the securities industry.
In 2015, Mr.
Falcone started his long-term-care plan.
Over the next
couple of years, the diversified conglomerate he was running obtained
regulatory approvals to acquire two small insurance carriers that were no
longer selling the insurance but had policies being wound down. Tied to the
acquisitions, insurance departments in at least three states—Florida, Ohio
and South Carolina—restricted Mr. Falcone from involvement in day-to-day
operations.
Today, Mr.
Falcone has left the conglomerate. A former regulator he hired to run the
conglomerate’s insurance operation was fired and has filed a federal
whistleblower complaint against the company. And the conglomerate is in
talks to sell the insurance operation, known as Continental Insurance Group
Ltd.
Mr. Falcone
declined to comment for this article.
State
regulators, meanwhile, are still trying to figure out how to stabilize the
struggling long-term-care insurance industry.
Mr. Falcone,
then chairman and chief executive of HC2 Holdings Inc., was well known when
he entered the long-term-care insurance industry. A Harvard University
ice-hockey standout from Minnesota, he had shot from relative obscurity
running Harbinger Capital Partners to riches and stardom after successful
bets in 2007 against the U.S. housing market.
In turning to
insurance in the wake of the SEC settlement, he aimed to turn the newly
acquired carriers into a cost-efficient platform for acquiring additional
closed blocks of long-term-care policies to run off. Along the way, HC2
would earn investment-management fees for the conglomerate, he told HC2
shareholders.
Mr. Falcone
hired James Corcoran, New York state’s top insurance regulator in the 1980s,
to run Continental.
Continued in article
Jensen Comment
The biggest problem is inflation in long-term health care costs, especially the
costs of liability and malpractice insurance added to tougher regulations on
quality of care. One thing I've never seen mentioned in the major media (think
the NYT, Washington Post, CBS, NBC, and ABC) is what raising the minimum wage to
$15 per hour will do the the cost of long-term care, especially the cost for
cleaners and kitchen helpers in nursing homes. Raising the minimum wage so
dramatically will especially hit states covering Medicaid costs.
Medicare insurance does not cover long-term care needs. Medicaid does cover
those needs but is restricted to poor people eligible for Medicaid. Meanwhile
the biggest headache of all 50 states annual budgeting has become the rise in
the cost of Medicaid coverage, particularly coverage of long-term care needs.
There's a great deal of fraud where heirs manage to drain off the assets of an
aging parent to make that parent eligible for Medicaid. There are unfortunate
legal means for draining off those assets with careful planning. I don't know of
a single nation that provides free long-term nursing care without trying to get
something out of patients' assets before long-term care turns free.
Some nations are better than others at minimizing the cost of long-term
nursing care. Some do it with lower quality for the poor in nursing homes, which
is what happens often for patients on Medicaid in the USA. Canada tries to get
relatives of older people to provide much of the care with the so-called mobile
"granny cottages" that are sometimes financed by Canada's health care insurance.
This, however, is not usually a solution when the patients must remain in bed or
otherwise looked after 24/7.
Some nations transport nursing care patients across borders. For example,
Germany notoriously ships many nursing home patients to Poland, and Poland
accepts them as long as the German government pays the fees. In other cases, the
nursing care in Germany is staffed by lower-cost foreign labor ---
https://brownpoliticalreview.org/2018/11/nursing-german-economy/
The largely foreign-staffed (Germany) nursing
industry has recently become the target of Kindergeld-related anger. Many
Eastern European nurses come to Germany alone, leaving families and children
behind. Even though these children may not reside within the German state,
their German-employed parents still receive Kindergeld on their behalf.
Critics argue that when these payments are shipped to Poland, Romania, or
Croatia, where the cost of living is lower, they take on a
disproportionately high value compared to their value in wealthy Germany.
This is an issue of equity, critics say—these payments privilege the
children of foreign Pflegekräfte at the cost of domestic German youth.
EY: SEC adopts interim final rules for foreign companies in jurisdictions
that don’t allow PCAOB inspections
The SEC adopted interim rule amendments to
implement submission and disclosure requirements for companies whose
financial statements are audited by registered public accounting firms in
foreign jurisdictions that don’t allow inspections by the PCAOB, as mandated
by the Holding Foreign Companies Accountable Act (HFCA Act).
The SEC is also seeking public comment on how it
should identify registrants that will be subject to the requirements and
other aspects of the rule amendments.
The amendments require registrants identified by
the SEC to submit documentation establishing that they are not owned or
controlled by a governmental entity in the foreign jurisdiction, among other
things.
The interim rule amendments will become effective,
and public comments are due, 30 days after publication in the Federal
Register.
EY:
Reminders about calculating the expected volatility used to value share-based
payment awards
Stock price
volatility related to the COVID-19 pandemic has raised questions about how
periods of extraordinary share-price volatility affect assumptions entities
use in measuring share-based payment awards.
Expected
volatility is a key assumption used to calculate the fair value of stock
options issued as compensation under ASC 718, Compensation – Stock
Compensation. To estimate expected volatility, entities consider the
historical realized volatility for their shares over time or the implied
volatility of their traded options, or both.
Historical
realized volatility, which is often the starting point in estimating
expected volatility, is typically calculated based on historical share
prices over the expected or contractual term of an option issued as an
award. ASC 718 says an entity may disregard a period of extraordinary
volatility if (1) the volatility resulted from an event or transaction that
was specific to the entity (e.g., a large merger or spin-off) and (2) the
event or transaction is not reasonably expected to occur again during the
estimated or contractual term of the option. Volatility of the overall stock
market (e.g., during the COVID-19 pandemic) is not entity-specific and
should not be excluded from the calculation of historical realized
volatility.
Implied
volatility can be useful in estimating expected volatility because it is a
forward-looking measure that reflects market participants’ expectations over
the term of the traded options. Therefore, entities that can observe
reliable trading of options on their shares often consider both the implied
and historical realized volatilities when developing an estimate of expected
volatility. Determining the appropriate weighting and the length of the
lookback period for historical volatility involves judgment. While ASC 718
does not preclude an entity from changing assumptions if circumstances
change or if a refinement of the methodology used to develop the assumptions
is warranted, changes should only be made if they provide a better estimate
of fair value. In other words, an entity should not change how it calculates
expected volatility or the assumptions it uses to lessen the effects of
short-term market fluctuations unless doing so will result in a better
estimate of expected volatility.
From the CFO Journal's Morning Ledger on March 31, 2021
Grant
Thornton:
CFOs Plan to Cut Spending on Travel, Real
Estate
Some finance chiefs plan to cut spending
on travel and real estate in 2021 and beyond, according to a
survey released Tuesday by Grant Thornton LLP, a
professional services firm.
Thirty-one percent of respondents said
they expect to reduce budgets for real estate and other
facilities over the next year, while 32% plan to make
permanent changes to their company’s real-estate holdings.
Forty-five percent of finance executives said they would
look to reduce travel expenses over the next year, and 41%
said they want to permanently lower travel costs, Grant
Thornton said.
The company in February surveyed 250
finance chiefs and other executives at companies with more
than $100 million in annual revenue.
From the CFO Journal's Morning Ledger on March 24, 2021
Blockchain.com,
a London-based firm that provides a variety of cryptocurrency services to
retail and institutional clients,raised
$300 millionin
a deal that highlights venture capital’s growing willingness to jump back
into the bitcoin frenzy.
From the CFO Journal's Morning Ledger on March 23, 2021
The
Financial Accounting Standards Board is expected
to discussdisclosure
related to supply-chain financing at a board meeting in the coming months, a
spokeswoman said. The accounting standard-setter launched a project to
explore the topic but hasn't issued a proposal yet.
From the CFO Journal's Morning Ledger on March 23, 2021
Market disruptions caused by the pandemic and
near-zero interest rates have made it harder for companies to manage their
pension obligations, especially plans sponsored by a single employer. Low
interest rates contribute to higher liabilities, increasing the amount of
funding that companies need to set aside for pension obligations.
Single-employer plans often promise to pay out
fixed sums to retirees, sometimes over several decades, similar to other
defined-benefit plans. More than 20,000 U.S. companies offer these
single-employer plans, according to consulting firm Mercer LLC.
The $1.9 trillion aid package that President
Biden signed into law earlier this month helps sponsors of single-employer
plans hold on to cash and delay paying off any deficit in their plan over a
15-year period versus the current seven-year period. It also set aside about
$86 billion for struggling multiemployer pensions, which are jointly run by
unions and companies.
From the CFO Journal's Morning Ledger on March 19, 2021
Good morning. Investors
arepiling
intoa long-neglected sector:
old-school car makers that are reinventing themselves as electric-vehicle
producers.
After years lamenting that their shares were
undervalued, FordMotor Co., General
Motors Co., Volkswagen AG and other blue-chip car
manufacturers are experiencing sharp share-price gains this year as they
embrace the new technology.
Ford is up 42% so far this year, while GM’s
shares have also surged 42%. VW’s stock is up 46% and even briefly rose 29%
in intraday trading one day this week when the company held a “Power Day”
event, saying it would build six EV battery factories in Europe alone over
the next 10 years. VW has this week also pushed ahead of SAP SE to become
the most valuable stock on the German DAX index. By comparison, the S&P 500
index is up just 4.2% so far this year.
The new infatuation with established auto
makers, many of which have been in business for more than a century, follows
an earlier rush into electric-vehicle stocks that has driven shares of Tesla Inc.
and other electric-vehicle and battery manufacturers into territory that
some analysts say is reminiscent of the dot-com bubble of the 1990s.
From the CFO Journal's Morning Ledger on March 18, 2021
The U.S.’s economic
prospects look brighter than those of many other countries—and that has
driven an
unexpected dollar rally this year. Investors
thought the greenback would weaken during a coordinated global rebound from
Covid-19 lockdowns. Instead, the U.S. stands apart from the rest. The flip
side of this exceptionalism is a growing fear of higher inflation that could
eventually reverse the dollar’s fortunes, according to some investors.
Jensen Comment
It is not that the USA economy is so outstanding as much as it is that the
competition is so messed up.
What are some of the ways to avoid this tax while still giving executives
outrageous compensation?
From the CFO Journal's Morning Ledger on March 18, 2021
Sen. Bernie Sanders introduced legislation that would seek to apply anadditional
tax on corporationswhere
the chief executive officer is paid more than 50 times the median worker.
Jesen Comment
There are two ways to equalize income of all workers in the economy. One is to
raise the bottom; The other is to lower the top. So often Bernie contemplates
taxes that are punishments to companies and individuals rather than serious
taxes to raise government revenue. Cuba discovered that equalizing incomes of
all workers was dysfunctional and recently abandoned the great Cuban experiment
---
From the CFO Journal's Morning Ledger on March 18, 2021
Starbucks Corp.
shareholdersrejected the
coffee company’s executive compensation proposal, a rare rebuke to a major
U.S. company.
From the CFO Journal's Morning Ledger on March 17, 2021
Good
morning. U.S.
retailers and manufacturers slumped in February due to winter storms and
supply-chain disruptions, but a broader economic rebound appears poised to
accelerate this spring because of the easing pandemic and another round of
government stimulus.
Retail sales fell
by 3%in
February compared with the prior month, the Commerce Department said
Tuesday. The decline followed robust January sales that were propelled by
stimulus payments to households from the December pandemic-relief package.
January sales advanced a revised 7.6%, up from the earlier estimate of a
5.3% increase.
Severe winter weather wreaked havoc across a large swath of the U.S.,
affecting retail shopping and manufacturing output last month. The Federal
Reserve separately said industrial production fell a seasonally adjusted
2.2% in February compared with January.
February is typically a quiet month for retail sales, as stores gear up for
the spring selling season, including Easter. Economists expect spending to
accelerate as additional government stimulus is distributed and Covid-19
vaccinations lead to a corresponding decline in cases.
From the CFO Journal's Morning Ledger on March 16, 2021
Good
morning. Investors
arescooping
up low-rated
corporate loans, fueling a rally that is lowering borrowing costs for highly
indebted companies.
Investors poured
more than $8 billion into funds of so-called leveraged loans in January and
February, according to Lipper data from Refinitiv—the
most in more than two years and a notable reversal from more than $26
billion in net outflows last year. That has helped boost loan prices to
around their highest levels since November 2018, beating returns on
corporate bonds and Treasurys.
Companies issuing
new loans, including web-hosting firm GoDaddy Inc.
and racetrack operator Churchill
Downs Inc., are taking advantage of the demand, raising a
record of $110 billion during the first two months of the year. Other
borrowers, such as consulting firm AlixPartners LLP
and software company Kofax Inc.,
have pursued more opportunistic loan deals intended to pay a dividend to
shareholders.
Loans generally
don’t prohibit borrowers from paying back debt more quickly than expected,
allowing them to take advantage of investor demand to refinance debt—a move
that can limit investors’ returns. Around 60% of the $110 billion of loans
sold during January and February have been used to refinance or reprice
existing debt.
From the CFO Journal's Morning Ledger on March 12, 2021
Tesla Inc.’s
grip on critical markets is showing early
signs of slipping as
established auto makers push rival models in their race to catch up to Elon
Musk’s vision for an electric-car future.
In the U.S., Ford
Motor Co.’s electric sport-utility vehicle, the Mustang
Mach-E, has begun eating into Tesla’s market share, according to new market
data, while in Europe, the world’s largest electric-car market, Volkswagen AG
beat Tesla to become the top-selling all-electric vehicle maker there last
year.
Jensen Comment
Established automakers have an advantage of thousands of dealerships around the
world, Telsa still has a better grip on battery manufacturing. All
battery-operated car manufacturers are subject to risk that battery alternatives
will give way to greener technology, particularly hydrogen cars, trucks, and
trains. Germany already has at least one hydrogen train. Most nations also
suffer from dependence upon a few countries (think China, Chile, and Zimbabwe)
for lithium and other rare-earth minerals needed for vehicle batteries.
From the CFO Journal's Morning Ledger on March 9, 2021
PwC Chairman Signs Open Letter Supporting
EU Corporate Governance Proposals
A European legislative push to strengthen
corporate governance gained the support of PricewaterhouseCoopers LLP’s
global chairman and a handful of corporate executives.
PwC Global Chairman Bob Moritz and Paul
Polman, the former chief executive of Unilever PLC,
along with more than 90 academics signed an open letter that
expresses support for a proposal by the European Commission
to draft legislation requiring board oversight of corporate
sustainability goals and initiatives.
“Sustainable corporate governance can
become integral to post-Covid economic recovery, not just in
Europe but around the world,” the letter said.
The EU in
late 2019 pledged
to eliminate net greenhouse-gas emissions by 2050, and also
established alegal
frameworkfor
determining what qualifies as a green investment. Requiring
board-level due diligence of sustainability programs is
critical to achieving the EU’s environmental targets, the
letter said.
From the CFO Journal's Morning Ledger on March 6, 2021
Good
morning. U.S.
public companies last year wrote down thelargest
amount of goodwillin
more than a decade as the value of certain assets declined during the
Covid-19 pandemic.
Economic recessions
historically lead to an increase in goodwill impairments. Most recently,
business across many industries slowed during the pandemic. When a public
company records an impairment charge on its balance sheets, it tells
investors that a transaction didn’t go as well as expected.
Total impairments
for 2020 will likely fall short of 2008, in part due to Federal Reserve and
U.S. government efforts to boost the economy, said Carla Nunes, a managing
director at valuation firm Duff
& Phelps LLP. Impairment levels in 2021 will depend on the
speed of the economic recovery and other factors, such as vaccination rates,
she said.
Rules governing
companies’ goodwill reporting could change as the U.S. accounting
standards-setter considers requiring companies to write down a set portion
of goodwill each year, as they did before 2001. So-called amortization could
lead companies to impair goodwill less frequently and in much smaller
amounts, said Feng Gu, professor of accounting and law at the State
University of New York at Buffalo. The charges could largely vanish,
depriving investors of a useful metric, he said.
From the CFO Journal's Morning Ledger on March 3, 2021
Microsoft Corp.
said a Chinese hacking group thought to have government backing is targeting
previouslyunknown
security flawsin
an email product used by businesses.
From the CFO Journal's Morning Ledger on March 1, 2021
Discussions about the future of work, such as
whether to reduce the salaries of employees who have left high-cost cities,
are priority items in board meetings and senior executive sessions across
industries, according to chief executives, board members and corporate
advisers. Companies say there is much at stake, from the happiness and
productivity of employees to regulatory consequences, if they get these
decisions wrong.
Companies such as payments firm Stripe Inc.
have offered employees leaving San Francisco, New York or Seattle the chance
to relocate for a one-time bonus of $20,000 if they agree to a salary cut of
up to 10%. Others, such as Microsoft Corp.,
have indicated that benefits and pay may change based on the company’s
compensation scale by location. A number of Fortune 500 companies across
industries are considering potential pay changes if an employee relocates
from a city like San Francisco to Texas, says Jimmy Etheredge, chief
executive of North America at the consulting firm Accenture PLC.
The prolonged remote spell is putting pressure
on companies to give parents more help with child care—while being careful
not to rankle workers without dependents. Some companies have offered Covid-related
stipends that workers can use for anything from child care to workout
equipment.
Street vs. GAAP: Which Effective Tax Rate Is More Informative?
This
study investigates how sophisticated market participants use tax-based
information by examining whether analysts’ street effective tax rates (ETRs) are
informative. When assessing firm performance, analysts exclude items they
believe do not reflect current performance, resulting in “street” metrics such
as street ETR. However, evidence on the properties of the components of street
earnings is limited. Examining the informativeness of street ETRs is important
because taxes are a significant component of earnings, and the extent to which
analysts understand and incorporate taxes into their analyses is not clear.
Using a hand-collected sample of analyst reports, we find that while
approximately 35 percent of street ETRs have at least one tax-specific
exclusion, over 90 percent reflect the tax effects of pre-tax exclusions.
Further, both tax-specific exclusions and the tax effects of pre-tax exclusions
significantly contribute to differences between GAAP and street ETRs. Consistent
with analysts understanding the implications of tax and non-tax exclusions, our
results suggest that street tax metrics exhibit greater predictive ability about
future tax outcomes and provide more information to investors than GAAP tax
metrics. We also find that ETR exclusions are of higher quality when the
magnitude of the potentially excluded item is greater and when managers disclose
pro forma earnings. Collectively, our findings suggest that analysts understand
taxes, but selectively exert effort to incorporate tax-based information into
their assessment of firm performance. Our study should be informative to
regulators and users of financial information because it provides evidence
regarding the usefulness of street earnings metrics.
Keywords: non-GAAP
reporting, street earnings, accounting for
income taxes, effective tax rates, analysts, taxes
Suggested Citation:
Beardsley, Erik and Mayberry, Michael and McGuire, Sean T., Street vs. GAAP:
Which Effective Tax Rate Is More Informative? (September 16, 2020). Contemporary
Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3748522
The Local Spillover Effect of Corporate Accounting Misconduct:
Evidence from City Crime Rates
Indiana University - Kelley School of Business - Department of Accounting
There
are 3 versions of this paper
Date Written: October 23, 2020
Abstract
This
study documents a spillover effect of accounting fraud
by showing that after the revelation of accounting misconduct,
there is an increase in financially motivated neighborhood crime (robberies,
thefts, etc.) in the cities where these misconduct firms are located. We find
that more visible accounting frauds
(e.g., greater media attention and larger stock price declines) are more
strongly associated with a future increase in financially motivated neighborhood
crime. We also find that the association between fraud revelation and increased
future financially motivated crime is strongest when local job markets are
shallower and where local income inequality is high, consistent with adverse
shocks from fraud putting pressure on local communities. Combined, our study
provides evidence that the societal ramifications of corporate accounting misconduct
extend beyond adversely impacting a firm’s capital providers and industry peers
to negatively influence the daily life of the residents in the firm’s local
community.
Keywords:accounting misconduct,
real effects, crime rate, corporate spillover, income inequality, accounting fraud
Suggested Citation:
Holzman, Eric and Miller, Brian P. and Williams, Brian, The Local Spillover
Effect of Corporate Accounting Misconduct: Evidence from City Crime Rates
(October 23, 2020). Contemporary Accounting Research, Forthcoming, Available at
SSRN: https://ssrn.com/abstract=3763692
Motivating Managers to Invest in Accounting Quality:
The Role of Conservative Accounting
While internal control over financial reporting has gained increasing regulatory
attention, its enforcement is far from perfect; thus firm-specific incentives to
management become important to increase the quality of financial reports. We
study how owners can motivate managers to invest in accounting quality
even though it is costly to the managers. Using an agency model, we establish
that a sufficiently conservative accounting system
(which understates performance) is necessary to induce a manager to invest in accounting quality,
and more conservatism increases this investment. The reason is that higher accounting quality
mitigates the expected reduction of the manager’s compensation from
conservatively measured performance. Higher accounting quality
makes the performance measure more precise, and the owner optimally lowers
incentives, even though that entails some loss of productivity. In total, more
conservatism increases both firm value and accounting quality.
Our findings suggest that striving for neutral accounting can
counteract incentives to improve accounting quality,
and they provide support to using conservatism as a metric of financial
reporting quality in empirical studies.
Ewert, Ralf and Wagenhofer, Alfred, Motivating Managers to Invest in Accounting
Quality: The Role of Conservative Accounting (December 1, 2020). Contemporary
Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3764459
Gender Discrimination? Evidence from the Belgian Public Accounting Profession
Prior research finds that women receive lower salaries than men. Similarly, we
show that female audit partners in Belgium receive significantly lower
compensation than male partners. However, there are alternative explanations for
the pay gap other than gender discrimination. For example, the gap in
compensation could reflect that men are paid more because they have higher
levels of productivity. We provide new predictions and tests of gender
discrimination by comparing the fees generated by audit partners (a measure of
partner productivity) and the types of clients assigned to partners. Consistent
with our prediction of female partners having to meet higher performance
thresholds than male partners, we show that female partners generate larger fee
premiums, but they are less likely to be assigned to prestigious clients. To
test whether these patterns are attributable to gender discrimination, we
examine whether the results are stronger in male-dominated offices because this
is where we would expect to find the most discrimination against women. We find
the fee premiums generated by female partners are larger in male-dominated
offices, while the negative association between prestigious clients and female
partners is stronger in male-dominated offices. Collectively, our combined
predictions and tests are consistent with female partners facing gender
discrimination in audit offices that are dominated by male partners.
Keywords: gender
discrimination, public accounting firms,
female partners
JEL Classification: D22,
J71, M41, M42, M51
Suggested Citation:
Hardies, Kris and Lennox, Clive and Li, Bing, Gender Discrimination? Evidence
from the Belgian Public Accounting Profession (December 15, 2020). Contemporary
Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3766075
How to Mislead With Statistics
Modeling Skewness Determinants in Accounting Research
Temple University - Fox School of Business and Management - Department of
Accounting
Date Written: November 30, 2020
Abstract
Skewness-based proxies are widely used in accounting and
finance research. To study how the skewness of a dependent variable Y varies
with conditioning variables X, researchers typically compute firm-specific
skewness measures over a short rolling window and regress them on X.
However, we show that this standard approach can cause severe biases and
produce false findings of both conditional skewness on average and
systematic variation in conditional skewness. These biases generalize beyond
rolling-window skewness. We develop alternative methods that address these
biases by directly modeling the conditional skewness of Y for each
observation as a function of X. Simulations confirm that our methods have
good type-I errors and test power even in scenarios in which the standard
method is severely biased. Our methods are transparent, robust, and can be
implemented in a few lines of code. Use of our methods changes a major prior
finding.
Keywords: Pearson’s
moment coefficient of skewness, quantile-based skewness, rolling window,
conditional distribution, generalized method of moments (GMM)
Frankfurt School of Finance & Management gemeinnützige GmbH
Date Written: February 3, 2021
Abstract
In
the European Union the goal of transition towards a carbon-neutral economy by
2050 is identified as a major aim of the European Commission. The integral role
of the financial services sector in funding such investments and enhancing the
(re-) direction and allocation of capital flows towards sustainable projects and
investments is increasingly acknowledged. Besides the integration of ESG and CSR
into the banks’ operations, it can serve and be utilized as risk management
tools.
This paper investigates the effectiveness of the EU Non-Financial Reporting
Directive (2014/95/EU) with respect to the CSR disclosure quality in European
banks from 2017-2019. After an overview of the EU’s path towards a sustainable
financial sector from 2013 till present, the most important regulations will be
assessed in detail, namely the Non-Financial Reporting Directive (2014/95/EU)
and the Taxonomy Regulation on Sustainable Economic Activity (2020/852/EU). By
constructing a multi-category CSR disclosure index to “translate” and quantify
disclosed CSR information in the banks’ annual filings, a positive comparative
development over the years is identified – indicating the general effectiveness
of the directive. The construction of the disclosure index and the content
analysis of the banks’ CSR disclosures is based on textual analysis.
In order to not only analyse and evaluate the level of CSR disclosure in
European banks from 2017-2019, but also to identify potential factors
influencing its quality, the collection of multiple data inputs is necessary.
The paper examines the association between three factors of the balance sheet
and the P&L on their significance on the disclosure score. These factors are
asset size in million euro (proxy for size), common equity tier 1 ratio (proxy
for market discipline) as defined in the Basel III regulatory framework (proxy
for market discipline) and pre-tax return on assets (proxy for profitability).
Furthermore, the association of other non-balance sheet factors and their
correlation on the disclosure score is examined which are listing status (listed
or non-listed), country of the head-quarter, (external) auditor and bank´s CSR
report type. Therefore, this adds detail to research, as existing majorly focus
on how CSR-related information is disclosed and not to what extent and quality.
This paper targets accountants, financial institutions, regulatory authorities,
shareholders, investors and stakeholders in general who are affected by and
interested in the overall CSR disclosure quality of European banks.
Keywords: Bank Accounting,
Banks, Corporate Social Responsibility, Sustainable Finance, Disclosure, Accounting,
Auditing
Loew, Edgar and Erichsen, Giulia and Liang, Benjamin and Postulka, Margret
Louise, Corporate Social Responsibility (CSR) and Environmental Social
Governance (ESG) – Disclosure of European Banks (February 3, 2021). European
Banking Institute Working Paper Series 2021 - no. 83, Available at SSRN: https://ssrn.com/abstract=3778674
Cognitive Determinants of Aggressive Financial Reporting – The Combined Effects
of Ego Depletion, Moral Identity, and an Ethical Intervention
Florida Atlantic University - School of Accounting
Date Written: January 8, 2021
Abstract
We
experimentally investigate the combined effects of ego depletion, moral
identity, and ethical interventions on managers’ financial reporting
aggressiveness in the development of an accounting estimate.
We find that decision makers with high moral identity become more aggressive
later in the day (once they become ego depleted), but those with low moral
identity do not. We also find that an ethical intervention has a significant
influence on the reporting judgments of depleted decision makers with low moral
identity, but not on the judgments of depleted decision makers with high moral
identity. However, the opposite effect occurs when decision makers are not
depleted. That is, an ethical intervention has a significant influence on the
financial reporting judgments of undepleted decision makers with high moral
identity, but not on the judgments of undepleted decision makers with low moral
identity. Supplemental analyses reveal different patterns of decision makers’
cognitive dissonance across experimental conditions.
Keywords: Aggressive
Financial Reporting, Ego Depletion, Moral Identity, Ethics
JEL Classification: M1,
M14, M4, M41
Suggested Citation:
Lauck, John and Negangard, Eric Michael and Rakestraw, Joseph, Cognitive
Determinants of Aggressive Financial Reporting – The Combined Effects of Ego
Depletion, Moral Identity, and an Ethical Intervention (January 8, 2021).
Available at SSRN: https://ssrn.com/abstract=3762591
Fundamental Analysis of XBRL Data: A Machine Learning Approach
Since 2012, all U.S. public companies must tag quantitative amounts in financial
statements and footnotes of their 10-K reports using the eXtensible Business
Reporting Language (XBRL). We conduct a fundamental analysis of this large set
of detailed financial information to predict earnings. Using machine learning
methods, we combine the XBRL data into a summary measure for the direction of
one-year-ahead earnings changes. Hedge portfolios are formed based on this
measure during the period 2015-2018. The annual size-adjusted returns to the
hedge portfolios range from 5.02 to 9.7 percent. These returns persist after accounting for
transaction costs and risk. Our strategies outperform those of Ou and Penman
(1989), who extract the summary measure from 65 accounting variables
using logistic regressions. Additional analyses suggest that the outperformance
stems from both nonlinear predictor interactions missed by regressions and more
detailed financial data in XBRL documents.
Keywords: Fundamental
Analysis, XBRL, Machine Learning
JEL Classification: M41,
G12
Suggested Citation:
Chen, Xi and Cho, Yang Ha and Dou, Yiwei and Lev, Baruch Itamar, Fundamental
Analysis of XBRL Data: A Machine Learning Approach (December 2, 2020). Available
at SSRN: https://ssrn.com/abstract=3741015
Hong
Kong Polytechnic University - School of Accounting and Finance
Date Written: December 2, 2020
Abstract
The
paper concerns concepts of equity valuation. Three primary financial ratios --
(forward) return on equity (ROE), (forward) earnings to price ratio (EP), and
the (current) market-to-book ratio (MTB) – are connected to the standard
valuation parameters, r = cost of equity (discount factor), and g = growth. The
framework relies on a Gordon-Williams type of PVD model and combines it with an
add-on steady-state growth requirement: Subject to clean surplus accounting,
(the expected) earnings, dividends, and book values all grow at the same rate.
This condition is adapted from “The Second Fundamental Law of Capitalism”,
articulated by Piketty (2014). Applying these ideas result in a benchmark model:
(i) a weighted average representation, EP = BTM*r + (1- BTM) *Div.Yield , and
(ii) the inequalities 0 < BTM < 1 and Div.Yield < EP < r < ROE. Additional
analysis relaxes the steady-state growth condition: the g-parameter is now
replaced by forecasts of near future earnings growth which get updated as time
passes. An empirical part of the paper evaluates whether the steady-state growth
concept holds as an average for S&P 500 firms. Results are generally supportive.
JEL Classification: G12,
M41
Suggested Citation:
Ohlson, James A. and Zhai, Sophia Weihuan, On (r, g) and the Identity ROE = EP*MTB
(December 2, 2020). Available at SSRN: https://ssrn.com/abstract=3741088
A Needle Found: Machine Learning Does Not Significantly Improve Corporate Fraud
Detection Beyond a Simple Screen on Sales Growth
University of California, Berkeley - Accounting Group
Date Written: November 29, 2020
Abstract
Recent papers have been highly promotional of the benefits of machine learning
in the detection of corporate fraud. For example, Bao, Ke, Li, Yu, and Zhang
(2020) recently published in the Journal of Accounting Research
report that their machine learning model increases performance by +75% above the
current parsimonious standard in the accounting literature,
the financial ratio-based F-Score (Dechow, et al. 2011), when measured at the
highest risk levels. They also show that raw variables alone, rather than
financial ratios, can achieve this task. However, a quick peak under the hood
reveals an issue that, if corrected for, reduces the results to no better than
the F-Score.
In this paper, I create a machine learning model applying the latest in machine
learning known as XGBoost to over 100 financial ratios sourced from prior
literature. I compare this model to an XGBoost model applying the 28 raw
variables suggested by Bao, et al. Additional models are benchmarked include the
F-Score, the M-Score (Beneish 1999), the FSD Score based on Benford’s Law (Amiram,
et al. 2015), and a simple screen on 4-year sales growth.
A Wilcoxon rank sum test will show that differences between the models at the
top 1% of risk are not significantly different. In fact, at this level, the
models fail often in any given year. At the top 10% of risk where models produce
consistent annual results, advanced methods match the performance of the
F-Score, or even a simple univariate screen on sales growth I measure
performance using positive predictive values (PPV) also known as precision which
measures the likelihood of a fraud case within the top 1% or top 10% list. My
XGBoost model outperforms the models at the 1% level, but positive predictive
values remain quite low to be of any practical use with PPVs in the 3% range. A
discussion will follow to explain what would be required to move positive
predicted values beyond the single digits for this research question.
Walker, Stephen, A Needle Found: Machine Learning Does Not Significantly Improve
Corporate Fraud Detection Beyond a Simple Screen on Sales Growth (November 29,
2020). Available at SSRN: https://ssrn.com/abstract=3739480
Measuring Employment Impact: Applications and Cases
Applying the Impact-Weighted Accounts Initiative’s employment impact
methodology, on eight leading companies, we document wide variability in
employment impacts as a percentage of salaries paid, ranging between 59 and 80
percent. We identify opportunities for improvement and discuss transition plans
for companies to create more positive employment impact. We conclude with a call
for disclosure of Equal Employment Opportunity Commission EEO-1 reports, paid
leave, childcare and healthcare benefits, which would greatly facilitate the
comparable and reliable measurement of employment impact in the future.
Panella, Katie and Serafeim, George, Measuring Employment Impact: Applications
and Cases (January 20, 2021). Harvard Business School Accounting & Management
Unit Working Paper No. 21-082, Available at SSRN: https://ssrn.com/abstract=3775838
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 19, 2021
Borrowing Binge Reaches Riskiest Companies
By Matt Wirz Sam Goldfarb | February 15, 2021
Topics: Corporate
Debt, Interest Rates
Summary: There
is a lending boom “offering lifelines for struggling
companies even as the coronavirus pandemic still drags on
the economy… More than $13 billion of that debt [issued
between January 1 and February 10, 2021] had ratings
triple-C or lower—the riskiest tier save for outright
default….[These] riskier companies can now borrow at
interest rates once reserved for the safest type of debt.”
Classroom Application: The
article may be used in a financial reporting class covering
debt issuances, specifically addressing economy-wide and
individual issuer factors leading to the level of interest
rates.
Questions:
What is a bond yield?
As of Friday, February 12, 2021, what was the average
yield of risky bonds as described in the article?
How does the yield on the riskiest bonds as of February
2021 compare to U.S. treasury security yields currently
and in the recent past?
What factors are leading to the current state of bond
yields as described in this article?
Demand for corporate debt has offered lifelines to
struggling firms that can borrow at interest rates once reserved for the
safest type of bonds
Investors’ near-insatiable demand for
even the riskiest corporate debt is fueling a Wall Street lending boom,
offering lifelines for struggling companies even as the coronavirus pandemic
still drags on the economy.
Companies such as hospital operator Community
Health Systems Inc. and
newspaper publisher Gannett Co. have
issued a record $139 billion of bonds and loans with below- investment-grade
ratings from the start of the year through Feb. 10, according to LCD, a unit
of S&P Global Market Intelligence. More than $13 billion of that debt had
ratings triple-C or lower—the riskiest tier save for outright default—about
twice the previous record pace.
Despite the onslaught of new bonds,
riskier companies can now borrow at interest rates once reserved for the
safest type of debt.
As of Friday, the average yield for bonds in
the ICE BofA
U.S. High Yield Index—a group that includes embattled retailers and fracking
companies—was just 3.97%. By comparison, the yield on the 10-year U.S.
Treasury note, which carries essentially no default risk, was as high as
3.23% less than three years ago. The 10-year Treasury yielded around 1.2%
Friday.
“At a high level, you have a meaningful
imbalance between supply and demand,” said David Knutson, head of credit
research for the Americas at Schroders, the
U.K. asset-management firm. “The demand exceeds the supply for bonds.”
The most striking aspect of the current lending
boom is its timing. Typically, it can take years after recessions for the
market to reach its present level of exuberance, analysts said. In this
case, it has taken less than 12 months and has arrived just as economic data
have revealed
a winter slowdown in the recovery.
Debt investors are hardly alone in their
enthusiasm. Investors across a range of asset classes have poured
money into risky wagers, even as the
frenzy around videogame company GameStop Corp. and
other popular stocks for individuals calms. Commodities such as oil and
copper have surged, and more than $58 billion went into mutual and
exchange-traded funds tracking global stocks during the week ended
Wednesday, the largest such inflow on record, according to a Bank
of America analysis of data from EPFR
Global.
Investors’ optimism rests largely on the
idea that current economic challenges aren’t normal and can be resolved
quickly once coronavirus vaccines are more widely distributed. The combined
efforts of the Federal Reserve and Congress have also helped by depressing
benchmark interest rates and pumping trillions of dollars into the economy,
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 19, 2021
Some Elite Business Schools Skip Rankings This Year
By Patrick Thomas | February 15, 2021
Topics: MBAs
Summary: Accounting
students may be applying to graduate business school for a
number of reasons including completion of the 150 credit
hour requirement for CPA licensure. Some may use the
business school rankings published in the business press in
their application decision-making. This article describes
some of the process for the rankings, benefits to the
schools that participate, and factors leading some to decide
not to participate in the 2020 rankings under Covid-19
circumstances.
Classroom Application: The
article may be used in any course discussing students’
consideration of graduate business education.
Questions:
Are you considering entering business graduate school?
If so, describe your reasons. If not, why not?
How do business schools participate in the ranking
process?
What benefits do business schools say come from their
participation in the ranking process?
What difficulties make it so that some schools are
dropping out of the rankings process, at least for 2020
rankings?
Do you think the impact of Covid-19 in 2020 on the
schools’ decisions to participate in the rankings
process would influence a students’ use of these
rankings? Explain your answer.
As Harvard, Stanford, other elite schools skip some
rankings this year, European universities top lists, lesser-known programs
get a boost
Several top U.S. business schools are
skipping popular M.B.A. rankings this year, upending an annual rite for
programs and prospective students.
Harvard Business School, the University
of Pennsylvania’s Wharton School, Columbia Business School and the Stanford
Graduate School of Business, among others, opted to skip the most recent
rankings by the Economist and the Financial Times. Several schools said
Covid-19 made it difficult to gather the data they must submit to be ranked.
More than bragging rights hang in the
balance—though there are plenty of those, too. Schools say a good showing in
rankings can draw interest from prospective students, stoking application
volumes, as well as plaudits or pans
from alumni who continue to track their alma mater long after leaving
campus.
Overall, 62% of programs plan to
participate in some rankings, while 10% don’t plan to cooperate for any
lists this year, according to a survey of business-school admissions
officials by Kaplan, the education subsidiary of the Graham Holdings Co.
Bloomberg Businessweek suspended its 2020
ranking, the only major list to do so. Dozens of notable schools were
missing from the Economist’s list published last month. Nine schools that
normally take part in the FT’s list chose not to participate, a spokeswoman
said.
With some major programs missing, other schools moved up the lists. Insead
in France topped the FT’s list of best M.B.A. programs, published earlier
this month, up from fourth place; some of last year’s top schools, including
Harvard and Stanford, sat it out.
HBS spokesman Brian Kenny said the school isn’t opposed to rankings, but
some data gathering—which can take months—was an added burden as schools
pivoted to remote learning earlier in the pandemic. Harvard, which often
tops lists, can afford to take a year off, he added.
“It doesn’t have the same impact on us as it would on another school who is
maybe struggling to get into top 50,” Mr. Kenny said. The school is
participating in the U.S. News & World Report rankings, due in March.
A
Stanford spokeswoman said the school didn’t want to overburden students and
alumni groups with surveys required for some rankings during a stressful
year.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 19, 2021
Judge Lets Revlon Lenders Keep Citi’s Botched $500
Million Payment
By Alexander Gladstone Andrew Scurria Becky Yerak |
February 16, 2021
Topics: Banking,
Internal Controls
Summary: Citigroup
Inc. mistakenly paid off debt principal in addition to
interest payments to investment firms that made loans to
Revlon Inc. A federal judge has ruled that “Brigade Capital
Management LP and other Revlon lenders can keep the money
they collected from Citi…While some lenders that were
mistakenly paid returned roughly $385 million to Citi,
others refused the bank’s request for repayment, touching
off a legal dispute that strained relationships with big
investors like Brigade, a longtime Citi client, and raised
questions with analysts about the bank’s internal controls.”
Classroom Application: The
article may be used when discussing internal controls in an
accounting systems course, a course on banking, or in a
financial reporting course. It also may be used when
discussing accounting for corporate debt to address the
process of handling interest payments and related internal
controls.
Questions:
Describe the process for corporate debt issuance and
repayment, including all cash receipts and disbursements
(payments) that occur.
Based on the description in the article, what service
did Citigroup provide to Revlon, Inc.?
How did Citi make erroneous extra payments to Revlon’s
lenders? What did Citi executives do in the aftermath?
What are internal controls? Cite your source for your
definition if from your textbook or elsewhere.
What internal control function should be used to prevent
such an error as Citi has made, or should have been
functioning properly at Citi? Give one example that you
can think of.
Brigade Capital Management and other investors win
court ruling allowing them to keep the Revlon loan payment they received
from their agent Citi
A
federal judge denied Citigroup Inc.’s request
to claw back roughly $500 million it mistakenly paid out of its own pocket
to investment firms that made loans to cosmetics giant Revlon Inc.
Brigade Capital Management LP and other Revlon lenders can keep the money
they collected from Citi when the bank wired them the full amount they were
owed instead of the small interest payment that was due, according to a
written ruling Tuesday by Judge Jesse Furman of U.S. District Court in New
York.
The August blunder by Citi, Revlon’s loan agent, satisfied a nearly $900
million debt that Revlon wasn’t due to pay until 2023 and delivered an
unexpected windfall to lenders on what had become an increasingly risky
investment.
While
some lenders that were mistakenly paid returned roughly $385 million to Citi,
others refused the bank’s request for repayment, touching off a legal
dispute that strained relationships with big investors like Brigade, a longtime
Citi client,
and raised questions with analysts about the bank’s internal controls.
Judge
Furman issued the decision after holding a trial in December that focused
on the pivotal question of
what Brigade and other recipients knew or suspected soon after they were
paid.
Citi, which has blamed the snafu on human error, argued that recipients knew
right away they had been paid in error. They said they didn’t think the
transactions were erroneous until Citi claimed as much and demanded
repayment.
Judge Furman agreed with the lenders that they “believed, and were justified
in believing, that the payments were intentional.” Citi’s mistake was “one
of the biggest blunders in banking history,” the judge said.
“We strongly disagree with this decision and intend to appeal. We believe we
are entitled to the funds and will continue to pursue a complete recovery of
them,” a Citi spokesperson said.
Robert Loigman, a lawyer representing the lenders, said “we are extremely
pleased with Judge Furman’s detailed and thorough decision.”
As soon as Citi realized its mistake, executives began trying to claw the
money back. Some lenders granted the bank’s request. Citi sued 10 investment
firms that declined, including Brigade, Symphony Asset Management LP and HPS
Investment Partners LLC.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 26, 2021
Jay-Z and LVMH Pop the Cork in Champagne Tie-Up
By Matthew Dalton | February 22, 2021
Topics: Joint
Ventures, Equity Method Investments
Summary: “LVMH,
the world’s biggest producer of Champagne, has taken a 50%
stake in Armand de Brignac, the high-end Champagne
brand…known for its metallic bottles that cost hundreds of
dollars each.” Armand de Brignac is owned by Jay-Z, the
rapper and mogul who made his investment after a perceived
snub in the luxury industry. “Rappers have long peppered
their lyrics with references to Dior, Louis Vuitton, Dom
Pérignon and other brands. But until recently, the luxury
industry kept its fans in hip-hop at a distance….In Armand
de Brignac, LVMH saw a label that was quickly drawing new
Champagne drinkers to the high-end segment of the
market…Armand de Brignac has been produced by a small team
inside the Cattier Champagne house, a family-run brand. Mr.
Schaus said LVMH’s resources in Champagne…would likely be
tapped to boost the brand’s volumes in the years to come.”
Classroom Application: The
article may be used in a financial reporting class
discussing equity method investments, joint ventures, and
business combination transactions.
Questions:
Is the LVMH investment transaction described in this
article a business combination? Explain your answer.
Based on the information given in the article, how do
think that LVMH will account for its investment in
Armand de Brignac?
Regardless of your answers above, the article describes
the strategic benefits associated with this investment
transaction. What are those benefits for LVMH?
Regardless of your answers above, the article describes
the strategic benefits associated with this investment
transaction. What are those benefits for Armand de
Brignac?
Luxury-goods giant LVMH acquires 50% of Armand de
Brignac as pandemic takes fizz out of Champagne sales
Jay-Z and LVMHLVMUY -0.23%Moët
Hennessy Louis Vuitton SE are joining forces in the Champagne business,
further cementing the alliance between the world of hip-hop and luxury as
the Covid-19 pandemic saps
sales of the festive wine world-wide.
LVMH, the world’s biggest producer of Champagne, has taken a 50% stake in
Armand de Brignac, the high-end Champagne brand owned by Jay-Z, the rapper
and mogul. The brand, one of the youngest in the famed sparkling-wine
region, is known for its metallic bottles that cost hundreds of dollars
each.
The investment, LVMH and Jay-Z said, is aimed at growing Armand de Brignac
through LVMH’s global distribution networks while drawing upon the
conglomerate’s resources within Champagne wine country. It comes at a
difficult moment for Champagne: The pandemic caused the cancellation of
weddings, soirees and other occasions to pop corks, cutting sales of the
wine by about 20% last year. The two sides didn’t disclose the value of the
transaction.
“We were working really hard to maintain a brand that was growing faster
than the staff we had and bigger than some of the expertise we had,” Jay-Z,
born Shawn Carter, said in an interview. “We’d been in this 15 years, not a
hundred.”
The partnership shows how European luxury brands are now embracing Black
recording artists and hip-hop culture to appeal to a younger, more diverse
clientele. Rihanna and LVMH launched a cosmetics line, Fenty Beauty. The
rapper Gucci Mane and the Italian fashion house Gucci have collaborated on a
collection. Dior, an LVMH brand, has used the rapper A$AP Rocky as a
featured model in several menswear collections. Streetwear has become a
staple of luxury fashion.
“I think that people have come to accept that these two worlds are a natural
fit,” Jay-Z said. “In the beginning, it wasn’t a natural fit.”
Rappers have
long peppered their lyrics with
references to Dior, Louis Vuitton, Dom Pérignon and other brands. But until
recently, the luxury industry kept its fans in hip-hop at a distance. One
such perceived snub pushed Jay-Z to invest in Armand de Brignac.
Since emerging as a star in the 1990s, the Brooklyn-born rapper had been a
devotee of Cristal, repeatedly name-checking the high-end Champagne brand in
his rhymes. That changed when, in 2006, an executive at Cristal’s parent
company was asked in The Economist whether the brand would be harmed by its
association with rap. “That’s a good question, but what can we do?” he
replied.
Jay-Z soon
organized a boycott of Cristal. Later in 2006, in the video for the single
“Show Me What You Got,” he touted
a new brand:
Armand de Brignac, which called itself “Ace of Spades” and was launched
earlier that year in the Champagne town of Chigny-les-Roses. The brand
quickly put out a news release highlighting the mention.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 26, 2021
Goodyear to Buy Rival Cooper Tire for $2.8 Billion
By Micah Maidenberg | February 22, 2021
Topics: Business
Combinations
Summary: “Goodyear
said Monday it would pay about $2.8 billion in cash and
stock for its smaller rival, including $41.75 a share in
cash for Cooper’s shares” in a “deal that seeks to combine
the two biggest tire manufacturers based in the U.S.”
Classroom Application: The
article may be used when introducing strategic reasons for
business combinations as well as an example of a cash and
stock transaction. DELETE BEFORE DISTRIBUTING TO STUDENTS:
ANSWER TO QUESTION 1 ASC 805 -10-25-1 An entity shall
determine whether a transaction or other event is a business
combination by applying the definition in this Subtopic,
which requires that the assets acquired and liabilities
assumed constitute a business. If the assets acquired are
not a business, the reporting entity shall account for the
transaction or other event as an asset acquisition. An
entity shall account for each business combination by
applying the acquisition method. The definition of a
business combination can be found in the glossary.
Questions:
Is there any question that this transaction is a
business combination? Support your answer with reference
to the definition of a business combination in
authoritative accounting literature.
As described in the article, what is(are) the main
benefit(s) accruing to Goodyear Tire & Rubber from this
transaction with Cooper Tire & Rubber?
According to sources outside of this article, Goodyear
plans to pay $41.75 in cash and .907 Goodyear shares for
every Cooper Tire& Rubber share. Cooper Tire & Rubber
has about 50.37 M shares of common stock outstanding.
The price of Goodyear Stock on February 22 prior to the
announcement of the business combination was $13.93.
Goodyear’s stock has no par value. Using this
information, show how the $2.8 billion acquisition
valuation of Cooper was determined.
Again use the information given above. Prepare the
Goodyear entry to record its investment in Cooper Tire &
Rubber assuming that all outstanding Cooper shares are
obtained by Goodyear but that Cooper is not immediately
dissolved by Goodyear. Round your answer to balance the
entry.
Goodyear said Monday it would pay about $2.8 billion in cash and stock for
its smaller rival, including $41.75 a share in cash for Cooper’s shares,
which rose about 30% to $56.89 in afternoon trading. Goodyear’s shares
increased 20% to $16.72.
The acquisition would add scale for Goodyear, giving it annual revenue of
roughly $17.5 billion, more than 50 factories and around 72,000 employees,
according to an investor presentation. Cooper’s tire brands include its
namesake line and Mastercraft.
Meanwhile, the companies said they are eyeing $165 million of cost cuts
annually within two years after the deal is complete.
Goodyear was
the third-largest tire company globally by tire sales for 2019, according to
industry publication Tire Business’s latest ranking. It trailed France’s
Michelin, and Japan’s Bridgestone Corp. ,
according to the ranking. Cooper was the 13th-biggest tire maker over that
time frame, but the second largest in the U.S. after Goodyear. Both
companies are based in Ohio.
Goodyear Chief Executive Richard Kramer said on a call with investors the
proposed acquisition would lift the combined company’s sales volumes of
replacement tires in the U.S. to about 64 million. In China, the deal would
help Goodyear sell more new and replacement tires, with the latter market
expected to grow quickly in the coming years, he added.
Many of the advantages of the deal “will accrue to our businesses in the
U.S. and China, the two largest tire markets in the world,” he said.
Executives said they aren’t initially looking for cost savings within their
plants. Instead, the combined company would focus on duplicative selling and
administrative expenses and finding savings tied to research and
development, procurement and logistics.
Goodyear and
Cooper have both said the
Covid-19 pandemic weighed
on financial results last year as each temporarily shut down plants. Sales
last year at Goodyear fell 16% to $12.3 billion and were off 8% at $2.5
billion for Cooper.
The combined
company will better be able to invest in “new mobility and fleet solutions,”
offering tires and related services to traditional and emerging
manufacturers, companies focused on
autonomous driving and
fleet operators, Goodyear and Cooper said.
After the transaction is completed, expected in the second half of the year,
the company will be based in Akron, Ohio, Goodyear’s home office right now,
and maintain a presence in Findlay, Ohio, where Cooper is currently based.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 26, 2021
What Biden’s Minimum-Wage Plan Means for Restaurant
Workers
By Eric Morath Heather Haddon | February 25, 2021
Topics: Direct
Labor
Summary: While
this article focuses on the implications for workers in the
title, it also includes business owner viewpoints on the
impact of the minimum wage proposal that is currently being
considered by Congress. The proposal as initiated by the
Biden Administration would replace a hodgepodge of state
laws regarding minimum wages with, essentially, one U.S
minimum wage of $15/hour after a phase-in period through
2025. In particular, many states, but not all 50, now allow
a minimum wage lower than the current federal minimum of
$7.25 per hour for tipped workers, called a sub-minimum
wage. “Nearly all full-service restaurants surveyed by the
National Restaurant Association said they would raise menu
prices if tipped wages are eliminated and the minimum wage
goes up…. Two-thirds said they would rely more on technology
to reduce labor, and 88% said they would cut hours.”
Classroom Application: REMOVE
BEFORE DISTRIBUTING TO STUDENTS FOR BEST DISCUSSION. The
article includes the term “direct labor,” typically
associated with labor cost of production. While a restaurant
involves a production process, tipped wages likely would be
associated with selling expense for server labor costs
unless tips are shared among all staff, servers and kitchen
staff. Questions ask students to think about a restaurant as
a production process and to identify which income statement
line items would be impacted by the change in minimum wage.
Questions:
Why can restaurant businesses pay workers less than
other businesses such as retailers?
How do you think restaurant businesses could demonstrate
that their wages comply with current state minimum wage
laws?
What proposal to change minimum wages is currently being
considered by the U.S. Congress?
What are the three components of product cost for a
manufacturing operation?
Do you think that a restaurant is a manufacturing
operation? Explain your answer.
Refer again to your answer to question 2 above. Would a
change in the minimum wage affect a restaurant’s
production cost or a part of its selling expenses?
Explain your answer.
Employers say eliminating $2.13-an-hour subminimum
wage for workers receiving tips could cost jobs and raise prices; plan’s
advocates say it would provide consistent income
The plan, under
consideration in Congress,
would lift the federal minimum wage to $15 an hour from the current level of
$7.25 an hour for all workers that has been in place since 2009. The
proposal also would eliminate a subminimum wage of as little as $2.13 an
hour for millions of workers such as servers or bartenders who receive tips.
Both changes would
be phased in over several years and
largely eliminate a patchwork of state wage laws.
In most
states, businesses can pay tipped workers less than others, so long as those
employees earn at least the minimum wage after tips are added. Under the
proposal, restaurants in 32 states could have increased direct labor costs
of between $10 and $13 an hour, with businesses in several more states
facing increases of $5 to $10 an hour. Seven states, including
California,
don’t have a subminimum wage for tipped workers.
Worker advocates say eliminating the tipped wage would mean servers and
others would have more consistent income and wouldn’t potentially need to
ask for more pay when tips fall short. The restaurant industry says the
existing tip structure means many jobs already pay well above the minimum
wage, and that the Biden plan would put jobs at risk while restaurants are
still hurting from the pandemic.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 5, 2021
Coke, Whirlpool Keep Tax Court Losses Off the Books
By Richard Rubin Theo Francis | February 24, 2021
Topics: Tax
Accounting, Contingency
Summary: Coca-Cola
Co. , Whirlpool Corp. WHR 1.04% and Eaton Corp. ETN 0.02%
have all lost to the Internal Revenue Service in the U.S.
Tax Court over the past two years. But none of the companies
has yet recognized the bulk of those tax expenses and
liabilities in their publicly reported results. Coca-Cola
has disclosed that total potential liability from its tax
dispute with the Internal Revenue Service could reach $12
billion. The company lost its tax court case in November 202
but has so far recorded only $438 million as an accrued
liability.
Classroom Application: The
article may be used in a financial reporting class
discussing contingent liabilities or income tax accounting.
The article discusses the "more likely than not" requirement
to accrue a liability in layman's terms and questions ask
the students to identify professional financial reporting
requirements behind those statements.
Questions:
Summarize the general concerns described in this article
with respect to corporate financial statement
disclosures.
According to the article, “…companies must conclude that
their eventual victory is ‘more likely than not’ in
order to avoid reporting an accrued liability and income
tax expense in its financial statements. What area of
accounting requirements establishes this threshold?
In cases in which a range of reported estimated
liabilities is possible, how much must companies record
as a liability under U.S. GAAP requirements? Do you
think this requirement may impact the issues discussed
in this article? Explain your answer.
Coca-Cola’s tax court loss stems from the worldwide
locations in which it reports profits, much of it in
foreign subsidiaries with low corporate tax rates. The
tax case relates to the years 2007 to 2009. How could it
be that the tax liability that might result relates to
years after 2009?
After losing to the IRS, some companies delay
recording the costs, confident they will eventually prevail
When court rulings and tax regulations go
against them, companies have an effective way to minimize or defer the
bottom-line costs. They don’t count them, and announce that they will beat
the government in the future.
Coca-Cola Co.KO 1.70%, Whirlpool Corp.WHR 4.57%and Eaton
Corp.ETN 2.19%have
all lost to the Internal Revenue Service in the U.S. Tax Court over the past
two years. But none of the companies subtracted the bulk of those costs from
their publicly reported results.
Instead, they analyzed the law and
declared they are confident those losses will eventually be overturned.
Coca-Cola, in particular, is gearing up for a contentious constitutional
fight against the government, with $12 billion on the line.
Others—including Newell
Brands Inc.NWL 2.84%and Maxim
Integrated Products Inc.MXIM 2.47%—stand
to lose millions under Treasury Department regulations issued in 2019, but
say they remain confident the rules will eventually be thrown out and aren’t
recording the costs.
“For them to say the tax authority has
got it all wrong, that’s a pretty bold statement,” said Jack Ciesielski, an
accounting expert and owner of R.G. Associates Inc., an investment research
firm. The more conservative approach is to recognize the cost, note the
legal dispute and reverse the cost later if the company prevails, he said.
In securities filings, the companies
generally argue they have strong cases and sometimes that federal
authorities followed improper procedure in adopting regulations. They also
say they and their accountants are careful to avoid market and legal
repercussions if they ultimately lose.
“There’s sufficient incentives there that
exist that would prevent both the auditors and the corporation from being
extremely aggressive,” said Erin Emily Henry, an accounting professor at the
University of Arkansas. “Nobody wants the egg on their face or a potential
lawsuit.”
The IRS, which doesn’t comment on pending
litigation, doesn’t govern what companies tell their investors about those
lawsuits. The Securities and Exchange Commission, which enforces corporate
disclosure rules, declined to comment, as did the Financial Accounting
Standards Board, which sets U.S. generally accepted accounting principles.
Determining whether the outcome of a tax
dispute must be booked now, or can be postponed or ignored, is technical and
subjective. If the company eventually loses beyond the point where it can
appeal, it must absorb the costs.
Under U.S. accounting rules, companies
must conclude that their eventual victory is “more likely than not.” That
requires executives, lawyers, accountants and auditors to assess the
strength of their legal case after a court loss.
“One man’s ‘more likely than not’ is
another man’s ‘less than more likely than not,’” said Don Williamson,
executive director of American University’s Kogod Tax Center.
Among the largest examples is Coca-Cola,
which lost its Tax Court case in November. The company has enlisted former
federal judge J. Michael Luttig, a leading conservative lawyer, and just
added Harvard professor and liberal scholar Laurence Tribe.
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 5, 2021
Target CFO Boosts Store Investments
as Pandemic Lifts Sales
By
Nina Trentmann | March 2, 2021
Topics: Managerial
Accounting, Budgeting
Summary: Target
Corp.’s chief financial officer is Michael Fiddelke. He took
the CFO role in November 2019 after 17 years in a variety of
Target departments. “Mr. Fiddelke said he gained deep
insights working in different parts of the organization…At
one point, during his time as a financial analyst for the
company, he wanted to allocate less money toward store
payrolls. Years later, when he worked in store operations
and would meet with financial analysts, he saw the other
side….’Thanks to that store payroll experience, I will never
think of store payroll as just an expense,’ he said.”
Classroom Application: The
article may be used in a managerial accounting course to
discuss capital and operational budgeting from both
financial and other perspectives.
Questions:
How has Target’s financial performance fared during the
pandemic? Be specific about the financial assessment you
make.
How does Target’s use of its store locations impact its
performance? In your answer, consider the statement that
“more than 95% of Target’s sales…in fiscal 2020 went
through the stores.”
What does Target CFO Michael Fiddelke mean when he says
that Target was wrong not to invest in digital sales
methods until about a decade ago “because the margins
didn’t look good”? In your answer, define the term
“margins.”
What capital budget plan does Target now have for its
store locations?
Michael Fiddelke, a 17-year veteran of the
retailer, has been CFO since late 2019
Michael Fiddelke, the Target Corp. veteran who has been running the
retailer’s finances since late 2019, is planning further investments in its
stores to hold on to sales gains made during the pandemic.
The company will continue to invest in its stores, supply chain and
fulfillment operations, Mr. Fiddelke said Tuesday, adding that Target plans
to spend $4 billion annually over the next few years. That is up from $2.59
billion in fiscal 2020. Target wants to open 30 to 40 new stores a year and
launch new distribution facilities in Delaware and Chicago, according to Mr.
Fiddelke. It opened 30 new stores in 2020.
Minneapolis-based Target in 2017 chose to make its
stores the core of its strategy, which means it ships its products to nearly
1,900 locations, where customers pick them up inside the bricks-and-mortar
part of the business. The stores also serve as places for curbside pickup
and as distribution centers for deliveries to peoples’ homes. “The store
powers all of that,” Mr. Fiddelke said. More than 95% of Target’s
sales totaling over $92 billion in
fiscal 2020 went through the stores.
The coronavirus pandemic has accelerated the company’s plans, with same-day
services growing by 235% to over $7 billion in sales during fiscal 2020. “We
were fast-forwarding years in a matter of months,” Mr. Fiddelke said.
Shipping from stores also took some pressure off Mr. Fiddelke and the
company’s supply chain management team, as they were struggling to forecast
customer demand. “The product that sits on the shelf can be picked up in the
cart, put into a box or put into a trunk,” Mr. Fiddelke said.
The company is now restarting some refurbishments that were put on hold
earlier in the pandemic. Target said it would remodel about 150 locations in
2021 after refurbishing 130 stores in 2020. The company plans to remodel
more than 200 locations in 2022 and beyond.
Mr. Fiddelke has worked at Target for 17 years in a variety of departments
outside of finance, including store operations, human resources and
merchandising. “A lot of what I brought to this role was framed by these
roles,” Mr. Fiddelke said about his current position as chief financial
officer, which he took on in November 2019.
Mr. Fiddelke said he gained deep insights working in different parts of the
organization, including how it feels to sit on the other side of the table,
opposite the finance department. At one point, during his time as a
financial analyst for the company, he wanted to allocate less money toward
store payrolls. Years later, when he worked in store operations and would
meet with financial analysts, he saw the other side.
“Thanks to that store payroll experience, I will never think of store
payroll as just an expense,” he said. Target has been paying its store
workers at least $15 an hour since the summer.
Mr.
Fiddelke succeeded Cathy
Smith, who served as Target CFO for
over four years, and inherited a strong
balance sheet, analysts said. The company on Tuesday reported net earnings
of $4.37 billion for fiscal 2020, up 33.1% compared with the prior year
period. Target held $8.51 billion in cash on the balance sheet as of Jan.
30, up from $2.58 billion on Feb. 1, 2020.
The company has learned a lot when it comes to e-commerce and online
shopping, Mr. Fiddelke said. “If you go back a decade, we thought about
digital wrong,” he said. “We didn’t invest enough because the margins didn’t
look good,” he said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 5, 2021
German Regulator Steps Down, EY
Changes Leadership Following Wirecard Scandal
By
Nina Trentmann | February 25, 2021
Topics: Auditing,
Accounting Fraud
Summary: “Payment
processing company Wirecard was the darling of Germany’s
fintech industry until auditors uncovered a $2 billion hole
in its accounting.” The article describing this company’s
downfall to insolvency was covered in this review in June
2020 and is available at https://www.wsj.com/articles/wirecard-files-for-insolvency-after-revealing-accounting-hole-11593075223 The
scandal has left a trail of changes in its wake among German
financial reporting executives at EY and in regulatory roles
including the partner in charge of EY’s German firm and the
president of Germany’s Financial Reporting Enforcement
Panel.
Classroom Application: The
article may be used in an international auditing or auditing
class discussing the impact of fraud on auditors and
regulators in a setting outside the U.S.
What accounting and auditing executives have lost their
jobs because of the Wirecard AG scandal?
What are the features of a new law proposed in Germany
to strengthen financial markets?
Do you think that awareness of these international
auditing and fraudulent accounting concerns are
important to know about even if you only plan to
practice accounting in the United States? Explain your
answer.
The once-high flying electronic payments company
disclosed a $2 billion accounting hole
The Wirecard AG scandal
is leading to more exits, with the head of Germany’s accounting regulator
stepping down and auditor Ernst & Young naming a new leadership team in the
country.
Edgar Ernst, president since 2011 of Germany’s Financial Reporting
Enforcement Panel, said he would step down from his role at the end of the
year. The change at the top of the organization, which is a private-sector
body that does routine checks of companies’ financial filings, will help it
move forward from a public debate around Mr. Ernst’s supervisory board
mandates, said Rolf Pohlig, chairman of the board.
Those
mandates, at companies including wholesaler Metro AG and
travel giant TUI AG ,
have come
under increased scrutiny as
the FREP and other regulatory bodies are facing questions about their
oversight of Wirecard.
The once-high
flying electronic payments company in June disclosed
a $2 billion accounting hole,
stating that the money missing from its balance sheet probably
doesn’t exist.
This confirmed earlier reports by banks that said they never held the funds,
and triggered various investigations into the company and several German
watchdogs. Senior executives including Chief Executive Markus Braun left the
business.
Meanwhile, Wirecard’s longtime auditor EY on Thursday said it appointed two
new executives to head up its German business. Hubert Barth, who led the
professional services firm in Germany since 2016, will transition to a
European role, EY said, but didn’t specify further. The company named Henrik
Ahlers, until now the managing partner for tax for Germany, Switzerland and
Austria, as well as Jean-Yves Jégourel, global assurance vice chair, to take
over from Mr. Barth.
EY also said it launched a new quality improvement program and established
an independent expert commission led by former German finance minister Theo
Waigel to help revamp its work. “EY is aware of the loss of trust caused by
the Wirecard case,” the company said in a statement.
It couldn’t
be learned who might succeed Mr. Ernst at the helm of the FREP, as it didn’t
immediately respond to a request for comment. The organization is facing
significant changes after the country’s justice ministry last year canceled
its contract with
the FREP, effective Dec. 31, 2021.
There is a continuing debate about whether the ministry will appoint another
body to take over FREP’s responsibilities or not. The Berlin-based
organization was set up in 2004 in response to various accounting scandals
and fraud cases, including at now-defunct Enron Corp., but has suffered from
staffing shortages and other constraints.
The German
government in December proposed a new law aimed at strengthening financial
markets. The legislation suggests giving companies’ supervisory boards
enhanced rights, strengthening auditor independence and overhauling BaFin,
the country’s market watchdog, whose president
was dismissed in
January. BaFin employees would be barred from trading
financial instruments,
the draft said.
Under the
proposal, companies also would be obliged to rotate auditors every 10 years.
Professional-services firms would have to separate their auditing and
consulting businesses, mirroring a similar proposal by U.K. regulators.
Auditors would bear extended liability and face harsher penalties in case of
misconduct, according to the draft legislation.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 12, 2021
Finance Chiefs Look to Price Increases to Offset
Higher Commodities Costs
By Kristin Broughton | March 8, 2021
Topics: Managerial
Accounting, Product Costs
Summary: “Consumers
could expect to see prices on goods from mattresses to
storage containers increase as finance chiefs try to offset
higher costs for raw materials.” The article discusses
factors leading to cost increases for polypropylene, a type
of plastic; the implications facing those who sells products
made from polypropylene; and other cost concerns such as
shipping. Companies, and their chief financial officers,
discussed in the article include the Container Store group
Inc. and other entities selling products made from this
plastic.
Classroom Application: The
article may be used in a managerial accounting course to
discuss product cost components and the challenges facing
companies to make decisions during cost increases. The
article also could be used therefore when discussing
standard costing.
Questions:
What are the three components of a product’s cost?
Which product cost component is discussed in this
article as increasing?
What factors have led to this product cost increase?
Name all that you find discussed in the article.
What are “margins”? How would the cost increases
discussed in the article negatively affect margins?
What are the challenges facing managements in deciding
whether to increase selling prices in response to cost
increases?
Consumers could pay more for goods as chemical and
raw-material prices put pressure on companies’ bottom lines
Consumers could expect to see prices on goods from
mattresses to storage containers increase as finance chiefs try to offset
higher costs for raw materials.
Companies across a range of industries are grappling
with higher prices for commodities such as lumber and steel, which
are rising in response to greater demand from consumers who
are spending more money for appliances,
cars or to remodel their homes. Freight and shipping costs also have
increased due to surging online orders and shortages in
shipping containers.
Costs for some petrochemicals, which are used
for consumer goods such as medical equipment and mattress foam, began to
increase in late 2020 and went higher after producers temporarily shut down
operations during the recent winter freeze in Texas. Prices for
polypropylene, a type of plastic, have surged 22% over the past month in the
spot market, to $2,398 per metric ton as of March 5, according to S&P Global
Platts, an energy market data firm.
Jeff Miller, the chief financial officer of Container
Store Group Inc. which sells plastic
storage boxes and other home-organization tools, said the rising cost of
polypropylene could put pressure on the retailer’s gross margin. That figure
on a consolidated basis fell 90 basis points to 57.9% in the third quarter
ended Dec. 26 compared with a year earlier, due in part to higher shipping
costs. Sales rose 20% during the third quarter to $275.5 million, driven by
the home-improvement boom spurred by the pandemic.
Container Store is weighing whether to raise
prices on some of its products, Mr. Miller said. “It’s always on the table,”
Mr. Miller said. The company said it could also negotiate with its vendors
or adjust its sourcing to compensate for the higher commodity costs.
Sleep Number Corp. ,
the Minneapolis-based mattress seller, has already decided to increase
prices this year to offset the higher cost of certain chemicals, finance
chief David Callen said. “We have not put them in place just yet, but we
will definitely be doing that,” Mr. Callen said.
The company has contracts in place that delay
the timing of when its foam suppliers can pass on higher input prices. But
the company nonetheless expects to feel an impact, Mr. Callen said. Sleep
Number declined to disclose additional details about its plans to raise
prices.
The company said it raised prices in the past,
often by low single-digit percentage points. Sleep Number’s beds start at
about $1,000 and can cost several thousand dollars. The company’s net sales
during the fourth quarter ended Jan. 2 rose to $567.9 million, up 29% from
the year earlier period.
Inc., the
Monroe, Mich.-based furniture company, began raising prices by low- to
mid-single digit percentages on new furniture orders in October, said CFO
Melinda Whittington. Ms. Whittington, who will take over as chief executive
in April, said the increases affected all products and were made in response
to higher prices on chemicals, wood and steel.
The furniture maker is currently working through a backlog
of orders, with lead times ranging
from five to nine months, up from several weeks before the pandemic. That
means La-Z-Boy is delivering orders that were placed when sale prices were
lower, she said. The company, which expects to benefit from higher prices in
the current quarter, generated $470.2 million in sales in the third quarter
ended Jan. 23, down 1% from a year earlier.
Some raw material costs could remain elevated this
year. The price of polypropylene for example is expected to drop from its
recent peaks as more producers reopen their plants, said Jennifer Van Dinter,
head of integrated analytics at S&P Global Platts.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 12, 2021
Companies Wrote Down Goodwill in Spades Last Year as
Pandemic Took a Toll
By Mark Maurer | March 3, 2021
Topics: Goodwill
Impairment Charge, Coronavirus
Summary: “Economic
recessions historically lead to an increase in goodwill
impairments. Most recently, business across many industries
slowed during the pandemic. U.S. gross domestic product
declined by 2.3% in 2020.” As a result, record amounts of
goodwill were written off in 2020. The energy producers
wrote down more than any other industry But AT&T was among
the companies recording the largest write-offs because of
its investment in direct TV—consumers have been getting out
of pay-TV and accelerated that trend during the pandemic.
Classroom Application: The
article may be used in a class covering business
combinations; it describes the accounting process for taking
goodwill impairments very well in general business terms.
Questions:
How significant are goodwill impairments that were
recorded in 2020? Describe how you assess this
significance.
As described in the article, what are the steps for
generating and testing goodwill for impairment?
What is an impairment charge?
Do companies record impairment charges on their balance
sheets? Explain your answer.
What accounting standard change to goodwill accounting
is currently being proposed by the FASB?
In data available thus far, U.S. public firms took
$143 billion in impairments in 2020, the most in at least a decade,
according to Duff & Phelps
U.S. public companies last year wrote
down the largest amount of goodwill in more than a decade as the value of
certain assets declined during the Covid-19 pandemic.
Companies report goodwill on their
balance sheets when they buy a business for more than the value of its net
assets. The acquiring business must measure the fair value of its reporting
units annually. If that figure is less than the amount recorded on the
books, the company reduces the value of the goodwill.
Goodwill impairments for listed U.S.
firms surpassed $143 billion in 2020 according to data received by Feb. 28
of this year, said Duff & Phelps LLC, a valuation firm. That preliminary
figure, which could change as companies continue to report last year’s
results, is more than double that of 2019, when impairments totaled $71
billion. It is also about 3.3 times higher than the annual average of the
past 10 years, according to an analysis of the Duff & Phelps data. The
company tracked more than 8,800 businesses for its study.
Economic recessions historically lead to an increase in goodwill
impairments. Most recently, business across many industries slowed during
the pandemic. U.S. gross domestic product declined by 2.3% in 2020.
When a public company records an impairment charge on its balance sheets, it
tells investors that a transaction didn’t go as well as expected. “All of a
sudden, the economy enters into recession and a company has a very hard time
justifying the value of its goodwill,” said Feng Gu, professor of accounting
and law at the State University of New York at Buffalo.
Energy
companies wrote down more goodwill than businesses in many other industries
due to the sharp drop in oil prices caused by the pandemic. So far, the
largest impairment in 2020 was Baker
Hughes Co. ’s $14.77
billion write-down,
which the oil-field-services company reported last April. The goodwill is
associated with an oil-field services and equipment business, most of which
Baker Hughes acquired in its merger with General
Electric Co. ’s
oil and gas division in 2017. A spokesman declined to comment further.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 12, 2021
Roblox Isn’t Priced for Playing Around
By Dan Gallagher | March 10, 2021
Topics: Initial
Public Offering (IPO), Common Stock
Summary: Roblox
has undertaken its direct listing on the New York Stock
Exchange (NYSE) on Wednesday, March 10, 2021, having delayed
from its original plan for December 2020. The stock was “up
nearly 8% over its opening price…Roblox[‘s] challenge will
be living up to what is now the most-expensive valuation by
far for a videogame publisher.” The company’s customers are
young—2/3 of its user base are under 14 years of age. One
factor investors consider in its valuation is the
probability that the company can develop a product popular
with older age groups.
Classroom Application: The
article may be used when discussing common stock issuances
and valuation.
Questions:
What is an initial public offering of stock (IPO)?
What is a “direct listing” and how does it compare to a
more traditional approach for an IPO?
Why is a valuation necessary to conduct an initial
public offering or for an investor to decide to acquire
shares of Roblox?
What factors are used to assess the valuation of Roblox
in this article? Name all that you can identify in the
article.
What are “bookings” as opposed to revenue? Why does
using bookings in assessing stock price make the Roblox
stock price seem more reasonable/
That said, Roblox’s unique business
model should justify a premium. The
company provides a platform for its users to design and run their own games,
generating revenue through the sale of so-called Robux for players to use as
in-game currency. That frees Roblox from the hit-and-miss cyclicality common
in the videogame industry. And investors have taken a shine lately to
alternative ways to play in the videogame space. Unity
Software, which
provides tools and services primarily to videogame developers, has jumped
46% since its first trading day last year and is now valued around 27 times
forward sales.
Roblox has been generating positive free
cash flow consistently—even before the pandemic boosted its business last
year. And the valuation looks a bit more reasonable if measured against the
company’s bookings, which are projected to exceed $2 billion this year—about
40% ahead of projected revenue.
Roblox’s main challenge might be showing
that it can expand beyond its core audience; about two-thirds of its user
base is under the age of 14. Respondents to a recent investor survey by
Bernstein Research put a 43% probability on Roblox’s being able to achieve a
similar level of market penetration with older age groups. At its current
valuation, Roblox can’t afford to be stuck at the kids’ table.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 19, 2021
Companies Still Working on Libor Changeover
By Anna Hirtenstein Julia-Ambra Verlaine Mark Maurer
| March 12, 2021
Topics: Interest
Rates, Bond
Summary: The
London interbank offered rate (LIBOR) is integral to many
business financing transactions as a benchmark to determine
the interest rate paid by borrowers. The rate will no longer
be published for many currencies by December and “remaining
dollar rates will end after June 30, 2023.” The rate met its
demise due to scandals involving rate setting. “Jason
Winkler, Motorola’s finance chief, said the
communications-equipment provider plans to use the
replacement preferred by the Federal Reserve—the Secured
Overnight Financing Rate, or SOFR.” The company hasn’t yet
made any changes because no finance contracts currently need
to be negotiated.
Classroom Application: The
article may be used when covering bonds and other long term
debt in a financial reporting class.
Questions:
What is the London-Interbank offered rate (LIBOR)?
In what way(s) is the LIBOR used in finance?
What will happen to LIBOR by December 31, 2021?
What challenges do CFOs face in the process of changing
away from using LIBOR?
Regulators press firms to drop borrowing benchmark,
while many weigh its replacement or discuss timing, financial implications
Regulators are pressuring Wall Street to do away with the London interbank
offered rate by year-end. Companies are still making the switch.
Chief
financial officers at major U.S. companies such as Motorola
Solutions Inc. and Ralph
Lauren Corp. said
they are working on issues including choosing between alternatives to the
troubled borrowing benchmark, used for decades to help set rates on
corporate debt, and discussing the timing and financial implications.
Jason Winkler, Motorola’s finance chief, said the communications-equipment
provider plans to use the replacement preferred by the Federal Reserve—the
Secured Overnight Financing Rate, or SOFR. But without any immediate
financial arrangements in need of adjustment, the company was still gauging
when to transition to the new rate.
“We’re working through it like many other companies and evaluating our
choices,” Mr. Winkler said.
Libor is a key reference rate for corporate borrowing, underpinning
trillions of dollars in financial contracts ranging from loans to
interest-rate swaps. But financial firms and regulators world-wide are
scheduled to abandon the rate at the end of this year after it fell into
disrepute a decade ago following a manipulation scandal.
The Fed warned banks Tuesday that they could face regulatory consequences if
robust plans aren’t in place to move away from the benchmark before Dec. 31.
That is when it expires for some shorter-dated dollar rates.
The U.K. regulator in charge of overseeing Libor, the Financial Conduct
Authority, said March 5 that Libor would cease for sterling, the euro, Swiss
franc and yen at the end of the year, building on its mandate that market
participants transition to other benchmark rates. The remaining dollar rates
will end after June 30, 2023.
The
use of Libor is still strong in the futures and options markets, data from CME
Group showed.
Daily trading volume reached the highest level for Eurodollar futures, which
use Libor as a benchmark, since 2014 on Feb. 25 at 10.7 million contracts
and averaged three million daily for the month. By comparison, average daily
volume for SOFR futures in February was 122,872 contracts.
“Examiners should consider issuing supervisory findings and other
supervisory actions if a firm is not ready to stop issuing Libor-based
contracts by Dec. 31, 2021,” said Michael Gibson, a director in the division
of supervision and regulation at the Fed.
CFOs said they have been examining contracts linked to Libor and are
discussing replacement options with lenders who bankroll them to fund
operations or other expenses. Many corporations’ credit lines and loans have
interest rates based off Libor. If they don’t change over, or otherwise
prepare, legal fallbacks in their contracts could raise their debt payments.
Banks have put resources and cash into programs to transition to SOFR, which
is based on the cost of transactions in the market where financial companies
borrow cash overnight using U.S. government debt as collateral. That was
developed by a committee of major banks, insurers and asset managers that
has joined the Fed in rallying users of Libor to adopt SOFR.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 19, 2021
IRS Delays Tax-Filing Deadline Until Mid-May
By Richard Rubin | March 17, 2021
Topics: Individual
Income Tax
Summary: “The
Internal Revenue Service delayed the main April 15
tax-filing and payment deadlines for individuals until May
17…. The move comes after lawmakers and accountants urged
the government to allow more time to complete 2020 tax
returns and adjust to tax-law changes implemented during the
pandemic.” As reported in a related article (available at https://www.wsj.com/articles/heres-how-you-can-still-save-on-2020-taxes-with-ira-contributions-11614909575),
IRS Commissioner Charles Rettig had wanted to keep the
typical April 15 deadline.
Classroom Application: The
article may be used in an individual income tax class.
Questions:
As described in the article, what was the most recent
change in tax law affecting amounts reported on 2020
individual income tax returns?
What steps must tax preparers undertake to cope with the
challenges of both the coronavirus pandemic itself and
the tax law changes that have been implemented for 2020
tax returns? List all that you find in the article. You
may include some that you think of yourself as well.
Some argue that the one month extension of the deadline
for federal individual income tax filings is not
sufficient. Why?
Extension will give taxpayers more time to grapple
with late law changes, pandemic
WASHINGTON—The Internal Revenue Service delayed the main April 15 tax-filing
and payment deadlines for individuals until May 17, giving taxpayers and
preparers a bit of breathing room in an unusually complicated tax season.
The move comes after lawmakers and accountants urged the government to allow
more time to complete 2020 tax returns and adjust to tax-law changes
implemented during the pandemic.
The tax-filing season started later than usual and has been challenging for
taxpayers dealing with the effects of last year’s economic disruptions and
late changes to the tax law. Typical in-person assistance, which can be
particularly valuable for low-income filers, has been more complicated this
year as well.
The automatic extension applies to individual returns and payments for 2020
that are due on April 15; they will be extended to May 17 without penalties
and interest. It doesn’t apply to 2021 estimated-tax payments due on April
15, the IRS said late Wednesday. Many questions remain unanswered, including
whether states will follow suit and extend their income-tax deadlines.
The IRS, seeking a return to something resembling its normal schedule after
2020, had been reluctant to change the deadline. It delayed the start of the
filing season to Feb. 12 from the typical late January date so it had time
to implement tax-law changes that Congress wrote in December. Calls for
another delay came this month as Congress changed 2020 tax law again.
“We are gratified that the IRS has recognized the need and heeded our calls
for additional time, and while we are pleased with this 30-day extension, we
will continue to monitor developments during this hectic filing season,”
Reps. Richard Neal (D., Mass.) and Bill Pascrell (D., N.J.) said in a
statement.
Bloomberg News first
reported the
delay. The IRS will release further details in the coming days.
“This continues to be a tough time for many people, and the IRS wants to
continue to do everything possible to help taxpayers navigate the unusual
circumstances related to the pandemic, while also working on important tax
administration responsibilities,” IRS Commissioner Charles Rettig said in a
statement.
Last
week’s late change
in the tax law compounded
difficulties facing tax preparers, taxpayers and the IRS, which is still
working through a backlog of 2019 tax returns. The government has received
18% fewer tax returns through early March this year compared with 2020.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 19, 2021
Minority-Owned Investment Banks Are Underwriting
More Corporate Bond Offerings
By Kristin Broughton | March 15, 2021
Topics: Bonds,
ESG Reporting
Summary: The
year 2020 produced records for total bond offerings. Another
record reached was an all-time high for the percent of
investment-grade debt issuances involving investment banks
that are owned or controlled by minority individuals, women,
or veterans. The percentage rose to 29% from 22% 10 years
ago. The article focuses on factors considered by chief
financial officers (CFOs) in deciding on which investment
firms to use in conducting a bond issuance. It also
discusses the investor base and other business benefits that
minority-, women-, and veteran-owned investment banks can
provide.
Classroom Application: The
article may be used when discussing bond offerings in a
financial reporting class or environmental, social, and
governance reporting in a managerial or financial accounting
class.
Questions:
Describe the process for a corporation to issue bonds to
the public.
Why have corporations used investment banks owned by
minority individuals, women, or veterans more frequently
in recent years than in the past?
What factor or factors do chief financial officers
(CFOs) consider in deciding which investment banks to
hire in conducting a bond offering to the public?
Participation in debt offerings by firms with
diverse ownership was at an all-time high last year, according to Refinitiv
Finance chiefs are hiring minority-owned investment banks as underwriters on
their corporate bond offerings more frequently, aiming to attract new
investors and demonstrate their commitment to diversity.
The 10
largest investment banks by deal volume that are owned by minorities, women
or veterans took part in 29% of debt sales by U.S. investment-grade
companies last year, according to data provider Refinitiv, raising $814.2
billion during a record
year for bond offerings overall.
That participation level for firms with diverse ownership was an all-time
high and up from 22% of debt sales with proceeds of $211.5 billion a decade
ago, according to Refinitiv.
So far in 2021, the top 10 firms with diverse owners have taken part in bond
offerings that raised $136.2 billion, accounting for 43% of proceeds in the
U.S. investment-grade market, according to Refinitiv. In the same period in
2020, such firms took part in debt sales that raised $95.1 billion,
accounting for 33% of the market, Refinitiv said.
The
bond sales come as finance departments play a more prominent role in their
companies’ diversity efforts following protests over racial injustice and
the killing of George Floyd in 2020. Some businesses, such as Netflix Inc. and PayPal
Holdings Inc. pledged to
move a portion of
their corporate deposits to
Black-owned banks.
Allstate Corp. ,
a Northbrook, Ill.-based insurance company, in November hired investment
banks owned by minorities, women or veterans as underwriters on a $1.2
billion bond sale to finance a portion of its
acquisition of
rival National General Holdings Corp., with Loop Capital Markets LLC,
Siebert Williams Shank & Co. LLC, Samuel A. Ramirez & Co. and Academy
Securities Inc. named lead underwriters. Some of the firms picked as leads
previously worked on Allstate’s debt and equity deals, but had never been
offered a leading role, said Mario Rizzo, the company’s chief financial
officer. “What changed was, I think, really the direct result of events of
last summer,” he said, referring to the protests over racial injustice.
Allstate previously hadn’t hired minority-owned firms to lead its bond
offerings because it viewed them as higher risk since they didn’t have the
same level of experience on large deals as the big banks, according to Mr.
Rizzo. It also simply hadn’t spent time during previous deals questioning
the matter, he said.
But the protests, along with a companywide diversity push, prompted Allstate
to use its latest bond offering to showcase such firms’ capabilities, Mr.
Rizzo said. It also reviewed previous deals at other companies where
minority-owned firms generally played a leading role. “They were always kind
of chaperoned by another larger institution, and we said we wanted to do
something different,” he said.
Finance chiefs and corporate treasurers usually consider several factors in
deciding which firms to hire as underwriters on bond sales. Among them:
whether the company has an existing relationship with an investment bank, or
wants to give a bank an opportunity to earn underwriting fees after
providing less prominent services, such as lending or handling share
repurchases. Big banks like JPMorgan
Chase &
Co. and Bank
of America Corp. dominate
the debt capital markets.
The firms that led the Allstate transaction said they have seen an uptick in
interest from potential new corporate clients in the months since the deal
closed. The transaction helped confront companies’ perceptions that smaller
firms lack the capabilities to execute large transactions on their own, they
said. Some view their competitive edge as complementing the services of big
banks.
“Where our value comes in is finding smaller, midtier investors that we can
reach out to and build relationships with,” said Jonathan Levin, head of
corporate finance at Siebert Williams Shank. He said his firm works with
institutional investors of all sizes, including many small and
minority-owned investment managers with under $10 billion in assets under
management.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 26, 2021
U.K. Mulls Capping Number of Audits Big Four Firms
Can Do
By Nina Trentmann | March 18, 2021
Topics: Auditing
Services, International
Summary: “The
U.K. government is seeking feedback on a range of proposals
to overhaul the country’s audit sector following a series of
corporate scandals as well as similar regulatory efforts in
Germany.” Proposals will be open for comment for 16 weeks
and include elements to increase competition for audits of
the largest U.K. companies by smaller audit firms.
Classroom Application: The
article may be used in an auditing class or an international
accounting or auditing class.
Questions:
Why is the U.K. government considering “overhauling the
country’s audit sector”?
What audit practice changes are being considered by the
U.K. government?
How do you think these proposed changes will impact the
strength of U.K. audit firm practices?
Suppose you were going to work for one of the public
accounting firms in the U.K., either the Big Four or
smaller. State your choice and then discuss whether you
think the developments in this article could impact your
career.
Government is inviting comment from business and
the public on revamping audit regulation in Britain
The U.K. government is seeking feedback
on a range of proposals to overhaul the country’s audit sector following a
series of corporate scandals as well as similar regulatory efforts in
Germany.
The government said on Thursday it plans
to reduce a general overreliance on Big Four firms Deloitte, Ernst & Young,
KPMG and PricewaterhouseCoopers by forcing companies to employ a smaller
audit firm to conduct part of their annual audit.
The Big Four also could face a cap on the
number of companies in the FTSE 350 Index they can audit if competition
doesn’t pick up, the release by the Department for Business, Energy and
Industrial Strategy said.
Other structural changes, for example, an
operational split between the audit and nonaudit business of
professional-services firms—first suggested by a U.K. regulator in 2019—will
fall into the remit of a
new oversight body called the Audit,
Reporting and Governance Authority. The ARGA, which would have
responsibility for large listed as well as privately owned businesses, would
have stronger powers to enforce audit standards, including the ability to
order companies to redo their financial accounts.
Thursday’s proposals come after several
reviews and studies about the functioning of the U.K. audit sector,
triggered by a series of corporate failures.
“It is clear from large-scale
collapses like Thomas
Cook, Carillion
and BHS [British Home Stores] that Britain’s audit regime needs to be
modernized with a package of sensible, proportionate reforms,” Business
Secretary Kwasi Kwarteng said, according to the release.
In Germany, lawmakers are currently discussing
whether to give companies’ supervisory boards enhanced rights, strengthen
auditor independence and overhaul BaFin,
the country’s market watchdog, after last year’s Wirecard AG scandal.
Under the proposals, German companies
would be forced to rotate auditors every 10 years. Professional-services
firms would have to separate their auditing and consulting businesses,
mirroring the U.K. proposal. Auditors would bear extended liability and face
harsher penalties in cases of misconduct, according to the German draft
legislation.
The U.K. government, which hasn’t
introduced a legislative proposal yet, also is readying new reporting
requirements for auditors and company directors around detecting and
preventing fraud. Companies would have to add clauses to executive contracts
that would require bonuses be returned in the event of failures up to two
years after any award was made. Large companies would be required to hold
off on paying dividends and bonuses when at risk of insolvency, the paper
said.
Directors would publish resilience
statements describing how their company is navigating short- and long-term
risks, including the fallout of climate change, the government said. Going
forward, auditors would be able to measure companies’ nonfinancial
performance in areas such as climate-protection targets, the release said.
Deloitte, E&Y, KPMG and PwC said they
welcomed the government consultation, which will last 16 weeks. The comment
period allows businesses and the public to provide their views on issues
such as whether shareholders should vote on companies’ audit policies or
whether to introduce a new set of enforceable audit principles.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 26, 2021
Covid-19 Relief Law Gives Companies More Time to
Fund Pensions
By Mark Maurer | March 23, 2021
Topics: Pension
Funds, Coronavirus
Summary: The
new Covid-19 relief package just signed into law will help
companies with defined-benefit pension plans. The plan
extends the time from seven years to 15 years over which
current plan deficits must be funded. The law assists
“struggling multiemployer pensions, which are jointly run by
unions and companies. The law creates a more predictable and
favorable basis for measuring the liabilities that
ultimately determine the funding obligation….” The stock
market boom has left many companies’ pension plans in a
healthier position. “The funding level of single-employer
plans sponsored by S&P 500 companies rose roughly 4.7
percentage points to 91.5% at the end of 2020, compared with
the previous year….The funded status has since climbed to
95.3% as of Feb. 28.” Some companies are winding down
pensions so won’t use the new flexibility available under
the relief plan. Contributing less now simply extends the
gap between assets available and funding required to
terminate them.
Classroom Application: The
article may be used when discussing pension plans accounting
an advanced financial reporting class. The article focuses
on federal pension funding requirements and one question
ensures that students understand the difference between
funding and financial reporting requirements.
Questions:
What laws establish funding requirements for U.S.
pension plans? Cite your source for this answer whether
from your textbook or elsewhere.
Do the pension funding requirements establish the
financial reporting requirements for these plans by plan
sponsors? Explain your answer and cite authoritative
accounting literature.
In which industries will companies be most likely to
adjust their pension funding requirements under this new
law?
Why do some companies’ chief financial officers think
they may not take advantage of this change in funding
requirements?
Single-employer plan sponsors will have 15 years—up
from seven now—to cover pension deficits, and flexibility in how money
earmarked for 2019 and 2020 pension contributions can be used
Finance chiefs will get more time to
cover their companies’ pension deficits and more flexibility with the cash
they have put into retirement plans as part of the new Covid-19 aid package.
Market disruptions caused by the pandemic
and near-zero interest rates have made it harder for companies to manage
their pension obligations, especially plans sponsored by a single employer.
Low interest rates contribute to higher liabilities, increasing the amount
of funding that companies need to set aside for pension obligations.
Single-employer plans often promise to
pay out fixed sums to retirees, sometimes over several decades, similar to
other defined-benefit plans. More than 20,000 U.S. companies offer these
single-employer plans, according to consulting firm Mercer LLC.
Many of these plans, which are largely
underfunded, have fared well with the rise in the stock market over the past
few months. The funding level of single-employer plans sponsored by S&P 500
companies rose roughly 4.7 percentage points to 91.5% at the end of 2020,
compared with the previous year, professional-services firm Aon PLC
said. The funded status has since climbed to 95.3% as of Feb. 28. The
estimated aggregate deficit of single-employer pensions sponsored by S&P 500
companies was $102.1 billion as of Feb. 28, tumbling 72.8% from the prior
year, Aon said.
But as interest rates are expected
to remain low for a while, companies
need long-term support to continue making contributions to their plans and
to cover any potential future market volatility or cash crunch, advisers
say.
The $1.9
trillion aid package that President
Biden signed into law earlier this month helps sponsors of single-employer
plans hold on to cash and delay paying off any deficit in their plan over a
15-year period vs. the current seven-year period. It also set
aside about $86 billion for struggling
multiemployer pensions, which are jointly run by unions and companies.
The law creates a more predictable and
favorable basis for measuring the liabilities that ultimately determine the
funding obligation, said Jonathan Price, a senior vice president at the
Segal Group Inc., an employee-benefits consulting firm.
Companies can use as a minimum, a
corporate bond yield of roughly 5%, to determine the value of their pension
liabilities. Before the law, there was no such minimum. The floor rate,
which is higher than the current market rate, is expected to reduce
short-term contributions that companies need to make for their plan.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 26, 2021
Why Finance Executives Rely on Supply-Chain Finance:
A Guide to the Financing Tool
By Mark Maurer and Kristin Broughton | March 22,
2021
Summary: In
supply-chain finance, a bank pays its customer’s vendor, but
the customer (debtor) pays the bank at a later due date. The
early payment is made at a discounted amount, such as
happens when companies offer discounts to encourage early
payments. Banks keep the discount difference when they are
repaid the full amount owed by the debtor. The system allows
debtors to extend repayment terms without requesting an
extension of terms directly from the vendor. As described in
the article “large manufacturers, such as airplane
manufacturer Boeing Co., and other global companies,
including soft drinks producer Keurig Dr Pepper Inc., are
avid users of supply-chain financing to extend payment
terms. But there tends to be a barrier to entry for some
businesses, especially those with weaker credit ratings.”
Classroom Application: The
article may be used in a managerial accounting class or in a
financial reporting class discussing disclosure
requirements. There has been limited disclosure by companies
about their use of this tool, but the recent Greensill
Capital insolvency filing, linked in the article and in
questions, has led to concerns about the lack of disclosure.
Questions:
What types of entities provide supply chain financing?
Summarize your understanding of how supply chain
financing operates.
Companies are setting up programs to improve
working capital and cut costs while disclosing few details
The struggles of Greensill Capital have shone a
light on the increasing use of supply-chain financing, a tool that gives
companies the ability to extend their payment terms to vendor
Regulators and standard-setters are closely watching
if and how companies disclose their use of the financing tool, which has
come into focus amid the recent
problems seen at Greensill, a major
provider of supply-chain finance. The firm filed
for insolvency earlier this month and is
facing regulatory scrutiny.
How Does
Supply-Chain Finance Work?
As part of a supply-chain finance agreement,
banks provide funding to pay a company’s supplier of goods and services. The
supplier is then paid earlier—but less—than it would be paid without the
agreement.
For small suppliers, the financing can provide
money for their operations without having big companies extend their payment
terms, potentially by months.
The company pays the money it owes the supplier
to the bank, often later than it would have paid its supplier. The bank
keeps the amount it doesn’t pay to the supplier in exchange for its
services.
Supply-chain finance has been around
for decades. Companies started using
it more frequently after the 2008 financial crisis, when many businesses
wanted to preserve cash on-hand by extending payment terms with vendors.
Since then, the market for this short-term borrowing
tool has expanded, with banks and other providers offering digital tools to
help companies manage related processes, such as procurement, according to
professional services firms KPMG LLP, PricewaterhouseCoopers LLP and the Hackett
Group Inc.
Which Companies Can
Use Supply-Chain Finance?
Large manufacturers, such as airplane manufacturer Boeing
Co., and
other global companies, including soft drinks producer Keurig
Dr Pepper Inc., are
avid users of supply-chain financing to extend payment terms.
But there tends to be a barrier to entry for
some businesses, especially those with weaker credit ratings. These ratings
help determine the discount rate applied to the payment the supplier
receives. The better the credit rating of a company, the cheaper it is for
the supplier to participate in the program.
“Smaller companies have to just deal with the
fact that their discount rates are fairly high,” said Rudi Leuschner,
associate professor of supply chain management at Rutgers University.
It is unclear how many companies have
supply-chain finance programs. Twenty-seven companies in the S&P 500
disclosed in their 2020 annual reports they are using the tool, up from 13
the previous year, according to data provider MyLogIQ. Between 2015 and
2019, an average of about eight companies in the S&P 500 said they used
supply-chain finance.
Who Are the
Providers?
Large financial institutions, including JPMorgan
Chase & Co. and Citigroup Inc., are
the most frequent providers of supply-chain financing. Banks provide capital
and run the programs for companies.
Financial technology and logistics firms in
recent years also have started to provide such funding, sometimes through a
partnership with a bank, along with other invoicing and procurement
services, advisers at KPMG, PwC and Hackett said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 26, 2021
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
The Forum, mostly by Jerry Trites, and sometimes
guests, on a variety of contemporary topics related to accounting and
finance. Also contributing is Don Sheehy, CPA, an expert in advanced
technology related assurance issues,
http://thinktwenty20.com/index.php/blog-issues-forum
Issues in Standard Setting by various
members of the Standards Setting group of CPA underlying Canada (first entry
to be in August), and by David Hardidge, an expert on International
Accounting Standards from Brisbane Australia focusing on explorations of the
issues underlying contemporary accounting standards setting,
http://thinktwenty20.com/index.php/home2-category/67-features/162-standards-roundup
Hey, What’s New by Gundi Jeffrey, focusing
on a random collection of news items she selects that should be interesting
to accountants.
http://thinktwenty20.com/index.php/news
Video:
Scenarios of Higher Education for Year 2020 (and beyond)---
http://www.youtube.com/watch?v=5gU3FjxY2uQ
The above great video, among other things, discusses how "badges" of academic
education and training accomplishment may become more important in the job
market than tradition transcript credits awarded by colleges. Universities may
teach the courses (such as free MOOCs) whereas private sector companies may
award the "badges" or "credits" or "certificates." The new term for such awards
is a
"microcredential."
Credential (Certificate,
Badge, License, and Apprenticeship) Count Approaches 1 Million ---
Click Here
For example, credentials for computer programming skills are becoming more
popular. Some certificates supplement college diplomas, whereas others are
earned by students who did not enroll in college.
The Academic Resource Hub is a database of hand-curated content from the
AICPA, accounting firms, academics and winning submissions from the AICPA's
teaching awards designed to help accounting educators prepare students for
the rapidly-evolving demands of the profession.
Signing up for the ARH will give you access to resources related to topics
like data analytics, cybersecurity and much more. Our resources cover a wide
range of class levels and will help you easily incorporate new ideas into
your syllabus.
This resource is *intended for accounting educators and professionals for
use in academic instruction, research or guidance and requires
registration as an accounting educator or professional on
ThisWaytoCPA.com to access.
New York’s $300 billion of other post-employment benefit (OPEB) debt from
state and local governments exceeds $16,000 per resident, dwarfing all other
states on a per-capita basis ---
https://www.data-z.org/news/detail/new-yorks-opeb-problem
No sweat. Congress will print enough money to bail out all the blue states'
debt. Washington DC's money tree commenced to bare fruit in 2121.
Two
former KPMG auditors agreed to be suspended from practicing before the U.S.
Securities and Exchange Commission after the financial regulator charged
them with improper professional conduct during an audit of the since-closed
College of New Rochelle in New York.
Christopher Stanley, a former KPMG partner, has
the right to apply for reinstatement after three years. Jennifer Stewart, a
former senior manager at the auditing firm, can apply for reinstatement
after one year. They agreed to be suspended without admitting to or denying
the SEC’s findings.
The two were involved in the approval of an unmodified
audit opinion for the College of New Rochelle’s 2015 fiscal year financial
statements, even though important audit steps had not been completed,
according to an SECnews
release. KPMG encountered difficulty
finishing the audit after the College of New Rochelle’s controller provided
inaccurate, incomplete and contradictory information -- but the auditors
nonetheless decided to issue a report after the college’s president and
controller told them on Nov. 30, 2015, that a report was needed by the end
of the day, according to the SEC.
Resulting financial statements overstated the
College of New Rochelle’s net assets by $33.8 million, according to the SEC.
The statements were published online as a disclosure to bond investors.
“Auditors of municipal issuers are key
gatekeepers in upholding the reliability and integrity of financial
information provided to investors in municipal bonds,” Matthew S. Jacques,
chief accountant of the SEC’s enforcement division, said in a statement. “It
is critical that they exercise professional care and skepticism.”
The College of New Rochelle collapsed after its
financial problems became clear, announcing its closurein
2019. The SECchargedits
by-then-former controller with fraud that year. He was convicted of
securities fraud and failure to pay payroll taxes and sentenced to three
years in federal prison,according
tothe Westchester & Fairfield
County Business Journals. Currently
he is at a Brooklyn halfway house, the business journals reported.
Home prices near Miami have
risen over 25% in the last year as Silicon Valley and Wall Street high income
families flock to Florida ---
Click Here
Silicon Valley elites and hedge fund millionaires are flocking to Miami, and
it's already resulting in a major spike in home prices.
A new report
from The
New York Times' Nellie Bowles examines
the influx of business leaders to South Florida amid the pandemic. What may
have begun as a temporary stay has become a permanent transfer, and it's
sending home prices skyrocketing.
By the end of 2020, the median home sale price in Palm Beach shot up to $4.9
million, an increase of 29% from the year earlier, real estate firm Douglas
Elliman told The Times. By comparison, Manhattan's prices rose only about 5%
during the same period.
In listserv correspondence Jagdish Gangolly wrote:
If my reading of the Dennis article is right, he is
arguing for the entity theory of accounting. That will require an entirely
new thinking on corporate governance,
somewhat on the lines of the German model where corporations have
Board of directors and Board of supervisors, the latter consisting of all
stakeholders. I personally think that would be a good idea and considerably
improve corporate governance in the US.
Jensen Comment About a Shortage of German Shareholders Willing to Take
Financial Risks in Equity Markets
German tendency toward government regulation and financial tradition for bank
financing resulted in the smallness of stock markets and equity financing in
Germany relative to the USA and even some other nations in Europe and China.
Germany depends mostly upon banks for business financing. As a result there is
no Silicon Valley for venture equity capital in Germany.
The German capital market has different
characteristics to those of the US and the UK. The key differences involve
the development of public equity markets, patterns of ownership structure,
and minority shareholder protection. In contrast to other major economies,
such as the US, the UK, and Japan, the number of exchange listed German
companies is comparatively low. As a
consequence, banks and other financial institutions act as the primary
suppliers of external capital for (German) corporations. In addition,
the typical market listed German firm is characterized by a small number of
large shareholders. Franks and Mayer (2001) observe that “85% of the largest
quoted companies have a single shareholder owning more 3 than 25% of the
voting shares”1 (based on 171 companies in 1990). This percentage seems to
be stable over time (at least for non-financial companies). In a study based
on all nonfinancial companies listed on the „official‟ trading segment of
the Frankfurt stock exchange between 1997 and 2004 (264 companies), Andres
(2007) states that the percentage observed by Franks and Mayer (2001) is
strikingly consistent with ownership patterns 15 years later, “with 84.5% of
the firms featuring a shareholder with a stake of more than 25%.”
German inventors and developers seek outside investors such as USA's Tesla
that is now building a mega electric vhicle factory in Germany. A German
biotechnology developer, BioNTech,
partnered with the USA's Pfizer to conduct clinical trials, finance,
and produce its covid vaccine ---
https://en.wikipedia.org/wiki/Pfizer%E2%80%93BioNTech_COVID-19_vaccine
BioNTech is the initial developer of the vaccine,
and partnered with Pfizer for development, clinical research, overseeing the
clinical trials, logistics,
finances and for worldwide manufacturing,[32] with the exception of
China, where the license to distribute and manufacture was purchased by
Fosun, alongside its investment in BioNTech.[33][34] Distribution in Germany
and Turkey is by BioNTech itself.[35] Pfizer indicated in November 2020,
that 50 million doses could be available globally by the end of 2020, with
about 1.3 billion doses in 2021.[
Jensen Comment
Until the radical left destroys equity capital markets, the USA is probably the
best nation for risky financing with corporate common stock. No other nation
welcomes
Initial Public Offerings like the USA. IPOs are generally marketed by
investment banks in the USA because there is such a large throng of USA
investors willing to make risky financial investments in their quests for the
American Dream. Before the 2020 election there were, as Jagdish points out, tax
advantages of equity investing in the USA. After the 2020 election tax
advantages of shareholder equity investing will largely disappear coupled with
new wealth taxes and new taxes on businesses that, combined with newer
German-like regulations of corporations, may dry up much of that risk capital in
the USA.
The USA, along with the rest of the world, will be moving toward having
governments finance risky ventures. This will help financial winners and losers
doing social good to become funded with taxpayer dollars, but it also adds
layers of inefficient politics, bureaucracy, fraud, and red tape. Exhibit A is
the massive fraud that arose with Medicare and Medicaid financing of health
care.
What's worse is that the paths of becoming billionaires with inventions and
developments will probably destroy much of the innovation that comes along with
the former American Dream.
Interestingly, while the American Dream declines the Chinese Dream is
roaring.
Like a relentless overachiever, China is eagerly
collecting superlatives. It’s the world’s fastest-growing major economy. It
boasts the world’s biggest hydropower plant, shopping mall, and crocodile
farm (home to 100,000 snapping beasts). It’s building the world’s largest
airport (the size of Bermuda). And it now has more self-made female
billionaires than any other country in the world.
This is not only because China has more females
than any other nation. Many of these extraordinary women rose from nothing,
despite living in a traditionally patriarchal society. They are a beguiling
advertisement for the New China—bold, entrepreneurial, and
tradition-breaking.
Four standouts among China’s intriguing new
superwomen are Zhang Xin, the factory worker turned glamorous real-estate
billionaire, with 3 million followers on Weibo (China’s Twitter); talk-show
mogul Yang Lan, a blend of Audrey Hepburn and Oprah Winfrey; restaurant
tycoon Zhang Lan, who as a girl slept between a pigsty and a chicken coop;
and Peggy Yu Yu, cofounder and CEO of one of China’s biggest online
retailers. None of these women inherited her money, and unlike many of the
richest Chinese who are reluctant to draw public scrutiny to their path to
wealth, they are proud to tell their stories.
How did these women make it to the top in the wild,
wild East? Did they pay a price, either in their family or their
professional lives? What was it that distinguished them from their famously
hardworking compatriots? As I set out to explore these questions, my
interest was partly personal. All four of my subjects lived for extended
periods in the West. As a Chinese-American, and now the infamous Tiger Mom,
I was curious: how “Chinese” were these new Chinese tigresses?
It turns out that each of these women, in her own
way, is a dynamic combination of East and West. Perhaps this is one secret
to their breathtaking success.
Zhang Xin is a rags-to-riches tale right out of
Dickens. She was born in Beijing in 1965. The next year Mao launched the
Cultural Revolution, and millions, including intellectuals and party
dissidents, were purged or forcibly relocated to primitive rural areas.
Children were encouraged to turn in their parents and teachers as
counterrevolutionaries. Returning to Beijing in 1972, Zhang remembers
sleeping on office desks, using books for pillows. At 14 she left for Hong
Kong with her mother, and for five years she worked in a factory by day,
attending school at night.
“I was a miserable kid,” she told me. With her chic
cropped leather jacket and infectious laughter, the cofounder of the $4.6
billion Soho China real-estate empire is today an odd combination of
measured calculation and warm spontaneity. “My mother drove me in school so
hard. That generation didn’t know how to express love.
“But it wasn’t just me. It was all of China. I
don’t think anybody was happy. If you look at photos from those days, no one
is smiling.” She mentioned the contemporary artist Zhang Xiaogang, who
paints “cold, emotionless” faces. “That’s exactly how we all grew up.”
. . .
But the four women I interviewed are a new breed.
Progressive, worldly, and open to the media, they are in many ways not
representative of China, past or present. Perhaps they are merely the lucky
winners of the 1990s free-for-all in China, a window that may already be
closing. Or perhaps they are the forerunners of a China still to come, in
which paths to success are far more open. Each has found a way to
dynamically fuse East and West, to staggering commercial success. It may
still be a long way off, but if China can achieve a similar alchemy—melding
its tremendous economic potential and traditional values with Western
innovation, the rule of law, and individual liberties—it would be a land of
opportunity tough to beat.
In Brief
The sixth annual 2020 NYSSCPA–Rosenberg Survey identifies trends from the
national 22nd Annual Practice Management Survey and provides profitability
and growth data of participating New York CPA firms. This year was unlike
any that our profession has faced in the 22 years of the survey. The survey
data reflects trends and performance from 2019, before the coronavirus
(COVID-19) pandemic struck. A second part of the survey presents analysis
and conclusions from leading experts and practice management consultants on
how accounting firms have adapted to the challenge of COVID-19. As Charles
Hylan, managing partner of Rosenberg & Associates and author of the survey
remarked: “The landscape for accounting firms changed quickly when the
pandemic hit. It was as if a switch was flipped. Managing partners were
forced to deal with massive changes in workflow and practice.” This year’s
Rosenberg Survey provides valuable analysis, guidance, expert insight, and
practical recommendations for CPAs on how to adapt and succeed during this
crisis and what comes after.
Jensen Comment
Sadly, the above report has nothing to say about the state of accounting
education. Maybe this is because accountics scientists accomplished so little on
issues of greatest concern in the profession ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong
Can you point to one accountics science finding that practicing CPA's
applaud?
Creating Relevance of Accounting Research
(ROAR) Scores to Evaluate the Relevance of Accounting Research
to Practice
Keywords: Research
Relevance, Accounting Rankings,
Practice-Oriented Research, Journal Rankings
JEL Classification: M40,
M41, M49, M00
Abstract
The relevance of accounting academic
research to practice has been frequently discussed in the accounting academy;
yet, very little data has been put forth in these discussions. We create
relevance of accounting research
(ROAR) scores by having practitioners read and evaluate the abstract of
every article published in 12 leading accounting journals
for the past three years. The ROAR scores allow for a more
evidence-based evaluation and discussion of how academic accounting research
is relevant to practitioners. Through these scores, we identify the
articles, authors, journals, and accounting topic
areas and methodologies that are producing practice-relevant
scholarship. By continuing to produce these scores in perpetuity, we
expect this data to help academics and practitioners better identify and
utilize practice-relevant scholarship.
V. CONCLUSIONS
This research provides empirical data
about the contribution accounting academics are making to practice.
Specifically, we had nearly 1,000 professionals read the abstract of
academic accounting articles and rate how relevant the articles are to
practice. We then present the data to rank journals, universities, and
individual scholars. Overall, we interpret the results to suggest that
some of the research that is currently produced and published in 12
accounting journals is relevant to practice, but at the same time, there
is room to improve. Our hope is that by producing these rankings, it
will encourage journals, institutions, and authors to produce and
publish more relevant research, thus helping to fulfill the Pathways
charge “to build a learned profession.”
We now take the liberty to provide some
normative comments about our research findings in relation to the goal
of producing a learned profession. One
of the key findings in this study is that the traditional top 3 and top
6 journals are not producing the most or the greatest average amount of
practice relevant research, especially for the distinct accounting topic
areas. Prior research shows
that the collection of a small group of 3/6 journals is not
representative of the breadth of accounting scholarship (Merchant 2010;
Summers and Wood 2017; Barrick, et al. 2019). Given the empirical
research on this topic, we question why institutions and individual
scholars continue to have a myopic focus on a small set of journals. The
idea that these 3/6 journals publish “the best” research is not
empirically substantiated. While many scholars argue that the focus is
necessary for promotion and tenure decisions, this seems like a poor
excuse (see Kaplan 2019). Benchmarking production in a larger set of
journals would not be hard, and indeed has been done (Glover, Prawitt,
and Wood 2006; Glover, Prawitt, Summers, and Wood 2019). Furthermore, as
trained scholars, we could read and opine on article quality without
outsourcing that decision to simple counts of publications in “accepted”
journals. We call on the 18 We recognize that only looking at 12
journals also limits the scope unnecessarily. The primary reason for the
limitation in this paper is the challenge of collecting data for a
greater number of journals. Thus, we view 12 journals as a start, but
not the ideal. academy to be much more open to considering research in
all venues and to push evaluation committees to do the same.
A second important finding is that
contribution should be a much larger construct than is previously
considered in the academy. In our experience, reviewers, editors, and
authors narrowly define the contribution an article makes and are too
often unwilling to consider a broad view of contribution. The current
practice of contribution too often requires authors to “look like
everyone else” and rarely, if ever, allows for a contribution that is
focused exclusively on a practice audience. We encourage the AACSB, AAA,
and other stakeholders to make a more concerted effort to increase the
focus on practice-relevant research. This may entail journals rewriting
mission statements, editors taking a more pro-active approach, and
training of reviewers to allow articles to be published that focus
exclusively on “practical contributions.” This paper has important
limitations. First, we only examine 12 journals. Ideally, we would like
to examine a much more expansive set of journals but access to
professionals makes this challenging at this time. Second, measuring
relevance is difficult. We do not believe this paper “solves” all of the
issues and we agree that we have not perfectly measured relevance.
However, we believe this represents a reasonable first attempt in this
regard and moves the literature forward. Third, the ROAR scores are only
as good as the professionals’ opinions. Again, we limited the scores to
5 professionals hoping to get robust opinions, but realize that some
articles (and thus authors and universities) are not likely rated
“correctly.” Furthermore, articles may make a contribution to practice
in time and those contributions may not be readily apparent by
professionals at the time of publication. Future research can improve
upon what we have done in this regard.
We are hopeful that shining a light on
the journals, institutions, and authors that are excelling at producing
research relevant to practice will encourage increased emphasis in this
area.
Jensen Question
Is accounting research stuck in a rut of repetitiveness and irrelevancy?
"Accounting
Craftspeople versus Accounting Seers: Exploring the Relevance and
Innovation Gaps in Academic Accounting Research," by William E.
McCarthy,Accounting
Horizons, December 2012, Vol. 26, No. 4, pp. 833-843 ---
http://aaajournals.org/doi/full/10.2308/acch-10313
Is accounting research stuck in a rut of
repetitiveness and irrelevancy? I(Professor
McCarthy)would
answer yes, and I would even predict that both its gap in relevancy and
its gap in innovation are going to continue to get worse if the people
and the attitudes that govern inquiry in the American academy remain the
same. From my perspective in
accounting information systems, mainstream accounting research topics
have changed very little in 30 years, except for the fact that their
scope now seems much more narrow and crowded. More and more people seem
to be studying the same topics in financial reporting and managerial
control in the same ways, over and over and over. My suggestions to get
out of this rut are simple. First, the profession should allow itself to
think a little bit normatively, so we can actually target practice
improvement as a real goal. And second, we need to allow new scholars a
wider berth in research topics and methods, so we can actually give the
kind of creativity and innovation that occurs naturally with young
people a chance to blossom.
Since the
2008 financial crisis, colleges and universities have faced
increased pressure to identify essential disciplines, and cut the
rest. In 2009, Washington State University announced it would
eliminate the department of theatre and dance, the department of
community and rural sociology, and the German major – the same year
that the University of Louisiana at Lafayette ended its philosophy
major. In 2012, Emory University in Atlanta did away with the visual
arts department and its journalism programme. The cutbacks aren’t
restricted to the humanities: in 2011, the state of Texas announced
it would eliminate nearly half of its public undergraduate physics
programmes. Even when there’s no downsizing, faculty salaries have
been frozen and departmental budgets have shrunk.
But despite the funding crunch, it’s a bull
market for academic economists. According to a 2015 sociologicalstudyin
theJournal
of Economic Perspectives, the median salary of economics
teachers in 2012 increased to $103,000 – nearly $30,000 more than
sociologists. For the top 10 per cent of economists, that figure
jumps to $160,000, higher than the next most lucrative academic
discipline – engineering. These figures, stress the study’s authors,
do not include other sources of income such as consulting fees for
banks and hedge funds, which, as many learned from the documentaryInside
Job(2010),
are often substantial. (Ben Bernanke, a former academic economist
and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for
a single appearance.)
Unlike
engineers and chemists, economists cannot point to concrete objects
– cell phones, plastic – to justify the high valuation of their
discipline. Nor, in the case of financial economics and
macroeconomics, can they point to the predictive power of their
theories. Hedge funds employ cutting-edge economists who command
princely fees, but routinely underperform index funds. Eight years
ago, Warren Buffet made a 10-year, $1 million bet that a portfolio
of hedge funds would lose to the S&P 500, and it looks like he’s
going to collect. In 1998, a fund that boasted two Nobel Laureates
as advisors collapsed, nearly causing a global financial crisis.
The failure of the field to predict the 2008
crisis has also been well-documented. In 2003, for example, only
five years before the Great Recession, the Nobel Laureate Robert E
Lucas Jrtoldthe
American Economic Association that ‘macroeconomics […] has
succeeded: its central problem of depression prevention has been
solved’. Short-term predictions fair little better – in April 2014,
for instance,a
surveyof
67 economists yielded 100 per cent consensus: interest rates would
rise over the next six months. Instead, they fell. A lot.
Nonetheless,surveys
indicatethat
economists see their discipline as ‘the most scientific of the
social sciences’. What is the basis of this collective faith, shared
by universities, presidents and billionaires? Shouldn’t successful
and powerful people be the first to spot the exaggerated worth of a
discipline, and the least likely to pay for it?
In the
hypothetical worlds of rational markets, where much of economic
theory is set, perhaps. But real-world history tells a different
story, of mathematical models masquerading as science and a public
eager to buy them, mistaking elegant equations for empirical
accuracy.
Jensen Comment
Academic accounting (accountics) scientists took economic astrology a
step further when their leading journals stopped encouraging and
publishing commentaries and replications of published articles ---
How Accountics Scientists Should Change:
"Frankly, Scarlett, after I get a hit for my resume inThe
Accounting ReviewI just
don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
Times are changing in social science research
(including economics) where misleading p-values are no longer the Holy
Grail. Change among accountics scientist will lag behind change in
social science research but some day leading academic accounting
research journals may publish articles without equations and/or articles
of interest to some accounting practitioner somewhere in the world ---
See below
Three years ago, the American Statistical Association (ASA) expressed
hope that the world would move to a “post-p-value
era.”
The statement in which they made that recommendation has been cited more
than 1,700 times, and apparently, the organization has decided that
era’s time has come. (At least one journal had already banned
p values by 2016.)
In an editorial in
a special
issue of
The American Statistician out today, “Statistical Inference in the 21st
Century: A World Beyond P<0.05,” the executive director of the ASA, Ron
Wasserstein, along with two co-authors, recommends that when it comes to
the term “statistically significant,” “don’t say it and don’t use it.”
(More than 800 researchers signed onto a piece
published in Nature yesterday calling
for the same thing.) We asked Wasserstein’s co-author, Nicole
Lazar of the University of Georgia,
to answer a few questions about the move.
So the ASA
wants to say goodbye to “statistically significant.” Why, and why now?
In the past few
years there has been a growing recognition in the scientific and
statistical communities that the standard ways of performing inference
are not serving us well. This manifests itself in, for instance, the
perceived crisis in science (of reproducibility, of credibility);
increased publicity surrounding bad practices such as
p-hacking (manipulating the data until statistical significance can be
achieved); and perverse incentives especially in the academy that
encourage “sexy” headline-grabbing results that may not have much
substance in the long run. None of this is necessarily new, and indeed
there are conversations in the statistics (and other) literature going
back decades calling to abandon the language of statistical
significance. The tone now is different, perhaps because of the more
pervasive sense that what we’ve always done isn’t working, and so the
time seemed opportune to renew the call.
Much of the
editorial is an impassioned plea to embrace uncertainty. Can you
explain?
The world is
inherently an uncertain place. Our models of how it works — whether
formal or informal, explicit or implicit — are often only crude
approximations of reality. Likewise, our data about the world are
subject to both random and systematic errors, even when collected with
great care. So, our estimates are often highly uncertain; indeed, the
p-value itself is uncertain. The bright-line thinking that is emblematic
of declaring some results “statistically significant” (p<0.05) and
others “not statistically significant” (p>0.05) obscures that
uncertainty, and leads us to believe that our findings are on more solid
ground than they actually are. We think that the time has come to fully
acknowledge these facts and to adjust our statistical thinking
accordingly.
This paper traces the historical development of
other comprehensive income (OCI) and comprehensive income (CI), analyzing
how their evolution has unfolded. Emphasis is on authoritative
pronouncements issued by the AICPA, FASB, and IASB. This paper discusses OCI
applications from specific standards issued by the FASB and IASB. This paper
also examines assertions from selected contemporary accounting books on this
subject.
. . .
Jensen Comment
The above article is a very good summary of the evolution of OCI/AOCI.
However would like to elaborate on the following paragraph.
IFRS report essentially the same OCI items as
does the FASB, with the exceptions of vested past service cost on
defined benefit plans, which are expensed immediately (IAS 19(R)) in
addition to fair valuation adjustments, called “revaluation surplus”
from such optional valuation of property, plant, equipment, and
intangibles (IAS 16, IASB 2003a; IAS 38, IASB 2004). In fact, only two
OCI items have been recycled to income in practice under IFRS—(1)
foreign currency translation adjustments (IAS 21, IASB 2003b), and
(2) the effective portion of cash flow hedging derivatives (IAS 30, IASB
2007). Non-recycling might be based on the notion, yet to be
demonstrated empirically, that over the long run the unrealized gains
and losses from most OCI items will balance out. Another possible
reason, as cited by Rees and Shane (2012), is that recycling is
“redundant, providing no additional benefit.” Additionally, different
board members may have different perspectives on which OCI items may be
more volatile than others. To the limited extent recycling occurs under
IFRS, any reclassification adjustments and related tax effects are
required to be disclosed separately from the other OCI items.
The term recycling refers to the reclassification of OCI items in equity to
current income (and hence reclassification from OCI in equity to retained
earnings in equity). For example,
the FASB did not want to account for hedging derivatives the same as speculation
derivatives, because economists and financial analysts pointed out that
the hedgers were really not taking on speculation risks to the extent that their
derivative financial instruments in fact ended up as effective hedges. To
include unrealized gains and losses on hedging derivatives in current income
adds misleading volatility that punishes hedgers relative to speculators who are
not hedging.
One of the fundamental problems is that hedged items often are not booked
whereas hedging contracts are now required to be booked when they go into
effect. Think of Southwest Airlines that commonly books future jet fuel prices.
Forecasted future jet fuel purchases a year into the future are not booked.
Southwest can speculate on the future price of jet fuel by not hedging. However,
Southwest can hedge in various ways, one way of which is to purchase an option
for a million gallons of jet fuel that expire one year from now. That
effectively locks in an option's strike price and takes all the risk and
opportunity of any price excess between future purchase price and the the
contracted option strike price. If Southwest Airlines closes its books in three
months the hedge item (forecasted purchase of a million gallons of jet fuel) is
not allowed to be booked whereas
the purchase options are required to be
booked. To report a gains on the options as income is entirely misleading
when the the intent is really to lock in a future net purchase price.
Gains and losses of hedging derivatives are booked in OCI until those options
either are exercised or expire. The ultimate gain or loss in OCI is
then reclassified in current income when the jet fuel is actually purchased. If
Southwest speculated in any derivative contracts that were not hedges,
unrealized gains and losses would not be held in suspense in OCI. Both the FASB
and FASB reasoned that hedge accounting in this manner
did not punish Southwest Airlines with
unrealized earnings volatility when in fact it was hedging rather than
speculating.
Sometimes hedges are not perfectly effective. For example, if Southwest
hedged a forecasted purchase of a million gallons of jet fuel in Miami with
Chicago option market prices, the ineffective portion of the hedge cannot be
booked in OCI and must be booked in current earnings when the value of the
option changes before Southwest actually purchases the jet fuel in Miami.
What encomiasts and financial analysts were worried about is that accounting
for hedging derivatives like they are the same as speculation derivatives adds
misleading income volatility to the financial statements of hedgers.
OCI arose in general over issues of unrealized income versus unrealizable
income or losses. Taken to extremes some gains and losses just cannot be
realized without fundamental and unlikely changes in the business model. For
example, Stanford University has over 10,000 acres of land that cannot be
legally sold as long as Stanford is a university. If Stanford was a for-profit
university it would be highly misleading to combine changes in the value of its
land each quarter to its current operating revenues for the quarter. Sure the
items can be shown separately on an income statement, but the problem is that
media and investors tend to have a "functional fixation" for the bottom line
fluctuations in net income.
The above article is quite good in describing the evolution of OCI to address
the problem of unrealized versus unrealizable income. I wanted to point out that
one of the sub-goals of OCI was not to punish hedgers and treat them like
speculators.
China buys more than
one-third of the world’s pulp and churns out paper products and packaging.
Shanghai pulp futures, which began trading in 2018, serve as a price guide
for an array of varieties and grades, similar to the way that West Texas
Intermediate and Brent crude futures are reference points for oil prices.
Demand for virgin pulp, from trees as
opposed to recycled
cardboard and paper,
has been on the rise in China, which
has limited scrap imports that
it once bought by the boatful to feed its factories. Pulp producers in
Europe and North America have been diverting shipments from local spot
markets to China to capture the surging prices, analysts say.
The big change occurred in
bathrooms and toilet tissue, napkins and paper towels made with virgin
pulp—and a lot less for the scratchy stuff made from recycled material and
found in offices, restaurants and other public places. kitchens. More time
at home during the pandemic meant greater demand for premium toilet tissue,
napkins and paper towels made with virgin pulp—and a lot less for the
scratchy stuff made from recycled material and found in offices, restaurants
and other public places.
A big
question lingering over the market is how much of the demand is from Chinese
companies needing pulp to make products and how much is being bought by
speculators who have bid up futures and need bales in case they get stuck
having to deliver pulp to trade counterparties. In the latter scenario,
futures prices are effectively pulling up physical, or spot, prices and
there is risk of a sharp reversal of prices,
Previously I wrote about the
first time my father ever took a trip away from the family farm in Seneca, Iowa.
The year was 1925 when he and four relatives drove on grass roads in a Model T
Ford to
Viking, Alberta to visit Norwegian relatives ---
http://faculty.trinity.edu/rjensen/vernon.htm
I mention this now to note that on the Viking farm some of the gas lamps were
never turned off, the reason being that the cost of one match used to light a
lamp daily was more than the cost a day's supply of gas for the lamp. So close
to the gas wells, lamp gas was very nearly a free good. In those days, Norwegian
immigrants counted every penny.
This cost example relates to
the following quotation from a former minister of our church who is now nearly
100 years old and blind. He's in the process of dictating his memoirs. One
recent paragraph reads as follows:
Quoin, Illinois, is on the mail line of the Illinois Central Rail Road that
ran from Chicago to New Orleans. Every time I would see a giant steam
locomotive I would say, “That’s what I want!”. Alas, I failed the eye test
to be a train engineer. When I was in college at Southern Illinois
University at Carbondale, only twenty miles south, I came home every
week-end. The train fare was cheaper
that buying seven meals and laundry. Then when I was in the
University of Illinois, 150 miles north on the ICRR, I rode the “City of New
Orleans” This was a diesel-electric trains. When I was in the army, I rode
the Pennsylvania from Newark [NJ] to Illinois. I also went to Boston and
back to New York on the on the New York, New Haven, and Hartford. Oh, yes,
my wife Emily, our baby Nancy, and I road 600 miles across the Island of
Newfoundland on the narrow-gage Canadian Pacific. Emily and I road the
Wabash from St. Louis to Chicago [and back, of course]. I still love the
steam locomotives; I still dream of life as an engineer and wonder what that
life would've been like. I might not have lived in nine states and in a
foreign country. I traveled as far west as Hawaii and as far east as Israel;
as are south as Florida and as far north as Canada. Never having much money,
I was seventy-seven before I flew for the first time.
The State of Washington launches investigation into 200,000 missing cows
at center of Easterday bankruptcy, legal fight ---
https://www.tri-cityherald.com/news/business/agriculture/article248970215.html
Jensen Coment
This is one of the reasons auditors are still supposed to test check inventories
in the high tech era
When I was a novice auditor we had to physically test check inventories at
Montfort Feedlot in Greeley, Colorado. The senior auditors on our team got
to count the cows. While wearing my dark auditor suit, black bowler hat, and a
white shirt I got to inventory the piles and piles of other valuable inventory
on in the enormous feedlot. There was so much of that inventory we ended up
paying for aerial photographs and used mathematics to estimate the amount of it
on hand.
Ninth Circuit Confirms Role of Efficient-Market Theory in Loss Causation
---
Click Here
From the CFO Journal's Morning Ledger on February 25, 2021
Good morning.GameStop Corp.’s
finance chiefwas
forcedout
of his role as activist investor Ryan Cohen pushes for a digital
transformation of the ailing videogame retailer, people familiar with the
matter said.
The
Grapevine, Texas-based company announced Tuesday that Chief Financial
Officer Jim Bell will depart the business March 26, but didn’t give a
reason. His exit isn’t related to the Reddit-fueled frenzy for the stock,
these people said. Mr. Bell didn’t immediately respond to a request for
comment.
Tuesday’s CFO exit is one element of the broader cleanup effort at
GameStop, the people familiar with the matter said. Mr. Cohen, the
co-founder of online pet-food retailer Chewy Inc., last
November disclosed a nearly 10% stake in GameStop through his
investment firm RC Ventures LLC. At that time, Mr. Cohen sent
a letter to GameStop’s board urging it to conduct a strategic review
of the business and reduce its reliance on physical retail, focusing
on e-commerce instead.
Although the company’s market value temporarily ballooned this year,
and its stock made substantial gains on Wednesday, the
bricks-and-mortar retailer’s business hasn’t changed as
dramatically. Revenue has been shrinking at the roughly 5,000-store
chain for several years. It faces the same fundamental challenge as
booksellers and music retailers before it: a shift from physical
copies to digital downloads.
From the CFO Journal's Morning Ledger on February 24, 2021
Good
morning. When
court rulings and tax regulations go against them, companies have an
effective way to minimize or defer the bottom-line costs.They
don’t count them, and announce that they will beat
the government in the future.
Coca-Cola Co., Whirlpool Corp.
and Eaton Corp.
have all lost to the Internal Revenue Service in the U.S. Tax Court over the
past two years. But none of the companies subtracted the bulk of those costs
from their publicly reported results.
Instead, they
analyzed the law and declared they are confident those losses will
eventually be overturned. Coca-Cola, in particular, is gearing up for a
contentious constitutional fight against the government, with $12 billion on
the line.
Others—including Newell
Brands Inc. and Maxim
Integrated Products Inc.—stand to lose millions under
Treasury Department regulations issued in 2019, but say they remain
confident the rules will eventually be thrown out and aren’t recording the
costs.
“For them to say
the tax authority has got it all wrong, that’s a pretty bold statement,”
said Jack Ciesielski, an accounting expert and owner of R.G. Associates
Inc., an investment research firm. The more conservative approach is to
recognize the cost, note the legal dispute and reverse the cost later if the
company prevails, he said.
From the CFO Journal's Morning Ledger on February 23, 2021
Good
morning. Regulators
areramping
up their scrutinyof
potentially misleading coronavirus disclosures by companies about a year
into the pandemic.
About one in three
companies put a dollar amount related to the impact of the coronavirus in
their earnings for the quarter that ended in December, according to a review
of 199 filings from S&P 500 companies by data provider Calcbench. The
financial pain inflicted includes everything from reduced revenues to
increased bad debts, impaired assets and restructuring costs. On the plus
side, several companies reported savings on travel and trade-show expenses,
the review found.
While metrics that
don’t follow generally accepted accounting principles, or GAAP, have been
criticized, they can be used to help investors disentangle the financial
effect of what companies consider a one-time event from the performance of
the underlying business.
The Securities and
Exchange Commission doesn’t dictate how companies report coronavirus costs
and income. But the agency says companies must ensure comments on the
effects of the pandemic are accurate and not misleading. One area of
Covid-19 accounting that the SEC said it will scrutinize closely is any
changes to revenue to compensate for losses because of the health crisis.
From the CFO Journal's Morning Ledger on February 17, 2021
U.K.’s FRC Plans for Higher Costs, More
Staff
The Financial Reporting Council on Friday
released its proposed budget for the year ahead as it
prepares to become part of a new regulatory body.
The U.K. audit and accounting watchdog
expects costs to rise to £52.2 million, equivalent to $72.3
million, for the budget year ending March 31, 2022, up 15%
from the current year. The increased funds in part are set
to go toward the U.K. Endorsement Board, which endorses and
adopts international accounting rules after the U.K.’s exit
from the European Union, it said.
The regulator plans to grow the number of
employees to 417, up 16% from the prior year. Some of the
additional staff will help the U.K. Department for Business,
Energy and Industrial Strategy develop audit-related
legislation, the FRC said.
The legislation is needed to be able to
fold the FRC into a new
regulatory body called the Audit, Reporting and Governance
Authority, which the British government announced in 2019.
The transition is expected to be completed in 2023, the FRC
said.
The FRC is asking for feedback on its
budget plan by March 12.
From the CFO Journal's Morning Ledger on February 12, 2021
Good morning. Chief
financial officers arewatching
closelyafter Tesla Inc.
this week disclosed a $1.5 billion investment in bitcoin and Twitter Inc.’s
Ned Segal mused publicly about potentially paying employees or vendors using
the cryptocurrency.
Many CFOs remain hesitant to follow suit. Some
point to the volatile price of bitcoin, which could have negative effects on
their balance sheets, and question whether the practical uses of bitcoin are
worth the risk. Companies’ investing policies in some cases prohibit them
from holding digital assets.
The value of Bitcoin more
than quadrupled in 2020 and rose further this week following Tesla’s
disclosure. It was trading $48,163 on Thursday, up over 6% from Wednesday,
according to Coinbase, a digital currency exchange.
CFOs said the swings in the
price of bitcoin, which has seen drastic rises and falls in recent years,
make it difficult to navigate, similar to holdings of foreign currencies
experiencing strong volatility. “One of the risks is that it introduces
something similar to currency volatility to the balance sheet and the
day-to-day operations of the business,” said Matthew Ellis, finance chief
of Verizon Communications Inc.
Jensen Comment
In
recent years, the SEC has ruled that the two most valuable cryptocurrencies—Bitcoin and
Ethereum—are not
securities,
partly on the grounds they are decentralized with no person
or company in control of them
You can get this and other useful information by entering the search terms [FASB,
"Accounting for Bitcoin"] without brackets at the link ---
https://www.google.com/advanced_search
From the CFO Journal's Morning Ledger on February 11, 2021
Good
morning. The
Financial Accounting Standards Boardapproved
a tweakto
goodwill accounting rules for private businesses and nonprofits to help
them reduce costs and complexity as they continue to weather the
coronavirus pandemic.
The move by the
U.S. standard-setter allows these companies and organizations to assess
at a later point in time a situation that might trigger a goodwill
impairment. Under current accounting rules, companies must monitor and
evaluate so-called triggering events for impairment of the goodwill
throughout the year.
For private
companies, there might be a long lag time between the date they evaluate
a triggering event and their next financial filing, given that many of
them only produce these statements once a year. That can be a problem
when they have to come up with a carrying value to test for goodwill
impairment but they haven’t reported financial statements yet.
By the end of
the annual reporting period, a company’s financial situation may have
changed, potentially resulting in outdated information for investors and
other users of financial statements. The new standard, which FASB
expects to publish in late March, enables private companies and
nonprofits to evaluate a triggering event when they report their
financial results, either at the end of a quarterly or annual period.
From the CFO Journal's Morning Ledger on February 10, 2021
Salesforce.com Inc.
plans for most of its employeestowork
remotelypart
or full time after the pandemic and to reduce its real-estate footprint as a
result, a top executive said, showing Covid-19’s lasting impact on how
companies manage their workforces.
The
business-software provider, which has 54,000 global employees, is among the
largest companies to spell out how it plans staff to work after Covid-19
recedes.
From the CFO Journal's Morning Ledger on February 5, 2021
A global semiconductor
shortageis expected to slash Ford’s
vehicle output by up to 20% in the first quarter of this year, illustrating
how deeply the fallout from the computer-chip crunch has hit the car
business.
Losses of vehicle production globally in the
first and second quarters could trim $1 billion to $2.5 billion from its
pretax bottom line this year.
From the CFO Journal's Morning Ledger on February 2, 2021
The eurozone’s economy is diverging
sharply from the U.S. and China, as
stubbornly high coronavirus infections, extensive Covid-19 restrictions and
a painfully slow vaccine rollout delay Europe’s recovery from last year’s
historic economic downturn.
Fresh data Tuesday highlighted an economic gap
between the eurozone and the U.S. and China that is likely to widen this
year, given that the U.S. is proceeding more quickly than the European Union
in rolling out vaccines and China remains largely free of the virus.
Continued in article
From the CFO Journal's Morning Ledger on February 2, 2021
Ford Motor plans
to use Google’s Android operating system to power its vehicle display
screens starting in 2023, the latest auto maker to tap Silicon Valley amid
the accelerating digitization of the car business.
Silicon Valley
firms arepushing
furtherinto
the auto business, eager to capitalize on the growth prospects of the car’s
evolution as a rolling personal device.
From the CFO Journal's Morning Ledger on February 2, 2021
SEC Names First-Ever Policy Adviser for
ESG Issues
The Securities and Exchange Commission on
Monday said it hired Satyam Khanna as its first-ever senior
policy adviser for environmental, social and governance
issues.
In his new role, Mr. Khanna
will oversee and coordinate the U.S. securities regulator’s
efforts related to climate risk and other sustainability
issues. He will report to acting chair Allison
Herren Lee.
Mr. Khanna is not new to the SEC. He
served as a counsel to then-SEC Commissioner Robert Jackson
from 2018 to 2019 and served on the regulator’s investor
advisory committee last year.
Mr. Khanna most recently was a resident
fellow at the New York University School of Law’s Institute
for Corporate Governance & Finance. He also served on a
transition team for the Biden administration that covered
the Federal Reserve, banking and securities regulators.
The SEC, under new
leadership, is expected to ask
companies to
disclose additional details on issues such as climate-change
risk and workforce diversity. At the moment, only some U.S.
companies provide ESG information.
Not only does the report fail to show that EU
businesses are misgoverned, it also makes proposals that would actually put
these businesses at risk. Most importantly, the report recommends an EU-wide
reformulation of directors’ duties to include a broad and ill-defined range
of considerations, including representing the interests of the “global
environment” and “society at large.” These duties would be enforced by
non-investor stakeholders bringing suits in court.
The effect of implementing such proposals would be
corporate paralysis. Almost any board decision could be legally challenged
by some stakeholder claiming a violation of directors’ almost boundary-less
duties. Concerned about personal liability, or even just the embarrassment
of being named defendant in a lawsuit, directors will refrain from major
decisions without getting buy-in from every stakeholder that might sue them.
How will these firms compete with nimble U.S. and Chinese firms? Conducting
business through an EU-listed firm will simply no longer be sustainable.
Firms will go private, or seek to avoid these rules by domiciling and
listing elsewhere.
In fact, the sustainability of Europe’s entire
business eco-system would be put at risk. Directors of large listed EU firms
would feel pressured to cut back on dividends and repurchases and invest
more internally, even if such investments make little sense from investors’
perspective. Capital would be trapped in cash-rich firms and mis-spent. The
flow of capital from larger public firms to smaller public and private firms
would dry up. Firms looking to raise cash would find it more difficult.
After all, why would investors hand funds over to directors whose EU-mandated
fiduciary duties now require them to deploy the funds to benefit the global
environment and society at large? The question answers itself.
If the European Commission really wishes to
increase business sustainability, it should take steps to make it easier,
not harder, for European firms to raise, deploy, and return equity capital.
It should turn its back on the report’s proposals, which are as
poorly-grounded as the findings of short-termism trotted out to justify
them.
Accounting Information
Technology and Village Finance Management in Indonesia
Gamayuni, R. R. (2020). Accounting information technology and village finance
management in Indonesia. Journal of Administrative and Business Studies, 6(1),
1-8. https://doi.org/10.20474/jabs-6.1.1
The
purpose of this paper is to examine (1) The effect of accounting information
technology on management accounting Information
Quality (IQ), and (2) The effect of management accounting IQ
on village finance management, and (3) The effect of Act of Republik Indonesia
(RI) Number 6/2014 on village finance management. This study population uses the
villages in Indonesia. The questionnaire as primary data is statistically
processed and tested using Structural Equation Model Partial Least Square (SEM-PLS).
The result of this study provides empirical evidence that the implementation of accounting information
technology has a positive and significant effect on management accounting IQ.
The v accounting information
technology has a positive and significant effect on village finance management.
The more quality of the information generated by information technology
application, the better the village finance management (transparent,
accountable, participative). The implementation of Act Number 6/2014 about The
Village has a positive and significant effect on village finance management. The
implementation of Act Number 6/2014 is reflected by being implemented the
strategy, organization, movement, leadership, and reasonable control so that it
will create transparent, accountable, and participative village finance
management. This result implies that villages must implement a high-quality
management accounting information
system to produce quality information to improve village finance management. The
novelty of this research is to give empirical proof about information technology
and quality of management accounting in
the village as the public sector, which is essential to create transparent,
accountable, and participative village finance management.
Suggested Citation:
Gamayuni, Rindu Rika, Accounting Information Technology and Village Finance
Management in Indonesia (February 12, 2020). Gamayuni, R. R. (2020). Accounting
information technology and village finance management in Indonesia. Journal of
Administrative and Business Studies, 6(1), 1-8. https://doi.org/10.20474/jabs-6.1.1,
Available at SSRN: https://ssrn.com/abstract=3743241
Taxation of Live Stock in Australia: A Critical Review of Tax Law and Policy
One
of the fundamental aims of any income tax system is to measure the net income
earned by taxpayers during a given financial year. This can be difficult for
primary production businesses involving live animals because animals are
inherently different from other kinds of assets. Whereas previously Australia's
tax system allowed primary producers to use either a market valuation or
cost-based valuation to assess the value of their animals, the Income Tax
Assessment Act 1997 (Cth) introduced changes that brought live animals under the
rules for ordinary trading stock. This article offers a critique of the policies
embodied in the Act and its approach to taxing animals in primary production. In
particular, it highlights the outdated prescribed values given to live stock
acquired through natural increase (ie offspring) and biased tax concessions that
apply to certain types of animals. These tax rules have not been reviewed in
decades and urgently need to be reassessed.
Keywords: live
stock, trading stock, Australian tax, offspring, livestock, accounting
Suggested Citation:
Allen, Christina, Taxation of Live Stock in Australia: A Critical Review of Tax
Law and Policy (October 1, 2020). 49(3) Australian Tax Review 209-233 (2020),
Available at SSRN: https://ssrn.com/abstract=3730528
Financial Reporting Comparability in US Firms Issuing Debt in the US Primary
Market
University of Groningen; University of Bristol - School of Economics, Finance
and Management
Date Written: October 16, 2020
Abstract
We
propose a novel method of measuring the comparability of reported accounting numbers
from the perspective of creditors. We demonstrate the validity of the measure
and show that new bond issues of firms with superior comparability have better
credit ratings and reduced bond yields, ceteris paribus. This is commensurate
with comparability reducing the information uncertainty surrounding credit risk
assessments derived from a firm’s financial information. Comparison of the
impact of comparability on public and private bond issues suggests that the
impact of comparability is greater in the public market, which we suggest is due
to the presence of uninformed investors and higher reputation costs for the
rating agencies.
Keywords: Comparability,
creditors, credit ratings, bond yields, bond markets
University of Sydney Business School; Financial Research Network (FIRN)
Date Written: December 25, 2020
Abstract
Investors are said to "abhor uncertainty", but if there were no uncertainty they
could earn only the risk-free rate. A fundamental result in the analytical accounting literature
shows that investors buying into a CARA-normal CAPM market pay lower asset
prices, earn higher expected returns, and obtain higher expected utility, when
the market payoff has higher variance. New investors obtain similar welfare
gains from risk under a log/power utility CAPM. These results do not imply that
investors "abhor information". To realize investors' ex ante expectations, the
subjective probability distributions representing market expectations must be
accurate. Greater payoff risk can add to investors' expected utility, but higher
ex post (realized) utility comes from better information and more accurate ex
ante expectations. An important implication for accounting is
that greater disclosure can have the simultaneous effects of (i) exposing more
accurately firms' payoff uncertainty and thereby increasing new investors'
expected utility, and (ii) improving market estimates of firms' payoff
parameters (means, variances, covariances), thereby giving investors a better
chance of realizing their expectations. Paradoxically, better information can be
valuable to new investors by exposing more accurately the uncertainty in firms'
business operations and results. New investors maximizing expected utility
typically want both more uncertainty and better information.
Since the enactment of the Securities Act of 1933 and 1934, both the legal
system and the accounting profession
have struggled with the question, “to what extent accountants should rely on the
statements of other accounting and
non-accounting experts
and when should they include parts of expert’s written statements in financial
statement disclosures.” The Supreme Court considered this issue in Omnicare v.
Laborers District Council Construction Industry Pension Fund (2015) (hereafter,
Omnicare). The Omnicare decision refined the expectations of preparers and
external auditors working on prospectuses for U.S. registrants. Omnicare
considered disclosures in Omnicare’s registration statement regarding their
opinions of their perceived compliance with federal regulations and laws. After
Omnicare was charged with violations, the Court considered when opinions in
registration statements could be treated as misstatements of material fact that
could lead to accountant liability.
The clarification to accounting disclosures
is important for limiting liability for future registrants as well as for
auditors who express an audit opinion on financial statements contained in
registration statements. Omnicare created a new rational basis test which is
precedential to future cases deciding whether an opinion statement included in a
registration statement becomes a misstatement of fact or the lack of an opinion
statement constitutes a material omission. Therefore, the rational basis test
should be considered by accountants in preparing and auditing registration and
post-registration statements, and this article contributes to the accounting and
auditing literature by providing new suggested language for incorporation into
SEC guidelines and/or PCAOB standards going forward.
Keywords: Financial
statement disclosures, registration statement disclosures, Omnicare, AS 4101
JEL Classification: M4,
K2
Suggested Citation:
Bitter, Michael and Chambers, Valrie and Elzweig, Brian and Ikram, Waleed, The
Impact of the Supreme Court’s Omnicare Decision on Audited Financial Statement
Disclosure (January 15, 2021). Journal of Accounting, Ethics and Public Policy
22(1): 1-26 (2021), Available at SSRN: https://ssrn.com/abstract=3767165
For Better or Worse? Financial Reporting Harmonization and Transnational
Information Transfers
SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3761063
45 Pages Posted: 8 Feb 2021 Last revised: 10 Feb 2021
We
find that global financial reporting harmonization is associated with investors
overreacting to peer firms’ earnings announcements. Using a sample of 35,116
firm-pair-years from 51 countries between 2000 and 2010, we show that heightened
information transfers due to financial reporting harmonization are followed by
predictable price reversals when investors observe own-firm earnings. However,
overreactions are not present for international firm-pairs that follow
different accounting standards.
Further, the same-standards overreactions are significantly stronger for firms
with lower reporting incentives and weaker information environments. A
difference-in-differences analysis of mandatory adoptions confirms our main
results. Collectively, the findings reflect unintended consequences of
harmonization.
This
study investigates how sophisticated market participants use tax-based
information by examining whether analysts’ street effective tax rates (ETRs) are
informative. When assessing firm performance, analysts exclude items they
believe do not reflect current performance, resulting in “street” metrics such
as street ETR. However, evidence on the properties of the components of street
earnings is limited. Examining the informativeness of street ETRs is important
because taxes are a significant component of earnings, and the extent to which
analysts understand and incorporate taxes into their analyses is not clear.
Using a hand-collected sample of analyst reports, we find that while
approximately 35 percent of street ETRs have at least one tax-specific
exclusion, over 90 percent reflect the tax effects of pre-tax exclusions.
Further, both tax-specific exclusions and the tax effects of pre-tax exclusions
significantly contribute to differences between GAAP and street ETRs. Consistent
with analysts understanding the implications of tax and non-tax exclusions, our
results suggest that street tax metrics exhibit greater predictive ability about
future tax outcomes and provide more information to investors than GAAP tax
metrics. We also find that ETR exclusions are of higher quality when the
magnitude of the potentially excluded item is greater and when managers disclose
pro forma earnings. Collectively, our findings suggest that analysts understand
taxes, but selectively exert effort to incorporate tax-based information into
their assessment of firm performance. Our study should be informative to
regulators and users of financial information because it provides evidence
regarding the usefulness of street earnings metrics.
Keywords: non-GAAP
reporting, street earnings, accounting for
income taxes, effective tax rates, analysts, taxes
Suggested Citation:
Beardsley, Erik and Mayberry, Michael and McGuire, Sean T., Street vs. GAAP:
Which Effective Tax Rate Is More Informative? (September 16, 2020). Contemporary
Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3748522
The Local Spillover Effect of Corporate Accounting Misconduct:
Evidence from City Crime Rates
Indiana University - Kelley School of Business - Department of Accounting
There
are 3 versions of this paper
Date Written: October 23, 2020
Abstract
This
study documents a spillover effect of accounting fraud
by showing that after the revelation of accounting misconduct,
there is an increase in financially motivated neighborhood crime (robberies,
thefts, etc.) in the cities where these misconduct firms are located. We find
that more visible accounting frauds
(e.g., greater media attention and larger stock price declines) are more
strongly associated with a future increase in financially motivated neighborhood
crime. We also find that the association between fraud revelation and increased
future financially motivated crime is strongest when local job markets are
shallower and where local income inequality is high, consistent with adverse
shocks from fraud putting pressure on local communities. Combined, our study
provides evidence that the societal ramifications of corporate accounting misconduct
extend beyond adversely impacting a firm’s capital providers and industry peers
to negatively influence the daily life of the residents in the firm’s local
community.
Keywords:accounting misconduct,
real effects, crime rate, corporate spillover, income inequality, accounting fraud
Suggested Citation:
Holzman, Eric and Miller, Brian P. and Williams, Brian, The Local Spillover
Effect of Corporate Accounting Misconduct: Evidence from City Crime Rates
(October 23, 2020). Contemporary Accounting Research, Forthcoming, Available at
SSRN: https://ssrn.com/abstract=3763692
Motivating Managers to Invest in Accounting Quality:
The Role of Conservative Accounting
While internal control over financial reporting has gained increasing regulatory
attention, its enforcement is far from perfect; thus firm-specific incentives to
management become important to increase the quality of financial reports. We
study how owners can motivate managers to invest in accounting quality
even though it is costly to the managers. Using an agency model, we establish
that a sufficiently conservative accounting system
(which understates performance) is necessary to induce a manager to invest in accounting quality,
and more conservatism increases this investment. The reason is that higher accounting quality
mitigates the expected reduction of the manager’s compensation from
conservatively measured performance. Higher accounting quality
makes the performance measure more precise, and the owner optimally lowers
incentives, even though that entails some loss of productivity. In total, more
conservatism increases both firm value and accounting quality.
Our findings suggest that striving for neutral accounting can
counteract incentives to improve accounting quality,
and they provide support to using conservatism as a metric of financial
reporting quality in empirical studies.
Ewert, Ralf and Wagenhofer, Alfred, Motivating Managers to Invest in Accounting
Quality: The Role of Conservative Accounting (December 1, 2020). Contemporary
Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3764459
Gender Discrimination? Evidence from the Belgian Public Accounting Profession
Prior research finds that women receive lower salaries than men. Similarly, we
show that female audit partners in Belgium receive significantly lower
compensation than male partners. However, there are alternative explanations for
the pay gap other than gender discrimination. For example, the gap in
compensation could reflect that men are paid more because they have higher
levels of productivity. We provide new predictions and tests of gender
discrimination by comparing the fees generated by audit partners (a measure of
partner productivity) and the types of clients assigned to partners. Consistent
with our prediction of female partners having to meet higher performance
thresholds than male partners, we show that female partners generate larger fee
premiums, but they are less likely to be assigned to prestigious clients. To
test whether these patterns are attributable to gender discrimination, we
examine whether the results are stronger in male-dominated offices because this
is where we would expect to find the most discrimination against women. We find
the fee premiums generated by female partners are larger in male-dominated
offices, while the negative association between prestigious clients and female
partners is stronger in male-dominated offices. Collectively, our combined
predictions and tests are consistent with female partners facing gender
discrimination in audit offices that are dominated by male partners.
Keywords: gender
discrimination, public accounting firms,
female partners
JEL Classification: D22,
J71, M41, M42, M51
Suggested Citation:
Hardies, Kris and Lennox, Clive and Li, Bing, Gender Discrimination? Evidence
from the Belgian Public Accounting Profession (December 15, 2020). Contemporary
Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3766075
Now to Mislead With Statistics
Modeling Skewness Determinants in Accounting Research
Temple University - Fox School of Business and Management - Department of
Accounting
Date Written: November 30, 2020
Abstract
Skewness-based proxies are widely used in accounting and
finance research. To study how the skewness of a dependent variable Y varies
with conditioning variables X, researchers typically compute firm-specific
skewness measures over a short rolling window and regress them on X.
However, we show that this standard approach can cause severe biases and
produce false findings of both conditional skewness on average and
systematic variation in conditional skewness. These biases generalize beyond
rolling-window skewness. We develop alternative methods that address these
biases by directly modeling the conditional skewness of Y for each
observation as a function of X. Simulations confirm that our methods have
good type-I errors and test power even in scenarios in which the standard
method is severely biased. Our methods are transparent, robust, and can be
implemented in a few lines of code. Use of our methods changes a major prior
finding.
Keywords: Pearson’s
moment coefficient of skewness, quantile-based skewness, rolling window,
conditional distribution, generalized method of moments (GMM)
Frankfurt School of Finance & Management gemeinnützige GmbH
Date Written: February 3, 2021
Abstract
In
the European Union the goal of transition towards a carbon-neutral economy by
2050 is identified as a major aim of the European Commission. The integral role
of the financial services sector in funding such investments and enhancing the
(re-) direction and allocation of capital flows towards sustainable projects and
investments is increasingly acknowledged. Besides the integration of ESG and CSR
into the banks’ operations, it can serve and be utilized as risk management
tools.
This paper investigates the effectiveness of the EU Non-Financial Reporting
Directive (2014/95/EU) with respect to the CSR disclosure quality in European
banks from 2017-2019. After an overview of the EU’s path towards a sustainable
financial sector from 2013 till present, the most important regulations will be
assessed in detail, namely the Non-Financial Reporting Directive (2014/95/EU)
and the Taxonomy Regulation on Sustainable Economic Activity (2020/852/EU). By
constructing a multi-category CSR disclosure index to “translate” and quantify
disclosed CSR information in the banks’ annual filings, a positive comparative
development over the years is identified – indicating the general effectiveness
of the directive. The construction of the disclosure index and the content
analysis of the banks’ CSR disclosures is based on textual analysis.
In order to not only analyse and evaluate the level of CSR disclosure in
European banks from 2017-2019, but also to identify potential factors
influencing its quality, the collection of multiple data inputs is necessary.
The paper examines the association between three factors of the balance sheet
and the P&L on their significance on the disclosure score. These factors are
asset size in million euro (proxy for size), common equity tier 1 ratio (proxy
for market discipline) as defined in the Basel III regulatory framework (proxy
for market discipline) and pre-tax return on assets (proxy for profitability).
Furthermore, the association of other non-balance sheet factors and their
correlation on the disclosure score is examined which are listing status (listed
or non-listed), country of the head-quarter, (external) auditor and bank´s CSR
report type. Therefore, this adds detail to research, as existing majorly focus
on how CSR-related information is disclosed and not to what extent and quality.
This paper targets accountants, financial institutions, regulatory authorities,
shareholders, investors and stakeholders in general who are affected by and
interested in the overall CSR disclosure quality of European banks.
Keywords: Bank Accounting,
Banks, Corporate Social Responsibility, Sustainable Finance, Disclosure, Accounting,
Auditing
Loew, Edgar and Erichsen, Giulia and Liang, Benjamin and Postulka, Margret
Louise, Corporate Social Responsibility (CSR) and Environmental Social
Governance (ESG) – Disclosure of European Banks (February 3, 2021). European
Banking Institute Working Paper Series 2021 - no. 83, Available at SSRN: https://ssrn.com/abstract=3778674
Cognitive Determinants of Aggressive Financial Reporting – The Combined Effects
of Ego Depletion, Moral Identity, and an Ethical Intervention
Florida Atlantic University - School of Accounting
Date Written: January 8, 2021
Abstract
We
experimentally investigate the combined effects of ego depletion, moral
identity, and ethical interventions on managers’ financial reporting
aggressiveness in the development of an accounting estimate.
We find that decision makers with high moral identity become more aggressive
later in the day (once they become ego depleted), but those with low moral
identity do not. We also find that an ethical intervention has a significant
influence on the reporting judgments of depleted decision makers with low moral
identity, but not on the judgments of depleted decision makers with high moral
identity. However, the opposite effect occurs when decision makers are not
depleted. That is, an ethical intervention has a significant influence on the
financial reporting judgments of undepleted decision makers with high moral
identity, but not on the judgments of undepleted decision makers with low moral
identity. Supplemental analyses reveal different patterns of decision makers’
cognitive dissonance across experimental conditions.
Keywords: Aggressive
Financial Reporting, Ego Depletion, Moral Identity, Ethics
JEL Classification: M1,
M14, M4, M41
Suggested Citation:
Lauck, John and Negangard, Eric Michael and Rakestraw, Joseph, Cognitive
Determinants of Aggressive Financial Reporting – The Combined Effects of Ego
Depletion, Moral Identity, and an Ethical Intervention (January 8, 2021).
Available at SSRN: https://ssrn.com/abstract=3762591
Fundamental Analysis of XBRL Data: A Machine Learning Approach
Since 2012, all U.S. public companies must tag quantitative amounts in financial
statements and footnotes of their 10-K reports using the eXtensible Business
Reporting Language (XBRL). We conduct a fundamental analysis of this large set
of detailed financial information to predict earnings. Using machine learning
methods, we combine the XBRL data into a summary measure for the direction of
one-year-ahead earnings changes. Hedge portfolios are formed based on this
measure during the period 2015-2018. The annual size-adjusted returns to the
hedge portfolios range from 5.02 to 9.7 percent. These returns persist after accounting for
transaction costs and risk. Our strategies outperform those of Ou and Penman
(1989), who extract the summary measure from 65 accounting variables
using logistic regressions. Additional analyses suggest that the outperformance
stems from both nonlinear predictor interactions missed by regressions and more
detailed financial data in XBRL documents.
Keywords: Fundamental
Analysis, XBRL, Machine Learning
JEL Classification: M41,
G12
Suggested Citation:
Chen, Xi and Cho, Yang Ha and Dou, Yiwei and Lev, Baruch Itamar, Fundamental
Analysis of XBRL Data: A Machine Learning Approach (December 2, 2020). Available
at SSRN: https://ssrn.com/abstract=3741015
Hong
Kong Polytechnic University - School of Accounting and Finance
Date Written: December 2, 2020
Abstract
The
paper concerns concepts of equity valuation. Three primary financial ratios --
(forward) return on equity (ROE), (forward) earnings to price ratio (EP), and
the (current) market-to-book ratio (MTB) – are connected to the standard
valuation parameters, r = cost of equity (discount factor), and g = growth. The
framework relies on a Gordon-Williams type of PVD model and combines it with an
add-on steady-state growth requirement: Subject to clean surplus accounting,
(the expected) earnings, dividends, and book values all grow at the same rate.
This condition is adapted from “The Second Fundamental Law of Capitalism”,
articulated by Piketty (2014). Applying these ideas result in a benchmark model:
(i) a weighted average representation, EP = BTM*r + (1- BTM) *Div.Yield , and
(ii) the inequalities 0 < BTM < 1 and Div.Yield < EP < r < ROE. Additional
analysis relaxes the steady-state growth condition: the g-parameter is now
replaced by forecasts of near future earnings growth which get updated as time
passes. An empirical part of the paper evaluates whether the steady-state growth
concept holds as an average for S&P 500 firms. Results are generally supportive.
JEL Classification: G12,
M41
Suggested Citation:
Ohlson, James A. and Zhai, Sophia Weihuan, On (r, g) and the Identity ROE = EP*MTB
(December 2, 2020). Available at SSRN: https://ssrn.com/abstract=3741088
A Needle Found: Machine Learning Does Not Significantly Improve Corporate Fraud
Detection Beyond a Simple Screen on Sales Growth
University of California, Berkeley - Accounting Group
Date Written: November 29, 2020
Abstract
Recent papers have been highly promotional of the benefits of machine learning
in the detection of corporate fraud. For example, Bao, Ke, Li, Yu, and Zhang
(2020) recently published in the Journal of Accounting Research
report that their machine learning model increases performance by +75% above the
current parsimonious standard in the accounting literature,
the financial ratio-based F-Score (Dechow, et al. 2011), when measured at the
highest risk levels. They also show that raw variables alone, rather than
financial ratios, can achieve this task. However, a quick peak under the hood
reveals an issue that, if corrected for, reduces the results to no better than
the F-Score.
In this paper, I create a machine learning model applying the latest in machine
learning known as XGBoost to over 100 financial ratios sourced from prior
literature. I compare this model to an XGBoost model applying the 28 raw
variables suggested by Bao, et al. Additional models are benchmarked include the
F-Score, the M-Score (Beneish 1999), the FSD Score based on Benford’s Law (Amiram,
et al. 2015), and a simple screen on 4-year sales growth.
A Wilcoxon rank sum test will show that differences between the models at the
top 1% of risk are not significantly different. In fact, at this level, the
models fail often in any given year. At the top 10% of risk where models produce
consistent annual results, advanced methods match the performance of the
F-Score, or even a simple univariate screen on sales growth I measure
performance using positive predictive values (PPV) also known as precision which
measures the likelihood of a fraud case within the top 1% or top 10% list. My
XGBoost model outperforms the models at the 1% level, but positive predictive
values remain quite low to be of any practical use with PPVs in the 3% range. A
discussion will follow to explain what would be required to move positive
predicted values beyond the single digits for this research question.
Walker, Stephen, A Needle Found: Machine Learning Does Not Significantly Improve
Corporate Fraud Detection Beyond a Simple Screen on Sales Growth (November 29,
2020). Available at SSRN: https://ssrn.com/abstract=3739480
Measuring Employment Impact: Applications and Cases
Applying the Impact-Weighted Accounts Initiative’s employment impact
methodology, on eight leading companies, we document wide variability in
employment impacts as a percentage of salaries paid, ranging between 59 and 80
percent. We identify opportunities for improvement and discuss transition plans
for companies to create more positive employment impact. We conclude with a call
for disclosure of Equal Employment Opportunity Commission EEO-1 reports, paid
leave, childcare and healthcare benefits, which would greatly facilitate the
comparable and reliable measurement of employment impact in the future.
Panella, Katie and Serafeim, George, Measuring Employment Impact: Applications
and Cases (January 20, 2021). Harvard Business School Accounting & Management
Unit Working Paper No. 21-082, Available at SSRN: https://ssrn.com/abstract=3775838
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 22, 2021
CFOs at U.S. Midmarket Companies Predict Revenues
Will Rebound
Summary: The
article discusses a survey by BDO USA LLP of both publicly
trade and privately held midsize companies’ CFOs, and other
data sources, assessing expectations for 2021. “Fifty-six
percent of chief financial officers at publicly traded and
privately held midsize companies predict revenue will
increase over the next 12 months…. The percentage is down
from last January, when 81% of CFOs forecast higher revenues
before the onset of the pandemic in the U.S.” Evaluating
results achieved by mid-market companies, both public and
private, shows that revenues grew 2.9% in October and
November of 2020 but earnings in that period “…rose to 14.9%
from 10% a year before….”
Classroom Application: The
article may be used in any level of financial reporting
class to discuss the importance of the revenue line item and
its forecast as well as the difference between revenue
growth and profitability.
Questions:
What did chief financial officers (CFOs) of
middle-market companies forecast for 2020 before the
onset of the pandemic?
What do these CFOs of middle-market companies forecast
for 2021?
Revenue growth at middle-market companies fell during
the two months of October and November of 2020 in
comparison to the same months in 2019. What happened to
profitability?
How did middle-market companies achieve this operating
performance?
The improved outlook comes after a year during
which midsize firms sought to preserve cash amid the pandemic
U.S. middle-market companies expect their businesses to rebound in the year
ahead after revenue growth slowed in 2020 due to the coronavirus pandemic.
Fifty-six percent of chief financial officers at publicly traded and
privately held midsize companies predict revenue will increase over the next
12 months, according to a recent survey by BDO USA LLP, a
professional-services firm.
The percentage is down from last January,
when 81% of CFOs forecast higher revenues before the onset of the pandemic
in the U.S. The BDO survey found that the outlook varies by sector, with 44%
of retail CFOs anticipating falling revenues in 2021, while 37% expect a
rise. The survey was conducted in September.
Middle-market companies usually generate
between $100 million and $3 billion in annual revenue and grow at a faster
pace than their larger counterparts. The improved outlook comes after a year
during which middle-market firms sought to preserve cash, dial back
investments and pause hiring plans amid economic uncertainty caused by the
pandemic.
Companies such as Park Place Technologies
LLC, a Cleveland-based provider of data-center services, saw revenue growth
weaken last year. The privately-owned company, which generated roughly $600
million in revenue in 2020, hired new staff and spent money on acquisitions
that could help propel sales this year, finance chief Andrew Gehrlein said.
“We continue to invest in the groundwork
that we’ve laid, to really lead us to a higher performance level and higher
growth in 2021,” Mr. Gehrlein said.
Midmarket companies reported median revenue growth of
2.9% in October and November, down from 8.3% in the prior-year period, according
to a report by Golub Capital, a
lender to more than 150 of these companies.
Despite lower revenue growth, midsize companies reported higher profits, as
finance chiefs executed emergency cost cuts in addition to planned long-term
reductions. Earnings growth in the first two months of the fourth quarter
rose to 14.9% from 10% a year before, Golub Capital said.
Sustaining that pace could become a challenge for CFOs in 2021, said
Lawrence Golub, chief executive of Golub Capital. “CFOs are going to be
under pressure to maintain margins,” he said.
Still,
midmarket CFOs are
more likely than in 2020 to hire new
workers and pursue mergers and acquisitions as the economy recovers and
vaccines against Covid-19 become more widely available, said Robert Brown,
chief executive for North America at Lincoln International LLC, an
investment bank.
But some companies might stick to the
cost cuts they introduced during the pandemic, Mr. Brown said. “Companies
may say…we don’t need to turn all of these costs back on, even though we may
be through the crisis,” he said.
Certain midmarket companies could face
more challenges in 2021—despite the improved outlook—including cash
shortages or issues around meeting financial targets set by their lenders,
said Wayne Berson, chief executive of BDO USA.
“Nothing about 2021 is going to be
normal,” Mr. Berson said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 5, 2021
AT&T Books $15.5 Billion Charge on DirecTV Unit
By Drew FitzGerald | January 27, 2021
Topics: Segment
Reporting , Asset Impairment
Summary: “AT&T
booked a $15.5 billion charge on its pay-television
business….The write-down created a fourth-quarter loss as
the media-and-telecommunications giant weighs the potential
sale of its pay-TV assets and executives focus their
investments on newer technologies….AT&T held deal
discussions…that valued the video business at more than $15
billion including debt. The…write-down reflects how the
business has changed since AT&T bought DirecTV in 2015
for…$66 billion including debt.” Overall, revenues have
fallen in the fourth quarter of 2020 as compared to 2019 and
“AT&T shares fell about 20% last year.” The earnings release
on which the article is based can be found at https://www.sec.gov/Archives/edgar/data/732717/000073271721000009/t-4q2020exhibit991.htm
Classroom Application: The
article may be used in a financial reporting course. It
primarily covers the topic of impairment write-down but also
focuses on detailed AT&T financial statement
items--revenues, segment revenues, and cash flows--to assess
the company’s financial performance. It also refers to
AT&T’s “postpaid phone subscribers, a metric watched closely
by Wall Street” and describes stock price performance in the
past year.
Questions:
What was AT&T’s overall performance during 2020?
Does this performance surprise you? Support your answer.
Refer to the graphic entitled Segment operating revenue.
How do the components of this graph further explain the
overall company results?
For what did AT&T take an impairment charge in the
fourth quarter of 2020? In your answer, define the term
impairment charge and identify all of the points
discussed in the article that you think are related to
this charge.
Legacy television unit weighs on conglomerate even
as it adds HBO Max and phone subscribers
AT&T Inc.T 1.33%booked
a $15.5 billion charge on its pay-television business, reflecting the damage
cord-cutting has taken on its DirecTV satellite unit even as the company’s
HBO Max streaming service’s growth ramped up.
The write-down created a fourth-quarter loss as the
media-and-telecommunications giant weighs the potential sale of its pay-TV
assets and executives focus their investments on newer technologies. The
company reported quarterly revenue declines in its legacy-video and
WarnerMedia units, offsetting gains in its core wireless-phone division.
Executives called the noncash accounting charge a sign of the pay-TV unit’s
aging status as the Dallas company promotes an internet-streaming model that
gives its content-production business a direct line to viewers.
“Our biggest and single-most important bet is HBO Max,” Chief Executive John
Stankey said on a conference call Wednesday. Executives plan to expand the
service’s footprint in other countries this year and launch an
advertising-supported version in the second quarter.
Overall, AT&T reported a fourth-quarter loss of $13.89 billion, or $1.95 a
share, compared with a profit of $2.39 billion, or 33 cents a share, a year
earlier. Revenue fell 2.4% to $45.7 billion.
The coronavirus pandemic has
strained the company, pressuring revenue from cable networks such as CNN and
TBS throughout the year and closing many of the theaters that show its
Warner Bros. films. Those pullbacks obscured recent gains in the company’s
wireless service, which still generates more than half of the company’s
profit
The
last three months of the year gave AT&T a net gain of 800,000 postpaid phone
subscribers, a metric watched closely by Wall Street. Rivals Verizon
Communications Inc. and T-Mobile
US Inc.reported
net gains of
279,000 and 824,000 such connections, respectively.
Revenue from AT&T’s WarnerMedia division fell 9.5% to $8.5 billion as the
show-business side continued to wrestle with low box-office revenue and weak
advertising revenue. The HBO business grew and ended the year approaching 42
million U.S. subscribers, a figure that includes older cable plans as well
as the new online service.
AT&T’s
media division stunned Hollywood last year with a plan to release
all of Warner Bros.’ 2021 movies on HBO Max the
same day they hit theaters. Executives said the move would help the business
cope with audiences reluctant to visit theaters during a pandemic, while
giving the studio’s sister streaming service an extra boost.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 5, 2021
Microsoft Sales Surge to Record, With Help From
Cloud and Videogames
Summary: Microsoft’s
fiscal year end is June 30. The company has just released
fiscal second quarter results for the period ending December
31, 2020; the filing is available on the Securities and
Exchange Commission (SEC) EDGAR database at https://www.sec.gov/cgi-bin/viewer?action=view&cik=789019&accession_number=0001564590-21-002316&xbrl_type=v As
is the case for most high tech companies, “the remote-work
era has been a boon for Microsoft.” CEO Satya Nardella has
described 2020 as “the dawn of a second wave of digital
transformation sweeping every company and every industry.”
Classroom Application: The
article may be used in any level of financial reporting
class covering revenues, profitability, and segment
reporting.
Questions:
What does Microsoft CEO Nadella mean by saying we have
witnessed the “dawn of the second wave of digital
transformation”?
How has that burgeoning need for digital products
benefitted Microsoft’s business overall? Specifically
highlight the overall results achieved by Microsoft and
its forecast for future performance.
How many segments of Microsoft’s business that have seen
growth during the pandemic are mentioned in the article?
In your answer, also define the term “business segment”
and identify how the segments are described in the
article.
Quarterly sales advance 17% to record $43.1 billion
Microsoft Corp.MSFT -0.41%posted
record quarterly sales underpinned by pandemic-fueled demand for videogames
and accelerated adoption of its cloud-computing services during the health
crisis.
The
remote-work era has been a boon for Microsoft. In addition to its videogame
and cloud-computing products, the company has notched strong sales of its
Surface laptops as people bought devices to facilitate working from home and
distance learning. The use of Microsoft’s Teams
workplace-collaboration software,
which has been a priority for Chief Executive Satya Nadella, has jumped
during the pandemic with its offering of such services as text chat and
videoconferencing.
“What we have witnessed over the past year is the dawn of a second wave of
digital transformation sweeping every company and every industry,” Mr.
Nadella said Tuesday.
The software giant said its fiscal second-quarter net income rose more than
30% to $15.5 billion. Sales advanced 17% to $43.1 billion. Those figures
beat Wall Street’s expectation of net income of $12.6 billion and sales of
$40.2 billion, according to FactSet.
Microsoft shares were ahead 4% in after-hours trading. The stock gained more
than 40% over the past year.
Tech companies broadly have been among the biggest corporate winners during
the pandemic and have drawn investor enthusiasm. Apple Inc., which reports
earnings Wednesday, has seen its stock rise about 80% over the past year as
people sheltering at home bought Mac computers and iPads. Online retailer
Amazon.com Inc. has piled up revenue, including in its cloud-computing
business that competes with Microsoft’s offering.
Microsoft finance chief Amy Hood told analysts Tuesday that further growth
is expected in the current quarter. Sales are projected to come in at $40.35
billion to $41.25 billion, the company said. Videogames are expected to post
roughly 40% growth from a year earlier, with Surface laptop sales also
enjoying double-digit increases, Ms. Hood said.
Mr. Nadella’s bet on cloud computing has been pivotal to Microsoft’s
multiyear run of year-over-year sales increases. Sales for the company’s
Azure cloud-services have expanded rapidly; however, before the pandemic hit
the pace of growth was slowing as the business gained scale. Remote working
arrested that decline. Azure sales increased 50% in the most recent quarter
ended Dec. 31, compared with a 48% rise for the prior three-month period.
Azure
became a bigger source of revenue for Microsoft than its Windows operating
system licenses in the September quarter, said Brent Bracelin, an analyst at
Piper Sandler. Microsoft doesn’t break out Azure revenue, but the company is
the world’s second-largest cloud-computing vendor after Amazon.com Inc.
The
role of videogames in Microsoft’s fortunes also has increased under Mr.
Nadella, in part fueled by acquisitions. The company last year bought
ZeniMax Media Inc., the parent company of the popular Doom videogame
franchise, for
$7.5 billion.
Xbox content and services revenue increased 40% in the latest quarter, aided
by the November release of two new gaming consoles, Xbox
Series X and S,
to battle Sony Corp.’s PlayStation
5.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 5, 2021
UPS to Sell Freight Trucking Business for $800
Million
Summary: “UPS
and rival FedEx have faced huge increases in shipping volume
during the coronavirus pandemic, as consumers have ordered
everything from their essential goods like toothpaste and
toilet paper to bulky items to outfit home offices and
outdoor play sets.” To focus on business to customer
delivery, and avoid investments that will be needed to
maintain competitiveness, UPS will sell its freight unit
which offers “less-than-truckload services” to TFI
International in a deal that will close in the second
quarter of 2021. This business move “is one of the biggest
strategic shifts by new Chief Executive Carol Tomé.” It has
led to a $500 million impairment charge.
Classroom Application: The
article may be used in a managerial accounting class
discussing business strategy and/or supply chain logistics.
The article also may be used in a financial reporting class
to discuss business segments and the related impairment
charge of approximately $500 million as disclosed in the
article ($545 million after taxes in the actual filing). The
Release of fourth quarter 2020 earnings is available at https://www.sec.gov/Archives/edgar/data/1090727/000109072721000010/exhibit991-q42020earningsp.htm In
the third paragraph, the release discusses GAAP results that
“include…an after-tax impairment charge of $545 million
associated with the Company’s decision to sell UPS Freight.”
Tables show an operating loss in the company’s Supply Chain
and Freight Segment of $228 million. Finally, the company
presents non-GAAP information showing an adjusted operating
margin of $260 million in the segment.
Questions:
UPS is a trucking and delivery company. Doesn’t selling
its freight business mean the end of its operations?
Explain your answer.
What is the meaning of “less than truckload services”?
How competitive is UPS Freight? In your answer, explain
how you measure this comparison.
UPS bought Overnite Corp. for $1.25 billion in 2005 to
move into the trucking market. Based on your reading of
the article, describe how the asset sale is related to
that earlier business acquisition.
Do you think that the impairment charge “of roughly $500
million” reported in this article relates to the
reported sale and the earlier acquisition of Overnite
Corp.? Explain your answer.
The sale
is one of the biggest strategic
shifts by new Chief Executive Carol
Tomé since she took the position last June. She has adopted a mantra of
“better, not bigger” in assessing UPS’s operations,
and jettisoning the freight business eliminates future capital investments
needed to keep the division competitive.
The agreement announced Monday would allow the
business to continue using UPS’s domestic package network for five years to
fulfill shipments. TFI, which is based in Canada, provides similar freight
trucking services, as well as logistics services and parcel shipping in
Canada.
UPS Freight offers less-than-truckload
services, in which cargo from multiple shippers is combined in a single
trailer, in all 50 states, Canada and Mexico. The business has about 14,500
employees, 80% of whom are full-time, UPS said.
The unit is the sixth-largest carrier by revenue
in the U.S. LTL market, behind carriers including FedEx Corp.’s FedEx
Freight unit and Old
Dominion Freight Line Inc., according
to SJ Consulting. UPS Freight generated an estimated $3.15 billion in 2020
revenue, down slightly from 2019, according to UPS. TFI, which has
truckload, less-than-truckload and logistics operations, reported revenue of
about $4.1 billion in 2019.
UPS on Monday said it expects to book a
noncash impairment charge of roughly $500 million before taxes for 2020. The
deal is expected to close in the second quarter.
UPS moved into the trucking market with its acquisition in 2005 of Overnite
Corp. for $1.25 billion, then its largest-ever acquisition. It said it
decided to sell the business after assessing its portfolio, enabling it to
pay down long-term debt. The delivery giant said it would retain historical
pension assets and liabilities, while pension benefits earned after closing
will be TFI’s responsibility.
UPS and
rival FedEx have faced huge
increases in shipping volume during
the coronavirus pandemic, as consumers have ordered everything from their
essential goods like toothpaste and toilet paper to bulky items to outfit
home offices and outdoor play sets. The carriers have raised shipping rates
and added new surcharges to
offset the higher costs, but it has had
little effect in slowing demand for online buying.
“As more and more parcel goes B2C [business-to-consumer], the bundling with
freight and parcel is less relevant,” said Satish Jindel, president of
research firm SJ Consulting Group Inc. UPS’s freight “is mostly industrial
and manufacturing,” he added.
The acquisition leaves UPS rival FedEx, whose FedEx Freight unit has better
operating margins than UPS Freight, as the biggest major parcel shipper with
a less-than-truckload operation, Mr. Jindel said.
The Teamsters union represents some 11,000 UPS Freight workers who ratified
a five-year contract with the company in late 2018.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 12, 2021
New York Financial Groups Urge State Leaders to
Oppose Stock-Transfer Tax
By Jimmy Vielkind | February 3, 2021
Topics: State
Taxation
Summary: “Democratic
legislators in the State of New York have introduced bills
for more than a decade to reimpose [a stock transfer] tax”
which has not been collected since 1981 but was originally
enacted in 1905. None of these bills have come to the floor
of the legislature. Both Speaker Carl Heastie of the State
Assembly and Senate Majority Leader Andrea Stewart-Cousins
“said they were considering a financial transaction tax.”
They and other supporters of a stock-transfer tax say it
would raise additional revenue as the state confronts a
budget deficit. Financial industry leaders have sent a joint
letter to the legislature and claim they would leave the
state if such a tax is imposed. President of the New York
Stock Exchange, Stacey Cunningham, sent a letter to the WSJ
which was printed in the Opinion page on February 9, 2021
and is available at https://www.wsj.com/articles/the-nyse-isnt-movingyet-11612893427.
Classroom Application: The
article may be used in a tax class, a governmental
accounting class, or in a financial reporting class.
Questions:
What type of tax is being proposed for consideration by
the State of New York legislature?
What are the New York financial circumstances behind
this proposal?
Are there any other arguments in support of instituting
this tax besides New York’s financial circumstances?
What is a progressive tax? Cite your source for this
definition.
What types of taxes may be progressive?
How does this New York tax proposal reflect
progressivity?
A letter to New York Governor Andre Cuomo was signed by
the NASDAQ, NYSE, and SIFMA (not Simfa as erroneously
stated in the article). Who are these entities?
What do the NASDAQ, NYSE, and SIFMA say they or their
members may do in response to any new taxes imposed by
the state of New York?
Proponents of the idea say it would raise
additional revenue as the state confronts a budget deficit
ALBANY, N.Y.—Major financial exchanges and
securities industry groups on Wednesday urged New York state lawmakers to
not support a proposal being pushed by some Democrats and unions to impose
taxes on stock sales.
In a letter to Gov. Andrew Cuomo and leaders of
the state Assembly and Senate, the exchanges said any tax would prompt the
relocation of securities industry firms and jobs out of New York and would
also be passed along to investors and public pension funds. The letter’s 27
signatories include Nasdaq Inc., the
New York Stock Exchange, groups representing downstate businesses and the
Securities Industry and Financial Markets Association, or Simfa, which
represents financial firms.
“Such a tax would damage New York’s position as
a global financial capital, resulting in shrinkage of an industry that is
the largest contributor to our economy and tax base,” the letter says.
Sifma President and CEO Kenneth Bentsen Jr. said
in an interview that the groups sent the letter because a number of new
legislators, including Democrats who support a transaction tax, have
recently taken office.
Rebecca Bailin, director of the pro-tax Invest
in Our New York campaign, said the letter showed Wall Street firms were on
the defensive and said threats to move were empty. State Assemblyman Phil
Steck, an Albany-area Democrat who supports a stock-transfer tax, said any
impact on individual investors would be minuscule compared with the positive
effects of additional state spending on infrastructure.
New York enacted a stock transfer tax in 1905
but stopped collecting it in 1981. Democratic legislators have introduced
bills for more than a decade to reimpose the tax—which runs as high as 5
cents on a share priced at $20 or more—but none have come to the floor.
Supporters of a stock-transfer tax say it would raise additional revenue as
the state confronts a budget deficit.
Both state Assembly Speaker Carl Heastie, a
Democrat from the Bronx, and Senate Majority Leader Andrea Stewart-Cousins,
a Democrat from Yonkers, said they were considering a financial transaction
tax to raise more revenue for education and other social service programs
funded by the state. They are negotiating
a budget agreement with Mr. Cuomo;
the state’s current budget expires on March 31.
Mr. Cuomo, a Democrat, proposed increasing
income-tax rates last month as he addressed an $8.2
billion deficit in a $193 billion budget.
His budget director, Robert Mujica, said at the time that the governor
didn’t support a financial transaction tax and that the pandemic showed that
people could easily move business operations. A spokesman for the governor
said he would review the letter.
No other states tax financial transactions,
which members of the securities industry have lobbied against at the federal
level. In September, NYSE threatened
to move electronic trading systems out of New Jersey if
the state implemented a tax on financial transactions, which had the support
of the state’s Democratic governor, Phil Murphy.
An October report by state Comptroller Tom
DiNapoli found 182,100 New Yorkers were employed in the securities industry
in 2019, but the state’s share of industry jobs has fallen to 19% in 2019
from one-third in 1990. Mr. DiNapoli, a Democrat, estimated the industry was
responsible for 17% of economic activity in New York City and accounted
for 18% of state tax revenues.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 12, 2021
ESG Metrics Help CFOs Attract New Investors, Reduce
Costs
By Maitane Sardon | February 8, 2021
Topics: ESG
Reporting
Summary: The
article discusses chief financial officers' (CFOs') focus on
sustainability metrics and the forces driving that focus.
According to two data providers, “twenty companies in the
S&P 500 mentioned the acronym ESG or sustainability on
earnings conference calls between Oct. 1 and Dec. 31,
compared with only six companies three years before….[and,
g]lobally, the term ESG was mentioned 205 times on investor
calls during the fourth quarter of 2020.” More than 1,500
companies world-wide have pledged to reduce their carbon
emissions to net-zero in the coming years…[and m]any have
also made commitments to support diversity and inclusion.”
Factors driving these commitments include investor demand:
assets under professional management that include
sustainability in the investment strategy have nearly
doubled between 2016 and 2020 to $40.5 trillion.
Classroom Application: The
article may be used in a management accounting or financial
reporting course. Questions focus on students’ understanding
of chief financial officer (CFO) responsibilities to manage
and report on metrics associated with environmental, social
and governance (ESG) matters. The WSJ ranking of the world’s
100 most sustainably managed companies is available at https://www.wsj.com/articles/explore-the-full-wsj-sustainable-management-ranking-11602506733
Questions:
What are the responsibilities of a chief financial
officer (CFO)? Cite your source for this information.
Based on the discussion in the article, explain your
understanding of the phrase “corporate environmental,
social and governance matters” (ESG). If you refer to an
outside source, provide a citation.
Are you surprised that this article shows that CFOs
discuss sustainability issues and view their measurement
as a priority? Explain your answer.
More finance chiefs talk about sustainability on
earnings calls, provide disclosures
Chief financial officers are embracing sustainability measures as a way to
attract new investors, lower their companies’ borrowing costs and cut
operating expenses.
More than 1,500 companies world-wide have pledged to reduce their carbon
emissions to net-zero in the coming years, according to research by the
NewClimate Institute, a nonprofit. Many have also made commitments to
support diversity and inclusion. These kinds of environmental, social and
governance promises put pressure on finance chiefs across industries to
square company finances with sustainability metrics.
“We need to take a broad and long-term view…and
look at the intangibles that any investment can bring to the table, we need
to look at the bigger picture,” said Sreedhar N., chief financial officer at
Compagnie de Saint-Gobain SA, a
French manufacturer of construction materials.
More CFOs have been talking about
sustainability in recent months. Twenty companies in the S&P 500 mentioned
the acronym ESG or sustainability on earnings conference calls between Oct.
1 and Dec. 31, compared with only six companies three years before,
according to FactSet, a data provider. Globally, the term ESG was mentioned
205 times on investor calls during the fourth quarter of 2020, research
platform Sentieo found.
Finance chiefs at South Korea’s LG
Electronics Inc., Chinese
utility provider CLP
Holdings Ltd. and
French electric equipment maker Schneider
Electric SE all said that they consider
sustainability metrics a priority.
Many CFOs said integrating sustainability
into their decision-making can help reduce operating expenses like the cost
of carbon, water or other raw materials. They said they are seeing the
benefits of investing in initiatives that provide cost savings and can make
their businesses more resilient against the effects of climate change, such
as droughts and floods.
Saint-Gobain, for example, has invested
€13.6 million, equivalent to $16.4 million, to reduce the environmental
footprint of its flat-glass manufacturing plant in India and make it more
water efficient. The company built two reservoirs to store up to 130 million
liters of rainwater. Those investments help keep the plant running and save
money, CFO Sreedhar N. said.
Strong performance in terms of environmental
metrics landed Saint-Gobain a place among the top 20 companies in The Wall
Street Journal’s latest ranking of the
world’s 100 most sustainably managed companies.
The rankings track company disclosures and media coverage of their actions
across 26 ESG categories.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 12, 2021
Cash-in-Pockets Emerges as Democrats’ Approach in
Stimulus Bill
By Richard Rubin | February 11, 2021
Topics: Individual
Income Tax , Child Tax Credit , Coronavirus
Summary: This
article by the WSJ’s U.S. tax policy reporter analyzes the
components of the coronavirus relief package and their
combined impact on U.S. households’ earnings. See a related
article from January 14, 2021, when the legislation was
introduced at https://www.wsj.com/articles/biden-to-propose-1-9-trillion-covid-19-package-11610661977?mod=article_inline The
major “pieces of President Biden’s $1.9 trillion plan would
be temporary—one-time payments, one year of tax credit
expansions and unemployment benefits through Aug. 29. But
Democrats are already talking about turning some of them
into permanent…” status. The related short video
(approximately 2 1/2 minutes) narrated by Gerald F. Seib
provides a balanced comparison of amounts of aid under the
Biden/Democratic plan and a Republican proposal.
Classroom Application: The
article may be used in an individual income tax class to
discuss the proposals to cope with the continuing effects of
the coronavirus pandemic.
Questions:
What are the major components of the coronavirus relief
legislation currently being considered by the U.S.
Congress? You may refer to the video linked in the
article to answer this question as well.
The proposed legislation is comprised of temporary legal
provisions. What taxation items in the proposed
legislation might Democrats plan to implement
permanently?
Republicans respond with some concern about the proposed
legislation providing the greatest assistance to
households with the lowest income levels. What is the
concern?
After-tax incomes for bottom 20% of households
would rise by 20% under plan moving through House committees
These pieces of President Biden’s $1.9 trillion plan would be
temporary—one-time payments, one year of tax credit expansions and
unemployment benefits through Aug. 29. But Democrats are already talking
about turning some of them into permanent pieces of the federal financial
support network to households.
The child tax credit expansion, in particular, has deep support as a
no-strings-attached way to combat child poverty. Lawmakers are also pursuing
a policy to automatically adjust unemployment insurance to economic
conditions rather than setting end dates.
Democratic leaders haven’t, however, backed anything as expansive as a
universal basic income or suggested repealing existing programs. And they
have resisted extending the benefits to the upper middle class.
The one-year child tax credit expansion, costing nearly $110 billion, would
approximately double the size of that program. The $8 billion in additional
tax breaks for child care would more than double the cost of the existing
program, and the $12 billion temporary expansion of the earned-income tax
credit for childless workers would increase that break by more than 10%. The
direct payments would be $422 billion, slightly less than the combined $458
billion approved last March and December.
Antipoverty programs globally tend to be more durable when they are more
universal, because aid to the poor carries a stigma that undermines
political support for the programs, said Monica Prasad, a sociologist at
Northwestern University.
“If you try to target your policies to the poor, you end up not really
helping the poor,” she said.
In
the emerging Democratic view, the flexibility, simplicity and popularity of
cash aid are overcoming concerns about narrowing programs’ scope to direct
money to those in need.
“This is how you benefit Main Street business—you give Americans money to
pay their bills, to shop and live,” said Rep. Earl Blumenauer (D., Ore.)
during a meeting Wednesday of the House Ways and Means Committee, which
writes tax legislation.
Continued in article
&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 19, 2021
Borrowing Binge Reaches Riskiest Companies
By Matt Wirz Sam Goldfarb | February 15, 2021
Topics: Corporate
Debt, Interest Rates
Summary: There
is a lending boom “offering lifelines for struggling
companies even as the coronavirus pandemic still drags on
the economy… More than $13 billion of that debt [issued
between January 1 and February 10, 2021] had ratings
triple-C or lower—the riskiest tier save for outright
default….[These] riskier companies can now borrow at
interest rates once reserved for the safest type of debt.”
Classroom Application: The
article may be used in a financial reporting class covering
debt issuances, specifically addressing economy-wide and
individual issuer factors leading to the level of interest
rates.
Questions:
What is a bond yield?
As of Friday, February 12, 2021, what was the average
yield of risky bonds as described in the article?
How does the yield on the riskiest bonds as of February
2021 compare to U.S. treasury security yields currently
and in the recent past?
What factors are leading to the current state of bond
yields as described in this article?
Demand for corporate debt has offered lifelines to
struggling firms that can borrow at interest rates once reserved for the
safest type of bonds
Investors’ near-insatiable demand for
even the riskiest corporate debt is fueling a Wall Street lending boom,
offering lifelines for struggling companies even as the coronavirus pandemic
still drags on the economy.
Companies such as hospital operator Community
Health Systems Inc. and
newspaper publisher Gannett Co. have
issued a record $139 billion of bonds and loans with below- investment-grade
ratings from the start of the year through Feb. 10, according to LCD, a unit
of S&P Global Market Intelligence. More than $13 billion of that debt had
ratings triple-C or lower—the riskiest tier save for outright default—about
twice the previous record pace.
Despite the onslaught of new bonds,
riskier companies can now borrow at interest rates once reserved for the
safest type of debt.
As of Friday, the average yield for bonds in
the ICE BofA
U.S. High Yield Index—a group that includes embattled retailers and fracking
companies—was just 3.97%. By comparison, the yield on the 10-year U.S.
Treasury note, which carries essentially no default risk, was as high as
3.23% less than three years ago. The 10-year Treasury yielded around 1.2%
Friday.
“At a high level, you have a meaningful
imbalance between supply and demand,” said David Knutson, head of credit
research for the Americas at Schroders, the
U.K. asset-management firm. “The demand exceeds the supply for bonds.”
The most striking aspect of the current lending
boom is its timing. Typically, it can take years after recessions for the
market to reach its present level of exuberance, analysts said. In this
case, it has taken less than 12 months and has arrived just as economic data
have revealed
a winter slowdown in the recovery.
Debt investors are hardly alone in their
enthusiasm. Investors across a range of asset classes have poured
money into risky wagers, even as the
frenzy around videogame company GameStop Corp. and
other popular stocks for individuals calms. Commodities such as oil and
copper have surged, and more than $58 billion went into mutual and
exchange-traded funds tracking global stocks during the week ended
Wednesday, the largest such inflow on record, according to a Bank
of America analysis of data from EPFR
Global.
Investors’ optimism rests largely on the
idea that current economic challenges aren’t normal and can be resolved
quickly once coronavirus vaccines are more widely distributed. The combined
efforts of the Federal Reserve and Congress have also helped by depressing
benchmark interest rates and pumping trillions of dollars into the economy,
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 19, 2021
Some Elite Business Schools Skip Rankings This Year
By Patrick Thomas | February 15, 2021
Topics: MBAs
Summary: Accounting
students may be applying to graduate business school for a
number of reasons including completion of the 150 credit
hour requirement for CPA licensure. Some may use the
business school rankings published in the business press in
their application decision-making. This article describes
some of the process for the rankings, benefits to the
schools that participate, and factors leading some to decide
not to participate in the 2020 rankings under Covid-19
circumstances.
Classroom Application: The
article may be used in any course discussing students’
consideration of graduate business education.
Questions:
Are you considering entering business graduate school?
If so, describe your reasons. If not, why not?
How do business schools participate in the ranking
process?
What benefits do business schools say come from their
participation in the ranking process?
What difficulties make it so that some schools are
dropping out of the rankings process, at least for 2020
rankings?
Do you think the impact of Covid-19 in 2020 on the
schools’ decisions to participate in the rankings
process would influence a students’ use of these
rankings? Explain your answer.
As Harvard, Stanford, other elite schools skip some
rankings this year, European universities top lists, lesser-known programs
get a boost
Several top U.S. business schools are
skipping popular M.B.A. rankings this year, upending an annual rite for
programs and prospective students.
Harvard Business School, the University
of Pennsylvania’s Wharton School, Columbia Business School and the Stanford
Graduate School of Business, among others, opted to skip the most recent
rankings by the Economist and the Financial Times. Several schools said
Covid-19 made it difficult to gather the data they must submit to be ranked.
More than bragging rights hang in the
balance—though there are plenty of those, too. Schools say a good showing in
rankings can draw interest from prospective students, stoking application
volumes, as well as plaudits or pans
from alumni who continue to track their alma mater long after leaving
campus.
Overall, 62% of programs plan to
participate in some rankings, while 10% don’t plan to cooperate for any
lists this year, according to a survey of business-school admissions
officials by Kaplan, the education subsidiary of the Graham Holdings Co.
Bloomberg Businessweek suspended its 2020
ranking, the only major list to do so. Dozens of notable schools were
missing from the Economist’s list published last month. Nine schools that
normally take part in the FT’s list chose not to participate, a spokeswoman
said.
With some major programs missing, other schools moved up the lists. Insead
in France topped the FT’s list of best M.B.A. programs, published earlier
this month, up from fourth place; some of last year’s top schools, including
Harvard and Stanford, sat it out.
HBS spokesman Brian Kenny said the school isn’t opposed to rankings, but
some data gathering—which can take months—was an added burden as schools
pivoted to remote learning earlier in the pandemic. Harvard, which often
tops lists, can afford to take a year off, he added.
“It doesn’t have the same impact on us as it would on another school who is
maybe struggling to get into top 50,” Mr. Kenny said. The school is
participating in the U.S. News & World Report rankings, due in March.
A
Stanford spokeswoman said the school didn’t want to overburden students and
alumni groups with surveys required for some rankings during a stressful
year.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on February 19, 2021
Judge Lets Revlon Lenders Keep Citi’s Botched $500
Million Payment
By Alexander Gladstone Andrew Scurria Becky Yerak |
February 16, 2021
Topics: Banking,
Internal Controls
Summary: Citigroup
Inc. mistakenly paid off debt principal in addition to
interest payments to investment firms that made loans to
Revlon Inc. A federal judge has ruled that “Brigade Capital
Management LP and other Revlon lenders can keep the money
they collected from Citi…While some lenders that were
mistakenly paid returned roughly $385 million to Citi,
others refused the bank’s request for repayment, touching
off a legal dispute that strained relationships with big
investors like Brigade, a longtime Citi client, and raised
questions with analysts about the bank’s internal controls.”
Classroom Application: The
article may be used when discussing internal controls in an
accounting systems course, a course on banking, or in a
financial reporting course. It also may be used when
discussing accounting for corporate debt to address the
process of handling interest payments and related internal
controls.
Questions:
Describe the process for corporate debt issuance and
repayment, including all cash receipts and disbursements
(payments) that occur.
Based on the description in the article, what service
did Citigroup provide to Revlon, Inc.?
How did Citi make erroneous extra payments to Revlon’s
lenders? What did Citi executives do in the aftermath?
What are internal controls? Cite your source for your
definition if from your textbook or elsewhere.
What internal control function should be used to prevent
such an error as Citi has made, or should have been
functioning properly at Citi? Give one example that you
can think of.
Brigade Capital Management and other investors win
court ruling allowing them to keep the Revlon loan payment they received
from their agent Citi
A
federal judge denied Citigroup Inc.’s request
to claw back roughly $500 million it mistakenly paid out of its own pocket
to investment firms that made loans to cosmetics giant Revlon Inc.
Brigade Capital Management LP and other Revlon lenders can keep the money
they collected from Citi when the bank wired them the full amount they were
owed instead of the small interest payment that was due, according to a
written ruling Tuesday by Judge Jesse Furman of U.S. District Court in New
York.
The August blunder by Citi, Revlon’s loan agent, satisfied a nearly $900
million debt that Revlon wasn’t due to pay until 2023 and delivered an
unexpected windfall to lenders on what had become an increasingly risky
investment.
While
some lenders that were mistakenly paid returned roughly $385 million to Citi,
others refused the bank’s request for repayment, touching off a legal
dispute that strained relationships with big investors like Brigade, a longtime
Citi client,
and raised questions with analysts about the bank’s internal controls.
Judge
Furman issued the decision after holding a trial in December that focused
on the pivotal question of
what Brigade and other recipients knew or suspected soon after they were
paid.
Citi, which has blamed the snafu on human error, argued that recipients knew
right away they had been paid in error. They said they didn’t think the
transactions were erroneous until Citi claimed as much and demanded
repayment.
Judge Furman agreed with the lenders that they “believed, and were justified
in believing, that the payments were intentional.” Citi’s mistake was “one
of the biggest blunders in banking history,” the judge said.
“We strongly disagree with this decision and intend to appeal. We believe we
are entitled to the funds and will continue to pursue a complete recovery of
them,” a Citi spokesperson said.
Robert Loigman, a lawyer representing the lenders, said “we are extremely
pleased with Judge Furman’s detailed and thorough decision.”
As soon as Citi realized its mistake, executives began trying to claw the
money back. Some lenders granted the bank’s request. Citi sued 10 investment
firms that declined, including Brigade, Symphony Asset Management LP and HPS
Investment Partners LLC.
A mother was listening to her little boy working
on his homework in the kitchen. The little fellow said, “Two plus two, the
son-of-a-bitch is four.” “Two plus three, the son-of-a-bitch is five.” His
mother asked him where he had heard such a thing. He said, “My teacher told
us that is how you do math.” The somewhat confused mother called the teacher
and asked her if that is what she had said. The teacher laughed and said,
“No Mam, I said two plus two, the sum of which is four."
https://maaw.info/GadgetsandGames/KidsJokes.htm
One afternoon a lawyer was riding in his limousine when he saw two men along
the roadside eating grass. Disturbed, he ordered his driver to stop and he
got out to investigate.
He asked one man, "Why are you eating grass ?" "We don't have any money for
food," the poor man replied. "We have to eat grass." "Well, you can come
with me to my house and I'll feed you," the lawyer said.
"But sir, I have a wife and two children with me. They are over there eating
grass under that tree." "Bring them along," the lawyer replied.
Turning to the second poor man he stated, "You may come with us, also." The
other man, in a pitiful voice, then said, "But sir, I also have a wife and
six children with me!" "Bring them all as well," the lawyer answered. They
all entered the car, which was no easy task, even for a car as large as the
limousine. Once under way, one of the poor fellows turned to the lawyer and
said, "Sir, you are too kind. Thank you for taking all of us with you."
The lawyer replied, "Glad to do it. You'll really love my place. The grass
is almost a foot high."
Come on . . . did you really think there was such a thing as a heart-warming
lawyer story? Look at Congress -- over 300 Lawyers!!!
Forwarded by Auntie Bev
I'm glad I learned how to do parallelograms in high school instead of how
to do my own income tax returns. This comes in so handy during parallelogram
season.
"Psychotherapist" is one word, not three words.
Here in America older folks get phone calls from from caring people in
India people wanting to make sure that Medicare buys us back braces, neck
braces, skin care creams, etc. Up here in Sugar Hill they even wanted to
send a back brace to a woman laid out in a funeral parlor. Now that's really
caring a lot.
Masks are great for whispering swear words to irritating people without
having them punch you in the nose.
They say we can have gatherings of eight people without issues. I don't
know eight people without issues.
We should have people who deliver Amazon packages trained to give the
Covid vaccine. The entire population of the USA would be immunized by
Saturday (Thursday if you have Prime).
You're weight would be perfect if you were only eleven feet tall.
Pharmacist: You may experience the side effect of pain in your arm
or wrist, but that's just from trying to get the cap off.
Here's how to tell if you're young or old when you fall. If people laugh you're young.
If people rush to your aid you're old.
On her first day at the
senior complex, the new manager addressed all the seniors pointing out some
of her rules:
"The female sleeping quarters will be out-of-bounds for all males, and the
male dormitory to the females. Anybody caught breaking this rule will be
fined $20 the first time." She continued,
"Anybody caught breaking this rule the second time will be fined $60. Being
caught a third time will cost you a fine of $180. Are there any questions?" At this point, an
older gentleman stood up in the crowd inquired:
"How much
for a season pass?”
Forwarded by Auntie Bev
Popular Game in Retirement Homes: Guessing what tattoos u8sed to
be.
At my funeral take the bouquet off my coffin and throw it into the crowd
to see who's next.
Retirement Finance Advisor Asks: Which of you will wear the mask
and who will drive the get-away car?
Common Mistake: Chasing an eye floater with a fly swatter.
Setting up for a hot date with a recliner and a heating pad.
Tossing and turning at night should count as exercise.
Forwarded by Tina
I wish there was a way to donate fat like we donate blood.
Why is it that after I push 1 for English I still can't understand the
person at the other end of the line.
I wish I had the wisdom of a 90-year old, the body of a 20-year old, and
the energy of a 3-year old.
I've just been diagnosed with NCD --- No Can Do.
The secret of happiness is a good sense of humor and a bad memory.
My brain is like the Bermuda Triangle --- What goes in may never come out
again.
I'm not Wonder Woman, but I can do things that make you wonder.
The local news station was interviewing an 80-year-old-lady because she
had just gotten married for the fourth time. The interviewer asked her
questions about her life, about what it felt like to be marrying again at
80, and then about her new husband’s occupation. “He is a funeral director”
she answered. “Interesting,” the newsman thought.
He then asked her if she wouldn’t mind telling him a little about her
first three husbands and what they did for a living. She paused for a few
moments, needing time to reflect on all those years. After a short time, a
smile came to her face and she answered proudly, explaining that she had
first married a banker when she was in her 20’s, then a circus ringmaster
when in her 40’s and a preacher when in her 60’s and now in her 80s a
funeral director.
The interviewer looked at her, quite astonished, and asked why she had
married four men with such diverse careers.
(Wait for it)
She smiled and explained, “ I married one for the money, two for the show,
three to get ready, and four to go."
Forwarded by Auntie Bev
"You claim to be a chocolate lab," said the cat to the dog. "Lemme
check."
Attack this day with the enthusiasm and confidence of of a four-year old
wearing a Batman t-shirt.
I thought I would never be the kind of person to wake up early just to
exercise. I was right all along.
Two ways to really improve your day: Don't check the news, and stay
off the scales.
The Circle of Life: An old man on a walker meets a toddler trying
to push a stroller.
Elsie Frey's One Liners Forwarded by Tina
For me drinking responsibly means don't spill it.
The older I get, the earlier it gets late.
I remember when I could get up without sound effects.
When I ask for directions, please don't use words like "east."
When I run I run like the winded.
I finally got eight hours of sleep; It only took three days, but
whatever.
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
In Brief
The sixth annual 2020 NYSSCPA–Rosenberg Survey identifies trends from the
national 22nd Annual Practice Management Survey and provides profitability
and growth data of participating New York CPA firms. This year was unlike
any that our profession has faced in the 22 years of the survey. The survey
data reflects trends and performance from 2019, before the coronavirus
(COVID-19) pandemic struck. A second part of the survey presents analysis
and conclusions from leading experts and practice management consultants on
how accounting firms have adapted to the challenge of COVID-19. As Charles
Hylan, managing partner of Rosenberg & Associates and author of the survey
remarked: “The landscape for accounting firms changed quickly when the
pandemic hit. It was as if a switch was flipped. Managing partners were
forced to deal with massive changes in workflow and practice.” This year’s
Rosenberg Survey provides valuable analysis, guidance, expert insight, and
practical recommendations for CPAs on how to adapt and succeed during this
crisis and what comes after.
Jensen Comment
Sadly, the above report has nothing to say about the state of accounting
education. Maybe this is because accountics scientists accomplished so little on
issues of greatest concern in the profession ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong
Can you point to one accountics science finding that practicing CPA's
applaud?
Creating Relevance of Accounting Research
(ROAR) Scores to Evaluate the Relevance of Accounting Research
to Practice
Keywords: Research
Relevance, Accounting Rankings,
Practice-Oriented Research, Journal Rankings
JEL Classification: M40,
M41, M49, M00
Abstract
The relevance of accounting academic
research to practice has been frequently discussed in the accounting academy;
yet, very little data has been put forth in these discussions. We create
relevance of accounting research
(ROAR) scores by having practitioners read and evaluate the abstract of
every article published in 12 leading accounting journals
for the past three years. The ROAR scores allow for a more
evidence-based evaluation and discussion of how academic accounting research
is relevant to practitioners. Through these scores, we identify the
articles, authors, journals, and accounting topic
areas and methodologies that are producing practice-relevant
scholarship. By continuing to produce these scores in perpetuity, we
expect this data to help academics and practitioners better identify and
utilize practice-relevant scholarship.
V. CONCLUSIONS
This research provides empirical data
about the contribution accounting academics are making to practice.
Specifically, we had nearly 1,000 professionals read the abstract of
academic accounting articles and rate how relevant the articles are to
practice. We then present the data to rank journals, universities, and
individual scholars. Overall, we interpret the results to suggest that
some of the research that is currently produced and published in 12
accounting journals is relevant to practice, but at the same time, there
is room to improve. Our hope is that by producing these rankings, it
will encourage journals, institutions, and authors to produce and
publish more relevant research, thus helping to fulfill the Pathways
charge “to build a learned profession.”
We now take the liberty to provide some
normative comments about our research findings in relation to the goal
of producing a learned profession. One
of the key findings in this study is that the traditional top 3 and top
6 journals are not producing the most or the greatest average amount of
practice relevant research, especially for the distinct accounting topic
areas. Prior research shows
that the collection of a small group of 3/6 journals is not
representative of the breadth of accounting scholarship (Merchant 2010;
Summers and Wood 2017; Barrick, et al. 2019). Given the empirical
research on this topic, we question why institutions and individual
scholars continue to have a myopic focus on a small set of journals. The
idea that these 3/6 journals publish “the best” research is not
empirically substantiated. While many scholars argue that the focus is
necessary for promotion and tenure decisions, this seems like a poor
excuse (see Kaplan 2019). Benchmarking production in a larger set of
journals would not be hard, and indeed has been done (Glover, Prawitt,
and Wood 2006; Glover, Prawitt, Summers, and Wood 2019). Furthermore, as
trained scholars, we could read and opine on article quality without
outsourcing that decision to simple counts of publications in “accepted”
journals. We call on the 18 We recognize that only looking at 12
journals also limits the scope unnecessarily. The primary reason for the
limitation in this paper is the challenge of collecting data for a
greater number of journals. Thus, we view 12 journals as a start, but
not the ideal. academy to be much more open to considering research in
all venues and to push evaluation committees to do the same.
A second important finding is that
contribution should be a much larger construct than is previously
considered in the academy. In our experience, reviewers, editors, and
authors narrowly define the contribution an article makes and are too
often unwilling to consider a broad view of contribution. The current
practice of contribution too often requires authors to “look like
everyone else” and rarely, if ever, allows for a contribution that is
focused exclusively on a practice audience. We encourage the AACSB, AAA,
and other stakeholders to make a more concerted effort to increase the
focus on practice-relevant research. This may entail journals rewriting
mission statements, editors taking a more pro-active approach, and
training of reviewers to allow articles to be published that focus
exclusively on “practical contributions.” This paper has important
limitations. First, we only examine 12 journals. Ideally, we would like
to examine a much more expansive set of journals but access to
professionals makes this challenging at this time. Second, measuring
relevance is difficult. We do not believe this paper “solves” all of the
issues and we agree that we have not perfectly measured relevance.
However, we believe this represents a reasonable first attempt in this
regard and moves the literature forward. Third, the ROAR scores are only
as good as the professionals’ opinions. Again, we limited the scores to
5 professionals hoping to get robust opinions, but realize that some
articles (and thus authors and universities) are not likely rated
“correctly.” Furthermore, articles may make a contribution to practice
in time and those contributions may not be readily apparent by
professionals at the time of publication. Future research can improve
upon what we have done in this regard.
We are hopeful that shining a light on
the journals, institutions, and authors that are excelling at producing
research relevant to practice will encourage increased emphasis in this
area.
Jensen Question
Is accounting research stuck in a rut of repetitiveness and irrelevancy?
"Accounting
Craftspeople versus Accounting Seers: Exploring the Relevance and
Innovation Gaps in Academic Accounting Research," by William E.
McCarthy,Accounting
Horizons, December 2012, Vol. 26, No. 4, pp. 833-843 ---
http://aaajournals.org/doi/full/10.2308/acch-10313
Is accounting research stuck in a rut of
repetitiveness and irrelevancy? I(Professor
McCarthy)would
answer yes, and I would even predict that both its gap in relevancy and
its gap in innovation are going to continue to get worse if the people
and the attitudes that govern inquiry in the American academy remain the
same. From my perspective in
accounting information systems, mainstream accounting research topics
have changed very little in 30 years, except for the fact that their
scope now seems much more narrow and crowded. More and more people seem
to be studying the same topics in financial reporting and managerial
control in the same ways, over and over and over. My suggestions to get
out of this rut are simple. First, the profession should allow itself to
think a little bit normatively, so we can actually target practice
improvement as a real goal. And second, we need to allow new scholars a
wider berth in research topics and methods, so we can actually give the
kind of creativity and innovation that occurs naturally with young
people a chance to blossom.
Since the
2008 financial crisis, colleges and universities have faced
increased pressure to identify essential disciplines, and cut the
rest. In 2009, Washington State University announced it would
eliminate the department of theatre and dance, the department of
community and rural sociology, and the German major – the same year
that the University of Louisiana at Lafayette ended its philosophy
major. In 2012, Emory University in Atlanta did away with the visual
arts department and its journalism programme. The cutbacks aren’t
restricted to the humanities: in 2011, the state of Texas announced
it would eliminate nearly half of its public undergraduate physics
programmes. Even when there’s no downsizing, faculty salaries have
been frozen and departmental budgets have shrunk.
But despite the funding crunch, it’s a bull
market for academic economists. According to a 2015 sociologicalstudyin
theJournal
of Economic Perspectives, the median salary of economics
teachers in 2012 increased to $103,000 – nearly $30,000 more than
sociologists. For the top 10 per cent of economists, that figure
jumps to $160,000, higher than the next most lucrative academic
discipline – engineering. These figures, stress the study’s authors,
do not include other sources of income such as consulting fees for
banks and hedge funds, which, as many learned from the documentaryInside
Job(2010),
are often substantial. (Ben Bernanke, a former academic economist
and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for
a single appearance.)
Unlike
engineers and chemists, economists cannot point to concrete objects
– cell phones, plastic – to justify the high valuation of their
discipline. Nor, in the case of financial economics and
macroeconomics, can they point to the predictive power of their
theories. Hedge funds employ cutting-edge economists who command
princely fees, but routinely underperform index funds. Eight years
ago, Warren Buffet made a 10-year, $1 million bet that a portfolio
of hedge funds would lose to the S&P 500, and it looks like he’s
going to collect. In 1998, a fund that boasted two Nobel Laureates
as advisors collapsed, nearly causing a global financial crisis.
The failure of the field to predict the 2008
crisis has also been well-documented. In 2003, for example, only
five years before the Great Recession, the Nobel Laureate Robert E
Lucas Jrtoldthe
American Economic Association that ‘macroeconomics […] has
succeeded: its central problem of depression prevention has been
solved’. Short-term predictions fair little better – in April 2014,
for instance,a
surveyof
67 economists yielded 100 per cent consensus: interest rates would
rise over the next six months. Instead, they fell. A lot.
Nonetheless,surveys
indicatethat
economists see their discipline as ‘the most scientific of the
social sciences’. What is the basis of this collective faith, shared
by universities, presidents and billionaires? Shouldn’t successful
and powerful people be the first to spot the exaggerated worth of a
discipline, and the least likely to pay for it?
In the
hypothetical worlds of rational markets, where much of economic
theory is set, perhaps. But real-world history tells a different
story, of mathematical models masquerading as science and a public
eager to buy them, mistaking elegant equations for empirical
accuracy.
Jensen Comment
Academic accounting (accountics) scientists took economic astrology a
step further when their leading journals stopped encouraging and
publishing commentaries and replications of published articles ---
How Accountics Scientists Should Change:
"Frankly, Scarlett, after I get a hit for my resume inThe
Accounting ReviewI just
don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
Times are changing in social science research
(including economics) where misleading p-values are no longer the Holy
Grail. Change among accountics scientist will lag behind change in
social science research but some day leading academic accounting
research journals may publish articles without equations and/or articles
of interest to some accounting practitioner somewhere in the world ---
See below
Three years ago, the American Statistical Association (ASA) expressed
hope that the world would move to a “post-p-value
era.”
The statement in which they made that recommendation has been cited more
than 1,700 times, and apparently, the organization has decided that
era’s time has come. (At least one journal had already banned
p values by 2016.)
In an editorial in
a special
issue of
The American Statistician out today, “Statistical Inference in the 21st
Century: A World Beyond P<0.05,” the executive director of the ASA, Ron
Wasserstein, along with two co-authors, recommends that when it comes to
the term “statistically significant,” “don’t say it and don’t use it.”
(More than 800 researchers signed onto a piece
published in Nature yesterday calling
for the same thing.) We asked Wasserstein’s co-author, Nicole
Lazar of the University of Georgia,
to answer a few questions about the move.
So the ASA
wants to say goodbye to “statistically significant.” Why, and why now?
In the past few
years there has been a growing recognition in the scientific and
statistical communities that the standard ways of performing inference
are not serving us well. This manifests itself in, for instance, the
perceived crisis in science (of reproducibility, of credibility);
increased publicity surrounding bad practices such as
p-hacking (manipulating the data until statistical significance can be
achieved); and perverse incentives especially in the academy that
encourage “sexy” headline-grabbing results that may not have much
substance in the long run. None of this is necessarily new, and indeed
there are conversations in the statistics (and other) literature going
back decades calling to abandon the language of statistical
significance. The tone now is different, perhaps because of the more
pervasive sense that what we’ve always done isn’t working, and so the
time seemed opportune to renew the call.
Much of the
editorial is an impassioned plea to embrace uncertainty. Can you
explain?
The world is
inherently an uncertain place. Our models of how it works — whether
formal or informal, explicit or implicit — are often only crude
approximations of reality. Likewise, our data about the world are
subject to both random and systematic errors, even when collected with
great care. So, our estimates are often highly uncertain; indeed, the
p-value itself is uncertain. The bright-line thinking that is emblematic
of declaring some results “statistically significant” (p<0.05) and
others “not statistically significant” (p>0.05) obscures that
uncertainty, and leads us to believe that our findings are on more solid
ground than they actually are. We think that the time has come to fully
acknowledge these facts and to adjust our statistical thinking
accordingly.
This paper traces the historical development of
other comprehensive income (OCI) and comprehensive income (CI), analyzing
how their evolution has unfolded. Emphasis is on authoritative
pronouncements issued by the AICPA, FASB, and IASB. This paper discusses OCI
applications from specific standards issued by the FASB and IASB. This paper
also examines assertions from selected contemporary accounting books on this
subject.
. . .
Jensen Comment
The above article is a very good summary of the evolution of OCI/AOCI.
However would like to elaborate on the following paragraph.
IFRS report essentially the same OCI items as
does the FASB, with the exceptions of vested past service cost on
defined benefit plans, which are expensed immediately (IAS 19(R)) in
addition to fair valuation adjustments, called “revaluation surplus”
from such optional valuation of property, plant, equipment, and
intangibles (IAS 16, IASB 2003a; IAS 38, IASB 2004). In fact, only two
OCI items have been recycled to income in practice under IFRS—(1)
foreign currency translation adjustments (IAS 21, IASB 2003b), and
(2) the effective portion of cash flow hedging derivatives (IAS 30, IASB
2007). Non-recycling might be based on the notion, yet to be
demonstrated empirically, that over the long run the unrealized gains
and losses from most OCI items will balance out. Another possible
reason, as cited by Rees and Shane (2012), is that recycling is
“redundant, providing no additional benefit.” Additionally, different
board members may have different perspectives on which OCI items may be
more volatile than others. To the limited extent recycling occurs under
IFRS, any reclassification adjustments and related tax effects are
required to be disclosed separately from the other OCI items.
The term recycling refers to the reclassification of OCI items in equity to
current income (and hence reclassification from OCI in equity to retained
earnings in equity). For example,
the FASB did not want to account for hedging derivatives the same as speculation
derivatives, because economists and financial analysts pointed out that
the hedgers were really not taking on speculation risks to the extent that their
derivative financial instruments in fact ended up as effective hedges. To
include unrealized gains and losses on hedging derivatives in current income
adds misleading volatility that punishes hedgers relative to speculators who are
not hedging.
One of the fundamental problems is that hedged items often are not booked
whereas hedging contracts are now required to be booked when they go into
effect. Think of Southwest Airlines that commonly books future jet fuel prices.
Forecasted future jet fuel purchases a year into the future are not booked.
Southwest can speculate on the future price of jet fuel by not hedging. However,
Southwest can hedge in various ways, one way of which is to purchase an option
for a million gallons of jet fuel that expire one year from now. That
effectively locks in an option's strike price and takes all the risk and
opportunity of any price excess between future purchase price and the the
contracted option strike price. If Southwest Airlines closes its books in three
months the hedge item (forecasted purchase of a million gallons of jet fuel) is
not allowed to be booked whereas
the purchase options are required to be
booked. To report a gains on the options as income is entirely misleading
when the the intent is really to lock in a future net purchase price.
Gains and losses of hedging derivatives are booked in OCI until those options
either are exercised or expire. The ultimate gain or loss in OCI is
then reclassified in current income when the jet fuel is actually purchased. If
Southwest speculated in any derivative contracts that were not hedges,
unrealized gains and losses would not be held in suspense in OCI. Both the FASB
and FASB reasoned that hedge accounting in this manner
did not punish Southwest Airlines with
unrealized earnings volatility when in fact it was hedging rather than
speculating.
Sometimes hedges are not perfectly effective. For example, if Southwest
hedged a forecasted purchase of a million gallons of jet fuel in Miami with
Chicago option market prices, the ineffective portion of the hedge cannot be
booked in OCI and must be booked in current earnings when the value of the
option changes before Southwest actually purchases the jet fuel in Miami.
What encomiasts and financial analysts were worried about is that accounting
for hedging derivatives like they are the same as speculation derivatives adds
misleading income volatility to the financial statements of hedgers.
OCI arose in general over issues of unrealized income versus unrealizable
income or losses. Taken to extremes some gains and losses just cannot be
realized without fundamental and unlikely changes in the business model. For
example, Stanford University has over 10,000 acres of land that cannot be
legally sold as long as Stanford is a university. If Stanford was a for-profit
university it would be highly misleading to combine changes in the value of its
land each quarter to its current operating revenues for the quarter. Sure the
items can be shown separately on an income statement, but the problem is that
media and investors tend to have a "functional fixation" for the bottom line
fluctuations in net income.
The above article is quite good in describing the evolution of OCI to address
the problem of unrealized versus unrealizable income. I wanted to point out that
one of the sub-goals of OCI was not to punish hedgers and treat them like
speculators.
Cryptocurrency salaries revealed: From $60,000 to $400,000, here's how
much you could earn working in cryptocurrency ---
Click Here
Much like the currencies themselves, jobs in the crypto world are growing.
An analysis by
job search engine Monster found that
job postings with the terms "cryptocurrency," "blockchain," or "bitcoin"
grew almost 200% from 2017 to 2018. In 2020, LinkedIn named blockchain as
the most desired skill among companies when searching for new applicants.
Cryptocurrency has
been around since 2009, when bitcoin was introduced. Since then, the crypto
world has exploded. Now, thousands of
cryptocurrencies are available, and products supporting these
cryptocurrencies — wallets,
trading platforms,
and so on — are readily accessible to anyone interested in the decentralized
investment.
Using data from
the US
Office of Foreign Labor Certification,
Insider examined salaries to understand how much employees can make in the
crypto universe. Our analysis included nearly 300 visa applications for both
crypto-focused jobs at big companies like Facebook and Forbes to
crypto-focused companies like Coinbase.
It's worth noting that the H-1(B) data only provides salary information, and
does not include other types of compensation and benefits that employees may
receive in their roles, like bonuses, performance awards, or benefits.
Let's dig into the types of jobs in the cryptocurrency industry, how much
they pay, and who is currently hiring.
You typically have two options when looking to work with crypto: You can get
a technical job working with cryptocurrency and blockchain, or you can get a
more general role at a cryptocurrency company.
Professionals in fields like human resources, project management, or
management can work at companies that all have business models built around
cryptocurrency storage, investment, consulting, or purchase.
The company with the highest number of H-1(B) visas was Coinbase, which
hired mainly engineers, but also data scientists, recruiters, and operations
employees using the foreign worker visas.
Here are a few of the positions Coinbase hired, and how much it paid:
You typically have two options when looking to work with crypto: You can get
a technical job working with cryptocurrency and blockchain, or you can get a
more general role at a cryptocurrency company.
Professionals in fields like human resources, project management, or
management can work at companies that all have business models built around
cryptocurrency storage, investment, consulting, or purchase.
The company with the highest number of H-1(B) visas was Coinbase, which
hired mainly engineers, but also data scientists, recruiters, and operations
employees using the foreign worker visas.
Here are a few of the positions Coinbase hired, and how much it paid:
Jensen Comment
Here's an opportunity for academic research on accounting for payrolls paid in
cash versus cryptocurrency. Are there differences in today's rules and should
there be differences in future rules. One thought is that some companies that
pay salaries in cryptocurrencies may be such large players that they influence
the values of those currencies.
Bitcoin: Magic
Internet Money Crypto violates core rules of
investing: Always know what you are investing in; Not a capital asset or
store of value; nearly certainly a bubble and likely manipulated. (Research
Affiliates) see alsoThe Secret Pension Fund Manager:
Bitcoin has no clothes Our
columnist, a former portfolio manager at a major UK pension fund, gives a
professional investor’s view on the crypto currency craze.
(City
Wire Selector)
In 2019, the so called
"Big Four" accounting firms — PricewaterhouseCoopers (PwC), KPMG,
Ernst & Young (EY), and Deloitte — employed well
over a million people.
These firms are known
for paying employees six-figure salaries right out of business
school.
For example, some
analysts and auditors made more than $120,000 at Ernst & Young (EY),
principals were given up to $950,000 in compensation at KPMG, and
managers at PwC made $123,019 or more.
The so called "Big
Four" accounting firms — PricewaterhouseCoopers (PwC), KPMG, Ernst & Young (EY),
and Deloitte — are known for paying their staff high salaries.
In 2019, the four firms combined employed well
over a million people worldwide. New
hires typically earn six-figure salaries from the get-go. An entry-level
consultant who just graduated from business school can make more
than $200,000 a year at the four firms when
you include base salary, bonuses, and relocation expenses.
The Big Four firms are planning to hire in 2021. A
spokeswoman at PwC previously told Insider that the firm typically brings in
13,000 entry-level and experienced employees on a yearly basis, and its
hiring volume for interns and full-time workers will be similar this year.
Deloitte and EY are both planning to expand
their workforces in India.
Insider analyzed the US
Office of Foreign Labor Certification's 2020 disclosure data for
permanent and temporary foreign workers to find out what PwC, KPMG, EY, and
Deloitte paid employees for jobs ranging from entry-level to executive
roles. The salary data analyzed were based across the US.
We looked through entries specifically for
roles related to management consulting and accounting. Performance bonuses,
signing bonuses, and compensation other than base salaries are not reflected
in this data.
Here's how much PwC, KPMG, EY, and Deloitte
paid their hires last year.
It also applied for the greatest number of
visas compared to other leading consultancies. The company applied for 7,444
visas in the last half of 2019 and the first half of 2020. Deloitte did not
immediately respond to a request for comment on the salary data.
Deloitte delayed many of its full-time hires' start
dates, shortened internship programs for students, and laid off 5,000
US workers and 200
people in Canada in response to the
coronavirus pandemic.
Here are the salary ranges for consulting and
accounting roles:
Analyst: $58,261
to $116,500 (includes analysts specialized in business, human capital,
project delivery, and solutions)
Consultant:
$91,000 to $122,100
Senior consultant: $81,167
to $118,384
Manager: $107,640
to $160,480
Senior manager: $187,253
Consulting managing
director: $191,300
Audit and assurance
assistant: $58,822
Tax consultant: $47,570
to $55,195
Tax senior
manager: $124,909
Continued in article
Jensen Comment
Averages almost always are misleading without knowing standard deviations and
skewness. The most misleading part of this is differences in cost of
living. A $125,000 salary does not go far in San Francisco, London, or anywhere
in Switzerland. It goes quite a ways in Des Moines, San Antonio, and
Tallahassee.
My advice to my graduate students about to go to work full time was to almost
ignore starting salaries and look at the more important aspects of the first
job, including training, type of experiences, direct contact with clients, etc.
Especially important was and still is the type of training and experience. One
of my best graduating students in the specialty of accounting for financial
derivatives and hedging activities went with the Big Four that promised to let
him work mostly for a client in Houston having billions or dollars in derivative
contracts. In short time that student became a genuine expert on FAS 133 and
IFRS 39 to a point that in about six years he took on a new job as a financial
executive with Microsoft. Guess why Microsoft needed him?
One of my students who spoke Russian went with a firm that would send him to
Moscow. By doing so he was offered a partnership in a Big Four firm in what I
consider to almost be record time relative to his classmates that went with the
Big Four in the USA.
Sometimes my students complained that auditing and tax graduates are offered
less from the large accounting firms relative new graduates in engineering. I
consoled them by saying that accounting can often be a faster track to the
executive suite, especially the executive suite in finance and accounting.
Corporations often hire very few, if any, new (entry-level) graduates in
accounting. But they make very good deals with accountants who have become
specialized (think derivatives accounting, insurance accounting, lease
accounting, SEC accounting, etc.) after a few years of working for large
accounting firms.
There's also another aspect of high paying jobs to consider. Consultants in
the Big Four often start at higher salaries, but they are constantly living
under pressures to obtain new clients. Audit and tax clients, on the other hand,
tend to be the same clients year after year. For example, KPMG audited GE for
over 100 years before finally losing GE as an audit client. In comparison, KPMG
consultants had to keep competing for new consulting contracts year after year.
It can be very tedious writing consulting proposals year after year after year.
Another thing to contemplate when offered what seems like a huge starting
salary. The thing to ask is how much of that salary is based upon commissions
that create a lot of tensions on the job, especially when there is stiff
competition coming from other consulting firms writing proposals.
Federal lawmakers’ big year-end spending package includes a little-noticed
revision of the tax code that is likely to boost sales of life insurance,
particularly for wealthy Americans.
The law lowers a minimum interest rate used to determine whether combination
savings and death-benefit policies known as permanent life insurance are too
much like investments to qualify for tax advantages granted to insurance.
The interest-rate floor was put in place in 1984 to weed out policies that
were mostly investment vehicles with a thin layer of insurance. Lowering the
rate allows owners to put more in the savings portion.
And it makes it more feasible for insurers to offer
policies, since rates have tumbled so far in the past decade that the
1980s-era minimum limit is now well above long-term government-bond yields.
That has led insurers to warn they
might quit selling some of the
policies.
The reduction in the interest-rate assumption
was effective Jan.1 on new sales.
A
summary by the U.S. House staff said the revision was necessary “to reflect
economic realities” and give consumers “access to financial security via
permanent life-insurance policies.”
“It will create some new opportunities for clients,” said Katie Nentwick, a
managing director at Long Road Risk Management Services LLC in Phoenix,
which assists investment advisers with arranging and managing insurance
plans.
Owners of permanent-life
policies defer
taxes on their investment gains, and their beneficiaries receive the death
benefit tax-free. The policies are designed to be in place for a
buyer’s entire life, and allow a buyer to accumulate money to help fund the
policy’s future costs and to tap prior to death.
The year-end change by Congress will generally increase the amount of money
that policyholders can contribute to their so-called cash-value accounts,
though some restrictions remain. This change applies to buyers of all income
levels, though wealthier people would typically be better able to afford
extra payments into a policy.
“Given the impending rise of income-tax rates, this represents a unique
opportunity for high-net-worth
investors and investment advisers,” Ms. Nentwick said. She said it
could take months to know details of how it will play out, as many insurers
must redesign products and obtain regulatory approvals.
An
analysis by the Joint Committee on Taxation in May showed that the lower
interest-rate assumptions could reduce federal income-tax revenue by about
$3.3 billion over 10 years.
Wall Street spent the better part of a decade
battling for regulators to reshape the Volcker rule, which contained a ban
on banks making speculative investments. When the changes finally landed
Tuesday, the win felt more symbolic.
The Federal Deposit Insurance Corp. and other
regulators rolled out tweaks that clarify which trades are prohibited and
lay out limits for banks to follow in their market-making units. Although
those are some of the revisions that banks had pushed for, they’re far from
transformational changes that will spark a trading revival.
“Reports of the demise of the Volcker rule are
premature,” said Jai Massari, a partner at law firm Davis Polk & Wardwell.
“It will be more clear whether activities will be scoped in or out of the
rule, but the overall impact is not yet clear.”
Bank trading divisions have been totally
reshaped since the Volcker rule was passed as part of the 2010 Dodd-Frank
Act, the changes spurred by the new rules as well as technological
advancements and a multiyear revenue slump. Global banks’ stock and bond
desks are coming off their worst collective first half of a year since
before the financial crisis a decade ago. Goldman Sachs Group Inc. — once
the king of proprietary trading — just launched a credit card.
A federal rule change endorsed by the Supreme Court would expose more
foreign corporations to U.S. prosecution, a lawyer said.
The change to Federal Rule of Criminal Procedure 4 would expand the ways the
U.S. can serve a criminal summons beyond the current requirement of delivery
to the entity's American last known address. The amended rule that is now
before Congress and would go into effect at the end of the year, would allow
summons to be delivered intentionally by the U.S. or through a foreign
government. It would allow extraterritorial summons to be served where
federal statutes don't already provide for an arrest abroad. The result is
that more foreign corporations could be targeted in investigations, said
Thomas O'Brien from Paul Hastings law firm. "There appeared to be a loophole
on the government’s ability to effect services on certain foreign entities,"
he said.
The U.S. Justice
Department has often taken an expansive approach to enforcing laws
against foreign corporations, which sometimes have only a tangential
connection to the country and lack an American place of business. The
rule change would help make such prosecutions possible. “You can see the
frustration from the government’s standpoint,” Mr. O'Brien said about
not being able to issue summons to a company that broke a U.S. law.
“It’s going to be easier for the federal government to initiate criminal
proceedings,” he said, adding in an
article on
the issue that foreign corporations need to take note.
Kamil Sattar
started selling products online through a method called drop
shipping in 2017.
Drop shipping
refers to a type of fulfillment method where the seller
doesn't hold any inventory and instead acts as an
intermediary between the customer and the supplier.
As online
shopping has grown in popularity, the landscape of drop
shipping has changed quickly. Sellers now have to operate
stores at a higher standard of quality.
Sattar has
already made $1.7 million in sales on Shopify this year,
according to documentation emailed to Business Insider. He
outlined his four major tips for getting into drop shipping
in 2020.
As a teenager,
Kamil Sattar knew he wanted to work in business. But he dropped out of his
college's business program during his second year when he said he realized,
"I wasn't actually learning how to do business. I was learning how to work
for someone else's business and make them money."
That wasn't what Sattar had envisioned. He
decided his best route was to quit, get a job to build up his cash flow, and
use that money to fund what he really wanted to do: launch his own business.
While working stints in retail and personal shopping, Sattar kept coming
across a new e-commerce venture called drop shipping.
For the uninitiated, drop shipping describes a
fulfillment method. It means the online seller doesn't hold any inventory in
a warehouse and essentially acts as a middleman between the customer and the
product supplier.
In many cases, the sellers, or drop shippers,
who use this method, are finding products from suppliers that customers have
never heard of.
Drop shippers use wholesale marketplaces like
AliExpress, which is owned by Alibaba, China's largest e-commerce site.
AliExpress sells every category of goods, from apparel to luggage and yoga
mats, for shockingly cheap prices. Drop shippers then identify products they
think will be of interest to consumers. Once they find a product, they
advertise it on platforms like Facebook and Instagram with high-quality
photos and video, and if a customer bites, they handle getting the product
from the supplier to the customer.
The internet is full of drop shippers who say they
make tons of money in their spare time through this e-commerce method.
Sattar was intrigued and decided to start up his own shop in 2017.
Fast-forward to today, and Sattar has already moved $1.7 million worth of
products through drop shipping this year. These sales were made on the
e-commerce platform Shopify,
according to documentation emailed to Business Insider. Sattar shared his
tips for getting into drop shipping in 2020.
If my son
asked me today to see video of my late grandfather, whose name he bears, I’d
be in trouble.
First, I’d
have to locate the VHS tapes. Then I’d have to hunt down a gray-market VCR.
($500
and up for defunct technology!) Then I’d have to meet in some other dark
alley for a converter
box to hook it up to my fancy smart TV. Then I’d have to hope that, back
in 1996, someone was kind and did in fact rewind.
Luckily, my
3-year-old only asks for “Dora the Explorer.”
Technology
allows us to preserve the stories of people who die—assuming the technology
doesn’t die, too.
The idea of
old photos and videos being lost in obsolete media formats was something I
thought about a lot as I was producing “E-Ternal:
A Tech Quest to ‘Live’ Forever,” a documentary about death and
technology.
It’s
something viewers have written to me about, too. Some even suggested in
emails that paper is the best solution to ensuring stories are passed down.
Of course, I never met a piece of paper that improved in time—or in fire.
Printouts are great, but they’re not the same as digital copies living on a
rugged hard drive or up in the cloud for the entire family to access.
Converting old media into digital files might not sound like your idea of a
good time, but it doesn’t have to be a struggle. Here are some tips on how
to make these older formats enjoyable in 2021.
Old
Photos
There
are really two routes to digitizing any old media: 1) Source some
specialized hardware, roll up your sleeves and do it yourself, or 2)
outsource.
Photographs and prints are the easiest to do yourself. The most efficient
route? Invest in the $600
Epson FastFoto FF-680W scanner. Put a stack of photos—even Polaroids—in
the tray and it scans them in bulk, a photo as fast as every second, sending
them to your computer via USB or Wi-Fi. Epson’s software helps with
assigning years to each of the photo’s metadata and has simple
color-restoration and editing tools. It’ll even scan the backs with the
fronts, to preserve any writing or time stamps that are visible.
While
it’s pricey, the cost is worth it if you’re dealing with hundreds of photos.
Plus, the scanner is something you can share with family members or friends
who are daunted by their own photo troves.
Don’t
want to spend that much? iOS and Android apps like Google
Photoscan or Photomyne’s Photo
Scan App let you use your smartphone’s camera to capture the photos. Find a
table with good light, and point and shoot—without getting your hand-puppet
shadow in the way. The apps will automatically crop out the surface. Just
set aside plenty of time and prioritize the most important images, since you
have to go photo by photo with this option.
If any of
that sounds like a headache, just ship your photos to the pros at services
like ScanMyPhotos.com and Memories
Renewed. Gather your photos, organize them by year, get some bubble wrap
and pop them in the mail. ScanMyPhoto will even send you a prepaid label and
shipping box. The services will then digitize them, giving you options to
get them on a DVD, USB drive or cloud download. The companies send back the
originals. I used
ScanMyPhotos a few years back and was quite satisfied with the
turnaround time, the quality of the scanned images and the care taken with
my original prints.
Old Slides
Those
services will also take your old slides—35mm and other formats. But I
recently discovered the thrill of scanning those myself. Inspired by my
uncle, who scanned hundreds of 35mm slides during quarantine, I bought the $160
Kodak Scanza Digital Film Scanner.
Just power
up the coffee-tin-size device, pop your slide or negative into the
appropriate tray and slide it into the machine. You can see the image on the
built-in screen. Hit the camera button to save the photo to an SD card.
Sadly, there’s no easy way to assign dates to the photos—you’ll have to do
that afterward in your photo-editing program of choice.
If you’re looking to do some quick and dirty slide scans, try
the Photomyne’s SlideScan app for iOS and Android.
Hold your slide up to a backlit surface (your computer’s web browser pointed
to photomyne.com/backlight is
great) then snap a photo. The app automatically crops and brightens the
image. The quality wasn’t great, but it’s a nice way to figure out what’s
hiding on those old negatives.
ld Tapes
Converting
videotapes—be they VHS, Betamax, MiniDV, Video8 or some other ancient
format—requires a device that can play them. Then you need another device to
record the video, like this $170
ClearClick Video2Digital Converter 2.0. There are other ways to do this,
too, including hooking the VCR or old video camera up to your computer via
a converter like this.
It’s a lot.
There are plenty of online services that do tape conversion, too, including
ScanMyPhotos, Memories Renewed and Legacy Box. Also, Costco, CVS, Walmart and
other retailers use a third-party
service called YesVideo. Drop the tapes off at a local store and they’ll
take care of the rest for you.
Which state has the cheapest natural gas?
https://www.chooseenergy.com/data-center/natural-gas-rates-by-state/
Jensen Comment
Most of New Hampshire does not have access to natural gas. The small natural gas
market in NH is probably the main reason natural gas prices are high. We can buy
relatively expensive propane delivered by tank trucks, but propane apparently is
excluded from this study. Most homeowners in NH use fuel oil furnaces, although
homes and businesses are slowly putting in renewable energy for home use. The
short days in NH limit the advantage of solar relative to states further south,
but we do see more and more solar panels up here in part because electricity is
so expensive ---
https://www.nh.gov/osi/energy/saving-energy/incentives.htm
Because of our extensive forests, wood pieces and pellets are popular forms of
renewable energy in NH. Many homes have wood and oil/propane combinations. Wood
and other biomass alternatives constitute renewable energy alternatives that
spew carbon into the atmosphere. Wind farms are more popular in the plains
states (think Iowa) and states with lots of ocean shoreline. We have high winds
in New Hampshire, but the wind is less predictable than in some other states
like Iowa and our ocean exposure is very small.
It would be interesting for cost accounting students to investigate
alternative energy cost trends in various states. One complication for the
future will be the impact of Biden's green initiatives on these trends.
Are couples with daughters more likely to divorce
than couples with sons? Using Dutch registry and U.S. survey data, we show
that couples with daughters face higher risks of divorce, but only when
daughters are 13 to 18 years old. These age-specific results run counter to
explanations involving overarching, time-invariant preferences for sons and
sex-selection into live birth. We propose another explanation that involves
relationship strains in families with teenage daughters. In subsample
analyses, we find larger child-gender differences in divorce risks for
parents whose attitudes towards gender-roles are likely to differ from those
of their daughters and partners. We also find survey evidence of
relationship strains in families with teenage daughters.
Jensen Comment
This might be a useful study when teaching
cause versus correlation to students. It is relatively easy to find spurious
correlations that are unlikely causal models, the classic of which is the
discovery of correlation between changes in the number of stork nests in Denmark
with changes in Danish birth rates ---
http://www.jstor.org/pss/2983064
Studies like the one above in The Economic Journal are trickier to
conclude that the correlations are not
reflective of underlying causes.
My threads on cause vs. correlation art at
Bob Jensen's Illustrations of Critical Thinking (trinity.edu)
A problem sometimes arises when an unknown factor that affects both correlated
variables. For example, is it possible that climate changes affect both the
number of the number of Danish stork nests and Danish human birthrates. I'm not
saying that this is true, but it is an example of a possibility in the famous
Yates' illustration of spurious correlation. It is less likely that storks are
delivering new babies.
Also see Statistical Significance Testing: A Historical Overview of Misuse and
Misinterpretation with Implications for the Editorial Policies of Educational
Journals ---
Click Here
I'm not trying to suggest that there is not a causal relationship in the above
study in The Economic Journal.
The
Impact of Emerging Technologies on Management Accounting
Management accounting is
considered as a key component in current business units to achieve
organizational improvement in various areas such as: management and costs
reduction, strategic management, success in competitive global markets that
require the use of up-to-date technologies. This paper provides an overview of
emerging technologies and their impact on management accounting.
This study shows that many emerging technologies, due to the importance that
management accountants play in the success of organizations, require more
research in a fast and timely time process. Many organizations need to implement
business intelligence and analytics (BI&A) technologies, machine learning
algorithms, and the Internet of Things to achieve more accurate predictions and
support reporting and decision making. This research includes reviewing,
describing, analyzing, and summarizing some research in the field of management accounting,
which examines the impact of emerging technologies to enhance and assist
management accountants in guiding business units toward success in global
business markets.
Keywords: Emerging
Technologies, Management Accounting, Accounting,
Machine Learning, Internet of Things
Suggested Citation:
Zamani, Foad and Etemadi, Hossein, The Impact of Emerging Technologies on
Management Accounting (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=3722860
Making Sense of Cost-Consciousness in Social Work
Qualitative Research in Accounting and Management, Forthcoming
Aalborg University - Department of Business and Management
Date Written: October 29, 2020
Abstract
Purpose - This paper explores how the introduction of new accounting information
influences understandings of cost-consciousness. Furthermore, the paper explores
how managers use accounting information
to shape organizational members’ understanding of changes, and how focusing on
cost-consciousness influence professional culture within social services
.
Design/methodology/approach -The paper is based on a case study, drawing on
sense-making as a theoretical lens. Top management, middle management, and staff
specialists at a medium-sized Danish municipality are interviewed.
Findings - The paper demonstrates how accounting metaphors
can be effective in linking cost information and cost-consciousness to
operational decisions in daily work practices. Further, the study elucidates how
professionalism may be strengthened based on the use of accounting information.
Research limitations/implications - The study is context-specific, and the role
of accounting in
professional work varies on the basis of the specific techniques involved.
Practical implications - The paper shows how managers influence how
professionals interpret and use accounting information.
It shows how cost-consciousness can be integrated with social work practices to
improve service quality.
Originality/value - The paper contributes to the literature on how accounting information
influence social work. To date, only few papers have focused on how
cost-consciousness can be understood in practice and how it influences
professional culture. Further, the study expands the limited accounting metaphor
research.
Keywords: Budgeting,
Sense-Making, Management Accounting,
Metaphors, Public Sector, Social Services, Cost-Consciousness
Separating Accounting and
Economic Components of the Market-to-book Premium: Implication for Future
Investment Growth and Stock Returns
University of California,
Berkeley; China Academy of Financial Research (CAFR)
Date
Written: September 1, 2019
Abstract
This paper
analyzes the market-to-book premium, i.e., the difference between the market
value and the book value of a firm’s equity, based on the accounting principles
that govern the measurement of book value. The premium is accordingly dissected
into two components: one part resulting from conservative accounting which
biases the measurement of assets-in-place; the other part relating to the
delayed recognition of profits from future investments and operations. Both
components are positively correlated with future earnings’ volatility but
negatively correlated with future bankruptcy filings. On the other hand, the two
components have opposing correlations with future stock returns, and
substantially different correlations with future investments in tangible and
intangible assets as well as future growth in total operating assets. A modified
market-to-book ratio, adjusting for the effect of accounting conservatism,
subsumes the predictive power of the traditional market-to-book ratio with
respect to future stock returns.
Just the title of this paper should cause accounting standard setters to be
more than a little bit ashamed.
Non-economic accounting components of book value? Accounting components
should all be a subset of economic components, shouldn’t they? Otherwise,
all we’re doing is making stuff up. I do realize that not all accounting
components are economic components, but that’s the way things ought to be,
shouldn’t it? If I am wrong, someone please correct me.
Best,
Tom
January 9, 2021 reply from Bob Jensen
Hi
Tom,
The problem with "economic components" is that they vary with alternative
uses of assets in place --- piecemeal liquidation values versus versus
discounted future cash flows and financial risks in Use 1 versus discounted
cash flows and risks in Use 2, etc.
That's what makes economic
value of a "firm" so difficult to measure. For
example, a hotel not far from my home has gone through two bankruptcies.
Almost two years ago in a public auction by the bank holding most of the
debt received auction bids ranging from $500,000 to $2 million. The intended
uses varied greatly from using it as a private residence, using it as a dorm
for a school, using it as a stand-alone hotel, using it as part of a chain
of hotels, tearing it down and subdividing the land.
One would think that the bank would accept the highest bid, but the highest
bid was conditioned on the bank's continued line of credit versus bids that
were cash deals with no strings attached versus other cash deals with
strings attached (such as warranty conditions).
In
the end the auction was cancelled shortly after it started. The bank later
negotiated a cash deal for selling it without warranties for a rumored $1
million. The buyer, unlike previous owners, has very deep pockets with plans
to make it an anchor hotel for a small chain of hotels that he hopes to buy
or build in the future. Under such unknowns about possible future hotels
estimating economic value of this hotel with any degree of reliability is
literally impossible. The good news is that the buyer has very deep pockets
to carry the hotel through expensive renovations and very low occupancy that
transpired up to now in the middle of a pandemic. His plans for buying or
building other hotels in a chain are more uncertain in the current times of
troubles for almost all hotels even if the Covid-19 pandemic is licked.
The pandemic itself may have changed the travel industry in a fundamental
way. Many hotels may become care centers if Biden succeeds in funding
long-term care paid for by a national health insurance plan. Sadly, the
hotel mentioned above probably can never serve as a care center due to
fundamental problems such as being too small, not having town water, and not
having a sprinkler system. To meet nursing home standards it would have to
be torn down and rebuilt. And that's probably not going to happen in a
village that has no town water or sewage lines.
My
point here is that "economic value" is in the eye of the beholder who has an
intended use different from other beholders who envision different uses.
Accountants dream of measuring economic value in use, but that probably will
never happen in any reliable way except in very rare circumstances. Value in
use is not what accountants define as book value, exit value, or entry
value. We tend to think of economic value in terms of DCF but the forecasted
cash flows and discount rates vary widely with usage and future events that
are impossible to predict with any degree of objectivity.
My concern with the above SSRN paper is the
uncertainty about market value of total equity. It's foolhardy to take
current share prices times the number of outstanding shares as a measure of
market value.
Thanks Tom,
Bob
Description
of the Implementation of PSAK 45 and ISAK 35 in Mosque Financial Reporting Accounting
Mosques are non-profit organizations in the religious sector. Mosque
institutions must and have the right to make responsible financial reports and
report to users of mosque institutional financial reports. This study provides
an overview of the application of PSAK 45 and ISAK 35 in mosque financial
reporting. The results of the application of IAS 45 and Interpretation of SFAS
35 second reporting standards have almost no difference, especially in the
financial statements only in ISAK 35 m emperhatikan persyartaan minimum content
of financial statements in IAS 1 then d apat menyesuaiakan description of some
pis, d apat menyesuaiak a n a description of the report finance: report title,
considering the relevant facts so as not to reduce the quality of the
information presented and the addition of LRA financial reports is possible as
long as it is explained in the accounting policy
there are regulatory references, in this case assumptions and what is managed by
the mosque is much more complex in its sources and uses. Based on the
descriptions regarding the reporting standards of PSAK 45 and ISAK 35, the two
reporting standards can be used in the preparation of mosque financial reports,
although many mosques still use simple reports.
Latief, Danil and Haliah, SE and Nirwana, SE, Description of the Implementation
of PSAK 45 and ISAK 35 in Mosque Financial Reporting Accounting (December 5,
2020). Available at SSRN: https://ssrn.com/abstract=3743296
Fraud exists in all walks of life and detecting and preventing fraud represents
an important research question relevant to many stakeholders in society. With
the rise of big data and artificial intelligence, new opportunities have arisen
in using advanced machine learning models to detect fraud. This chapter provides
a comprehensive overview of the challenges in detecting fraud using machine
learning. We use a framework (data, method, and evaluation criterion) to review
some of the practical considerations that may affect the implementation of
ma-chine-learning models to predict fraud. Then, we review select papers in the
academic literature across different disciplines that can help address some of
the fraud detection challenges. Finally, we suggest promising future directions
for this line of research. As accounting fraud
constitutes an important class of fraud, we will discuss all of these issues
within the context of accounting fraud
detection.
This
paper reviews literature in the domain of information overload in accounting.
The underlying psychological concepts of information load (as applied in accounting research)
are summarized, and a framework to discuss findings in a structured way is
proposed. This framework serves to make causes, consequences, and
countermeasures transparent. Variables are further clustered into major
categories from information processing research: input, process, and output. The
main variables investigated are the characteristics of the information set,
especially the number of information cues as an input variable; the experience
of the decision-maker, the decision time, decision rule, and cue usage as
process variables; and measures related to decision quality (i.e., accuracy,
consensus, consistency) and related to self-insight (calibration, confidence,
feeling of overload) as output variables.
The contexts of the respective research papers are described, and the
operationalization of variables detailed and compared. I employ the method of
stylized facts to evaluate the strength of the links between variables (number
of links, direction and significance of relationship). The findings can be
summarized as follows: most articles focus on individual decision-making in the
domain of external accounting,
with financial distress predictions constituting a large part of these. Most
papers focus on input and output variables with the underlying information
processing receiving less attention. The effects observed are dependent on the
type of information input and the task employed. Decision accuracy is likely to
decrease once information load passes a certain threshold, while decision time
and a feeling of overload increase with increasing information load. While
experience increases decision accuracy, the results on decision time are
conflicting. Most articles have not established a significant link between
changes in information load and changes in decision confidence. Relative cue
usage, consensus, consistency, and calibration decline with increasing
information load. Based on these findings, implications for practice and future
research are derived.
Keywords: information
overload, literature review, accounting,
decision-making, information processing
Singapore Management University - School of Accountancy
Date Written: October 2020
Abstract
Cluster analysis is a data analytics technique that can help forensic
accountants effectively detect anomalies in complex financial datasets. This
article provides a description of clustering analysis, discusses how it can be
implemented to detect anomalies in data, and illustrates its use through a
worked example using the Tableau software.
Keywords: Forensic accounting,
data analytics, clustering, Tableau
Suggested Citation:
Goh, Clarence and Lee, Benjamin and Pan, Gary and Seow, Poh-Sun, Forensic
Analytics Using Cluster Analysis: Detecting Anomalies in Data (October 2020).
Journal of Corporate Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3760210 or http://dx.doi.org/10.2139/ssrn.3760210
Accounting for
Leases: Understanding the Impact of ASC 842, Leases
Review of Business & Finance Studies, v. 11 (1) p. 29-40, 2020
The
case seeks to contrast the lease accounting under
the previous standard (ASC 840) and the guidance to be implemented in 2019 (ASC
842). The case is relevant for accounting majors
especially those taking Intermediate Financial Accounting II.
It is also relevant for business and finance majors dealing with corporate
financial statements. It is also useful for professionals in practice/industry
interested in how the new rules will affect their company. In the context of a
hypothetical CFO and finance function of a domestic airline company, the case
requires the performance of a web search and the procurement of information on
former and current lease accounting.
The case also requires the write-up of responses to questions comparing and
contrasting the old and new guidance under ASC 840 and ASC 842, respectively;
and, the creation of Right-of-Use Asset (“ROUA”) and lease amortization
schedules. The paper is suitable for undergraduate classes. Individuals or
groups may be required to simply write-up their answers to the questions posed
or present their research to the class for discussion and comment, especially
with regard to the last, optional question. Completion of the case should
require 5-10 hours outside of class. Classroom discussion should be about two
hours.
McCallum, Brent and McCallum, Christopher and Romero, Rafael, Accounting for
Leases: Understanding the Impact of ASC 842, Leases (2020). Review of Business &
Finance Studies, v. 11 (1) p. 29-40, 2020, Available at SSRN: https://ssrn.com/abstract=3707697
Discussion of 'Economic Consequences of IFRS Adoption: The Role of Changes in
Disclosure Quality'
Li,
Siciliano, and, Venkatachalam (hereafter LSV) propose a two-stage approach to
studying the effects of the adoption of the International Financial Reporting
Standards (IFRS) on economic outcomes. The key innovation of their paper is that
it links the economic outcomes effect to a particular channel: disclosure
quality. LSV first investigate the effect of IFRS adoption on disclosure
quality, then link the change in disclosure quality to two economic outcomes:
market liquidity and audit fees. To proxy for disclosure quality, the authors
use the measure of line-item disclosure disaggregation in the balance sheet and
income statement proposed by Chen et al. (2015).
Our discussion proceeds in two steps: First, we discuss the existing literature
on this topic and position LSV within it. The goal is to highlight conceptual
issues and suggest opportunities for future research. Second, we discuss
empirical issues related to the research design and the results. We comment on
both stages of LSV’s two-stage approach and suggest possible avenues for future
research on this topic.
Keywords: IFRS,
IAS, Financial Reporting Regulation, International Accounting,
Disclosure Quality
JEL Classification: M41
Suggested Citation:
Naranjo, Patricia L. and Verdi, Rodrigo S., Discussion of 'Economic Consequences
of IFRS Adoption: The Role of Changes in Disclosure Quality' (August 31, 2020).
Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3683948 or http://dx.doi.org/10.2139/ssrn.3683948
Do
PCAOB Inspections Improve the Accuracy of Accounting Estimates?
Michigan State University - Department of Accounting & Information Systems
Date Written: October 20, 2020
Abstract
Despite issuing extensive guidance related to the evaluation of accounting estimates,
the PCAOB continues to identify deficiencies related to the audit of estimates
through their inspections process. We examine whether PCAOB inspections lead to
more accurate audited accounting estimates,
defined as those that more closely match economic reality, by examining a
significant estimate within the banking industry. We find that in contrast with
the PCAOB’s goal of more accurate and unbiased estimates, allowance for loan
loss (ALL) estimates become less accurate and more conservative with higher
levels of ALL-related inspection findings for public company audits. We find no
evidence of auditor response to PCAOB inspection findings for private-company
audits, which are not subject to PCAOB inspection. Overall, our findings cast
doubt on the efficacy of PCAOB inspections in improving estimate accuracy and
suggest that firms are managing inspection risk to the potential detriment of
audit quality.
Keywords: estimates,
auditor, regulation, PCAOB, allowance for loan losses
Deloitte LLP; The University of Auckland Business School
Date Written: September 2020
Abstract
Current accounting practice
expenses many investments in intangible assets to the income statement,
confusing earnings from current revenues with investments to gain future
revenues. This has led to increasing calls to book those investments to the
balance sheet. Drawing on the relevant research, this paper proposes solutions
for the accounting for
intangible assets that contrast with balance sheet recognition, and compares
them to current practice and the IFRS standards that dictate practice. Key is
the recognition that an accounting solution
comes from a double-entry system which produces an income statement as well as a
balance sheet, and that has features that both enable and limit the information
that can be conveyed about the value in intangible assets. In this system, asset
recognition in the balance sheet must consider the effect on measurement in the
income statement, for the income statement conveys value added to investment on
the balance sheet. A determining feature is uncertainty about investment outcome
and how that affects the income statement, so our solutions centre on accounting under
uncertainty. Two other accounting features
are added: There has to be an investment expenditure for balance sheet
recognition and that expenditure must be separately identifiable from
transactions. These features rather than the tangible-intangible asset dichotomy
lead to the prescribed solutions.
Between 1900 and 1956, women increased from a small proportion of public company
stockholders in the U.S. to the majority. In fact, by the 1929 stock market
crash, women stockholders outnumbered men at some of America’s largest and most
influential public companies, including AT&T, General Electric, and the
Pennsylvania Railroad. This Article makes an original contribution to corporate
law, business history, women’s history, socio-economics, and the study of
capitalism by synthesizing information from a range of historical sources to
reveal a forgotten and overlooked narrative of history, the feminization of
capital—the transformation of American public company stockholders from
majority-male to majority-female in the first half of the twentieth century,
before the rise of institutional investing obscured the gender politics of
corporate control.
Corporate law scholarship has never before acknowledged that the early decades
of the twentieth century, a transformational era in corporate law and theory,
coincided with a major change in the gender of the stockholder class. Scholars
have not considered the possibility that the sex of common stockholders, which
was being tracked internally at companies, disclosed in annual reports, and
publicly reported in the financial press, might have influenced business
leaders’ views about corporate organization and governance. This Article
considers the implications of this history for some of the most important ideas
in corporate law theory, including the “separation of ownership and control,”
shareholder “passivity,” stakeholderism, and board representation. It argues
that early-twentieth-century gender politics helped shape foundational ideas of
corporate governance theory, especially ideas concerning the role of
shareholders. Outlining a research agenda where history intersects with
corporate law’s most vital present-day problems, the Article lays out the
evidence and invites the corporate law discipline to begin a conversation about
gender, power, and the evolution of corporate law.
Keywords: Corporate
Governance, Shareholding, Separation of Ownership and Control, Stockholder
Passivity, Women, History, Capital, Political Economy, Berle & Means
From the CFO Journal's Morning Ledger on January 27, 2021
Good
morning. Gary
Gensler, President Biden’s pick to run the Securities and Exchange
Commission, isexpected
to seekhigher
fines and new disclosure requirements on public companies, lawyers and
former regulators say.
Mr. Biden nominated
Mr. Gensler earlier this month to head the agency that oversees U.S.
securities markets, succeeding Jay Clayton. The Senate needs to confirm his
choice for it to take effect, a process for which there is still no
confirmed timeline. Last week, Mr. Biden named SEC Commissioner Allison
Herren Lee to serve as acting chairwoman in the interim. Mr. Gensler headed
the U.S. Commodity Futures Trading Commission from 2009 to 2014, at which
time he spearheaded the creation of a new regulatory framework for
derivatives.
If confirmed, Mr.
Gensler will likely be tasked with toughening regulation of U.S. public
companies and the finance industry. Although he hasn’t outlined his plans
for the role yet, his reputation as a bold regulator makes it likely he will
beef up enforcement efforts and push for new disclosure rules, lawyers and
former regulators said.
Finance chiefs
already anticipate spending more time and money to comply with new
disclosure requirements in the next few years, said Howard Berkenblit, a
partner at law firm Sullivan
& Worcester LLP. “They’re bracing themselves for more
regulation,” he said.
From the CFO Journal's Morning Ledger on January 21, 2021
Tyson
Foods said
it hasagreed
to pay$221.5
million to settle with plaintiff groups of poultry buyers that sued it for
price-fixing claims, helping resolve a four-year legal battle over alleged
collusion in the $65 billion chicken industry
From the CFO Journal's Morning Ledger on January 21, 2021
Good
morning. Finance
chiefs and investors could be hard-pressed to find evidence of the economic
downturn in recent earnings reports from big companies, which so far have
mostly reflected the good fortunes of affluent consumers and investment
firms amid the pandemic.
Morgan
Stanley on
Wednesday was the latest Wall Street bank to postbetter-than-expectedresults,
as fourth-quarter earnings rose 51% from a year earlier, to $3.39 billion.
The bank focuses on wealthy Americans, large corporate clients and money
managers, making it less exposed to mass unemployment and small-business
exposures than Main Street banks. JPMorgan
Chase and Goldman
Sachs Group also reported largeprofitjumps.
Jensen Comment
There are exceptions such as oil & gas companies, airlines and hotels impacted
hard by the pandemic.
From the CFO Journal's Morning Ledger on January 20, 2021
Good morning. Companies
areramping
up their financial forecastingand
planning to prepare for potential changes to the U.S. tax code under the
incoming Biden administration, which are now more
likely after Georgia’s runoff elections
handed Democrats control of the Senate.
Joe Biden, who will be inaugurated as U.S. president
Wednesday, during the election campaign proposed reversing elements of the
2017 tax overhaul that lowered the federal tax rate for companies from 35%
to 21%. Mr. Biden suggested raising
the corporate tax rate to 28%
alongside other measures such as an alternative minimum tax of 15% on
businesses generating profit of $100 million or more.
Finance chiefs and tax executives at food
manufacturer Conagra Brands,
energy provider NRG Energy Inc. and aviation services firm AAR Corp.
are taking a hard look at their companies’ books and operations to see what
these proposals could do to their tax obligations.
“People now have to revisit their modeling
exercise,” said John Gimigliano, principal-in-charge of KPMG’s
U.S. tax legislative and regulatory services business. “Companies are going
back to the Biden plan and looking at the proposals.”
From the CFO Journal's Morning Ledger on January 15, 2021
The U.S.-China trade pact signed a year ago is being credited for improving
business conditions for some American companies, even if a cornerstone of
the deal—China’s commitment to greatly increase purchases of U.S. goods—has
fallen short.
Under the deal brokered by the Trump administration, China agreed to
purchase about $159 billion in U.S. goods by the end of 2020. Through
November, China’s actual purchases were about $82 billion, or about 52% of
the target goal, according to an analysis by Chad Bown, a senior fellow at
Peterson Institute for International Economics.
From the CFO Journal's Morning Ledger on January 15, 2021
Delta Air Lines said
it ishunkering
down for a long, dark winter as the
coronavirus pandemic drags on but still expects air-travel demand to turn a
corner this year.
Delta on Thursday reported a net loss of $755
million for the fourth quarter, compared with a profit of $1.1 billion in
the same period a year earlier. That brought the airline’s 2020 losses to
nearly $12.4 billion, making it the company’s worst year ever and marking
its first annual loss since 2009.
From the CFO Journal's Morning Ledger on January 15, 2021
Good
morning. President-elect
Joe Biden is calling for a $1.9 trillionCovid-19
relief plan to help Americans weather the economic shock of the
pandemic and pump more money into testing and vaccine distribution.
Mr. Biden in a
speech Thursday evening described his priorities related to the pandemic for
the early days of his administration. His plan calls for Congress to back a
round of $1,400-per-person direct payments to most households, a
$400-per-week unemployment insurance supplement through September, expanded
paid leave and increases in the child tax credit.
Mr. Biden takes
office next Wednesday as the virus death toll has topped 3,000 daily deaths
repeatedly in recent weeks and Americans deal with the economic fallout from
continued business and school closures. “We have to act and we have to act
now,” Mr. Biden said.
Earlier on
Thursday, the number of workers filing for jobless
benefitsposted
its biggest weekly gain since the pandemic hit last March and the head of
the Federal Reserve warned the job market had a long
way to go before
it is strong again.
From the CFO Journal's Morning Ledger on January 13, 2021
British stocks have enjoyed a world-beating
rallysince
the start of December, with international investors beginning to buy back
into one of their least-loved countries
From the CFO Journal's Morning Ledger on January 13, 2021
PCAOB Board Member to Step Down
The Public Company Accounting Oversight
Board on Tuesday said board member J. Robert Brown Jr., who
has been sharply criticizing the U.S. audit watchdog
recently, will step down this month. His term had been
scheduled to end in October.
The PCAOB didn't provide a reason for the
timing of Mr. Brown’s departure. He was appointed to the
PCAOB’s board in 2017 by the Securities and Exchange
Commission, and in recent months stated on several occasions
that the PCAOB hasn’t done enough to incorporate investor
feedback.
Under Chairman William
Duhnke, the PCAOB in 2018stopped
holding meetingsof
two groups that consulted investors, describing the meetings
as ineffective. The PCAOB replaced the meetings with
investor roundtables and events with asset managers and
owners.
“We appreciate Jay’s service to the PCAOB
and his efforts to advance audit quality. We wish him all
the best,” Mr. Duhnke said in a statement.
Before joining the PCAOB, Mr. Brown was a
law professor at the University of Denver and secretary to
the SEC’s investor advisory committee.
From the CFO Journal's Morning Ledger on January 13, 2021
Good morning. President-elect
Joe Biden isexpected
to choose Gary
Gensler, a former financial regulator and Goldman Sachs executive, to
head the Securities and Exchange Commission, according to people familiar
with the decision.
Mr. Gensler’s nomination
would please liberal Democrats who cheered the former regulator’s tough
approach to rule-making during the Obama administration, when he spearheaded
the overhaul of derivatives markets mandated by the 2010 Dodd-Frank Act and
oversaw enforcement actions against investment banks accused of manipulating
benchmark interest rates. The choice of Mr. Gensler, who declined to
comment, wasn’t final and could still change, the people said.
As head of the Commodity Futures Trading
Commission from 2009 to 2014, Mr. Gensler developed a reputation among his
colleagues for bare-knuckle tactics as he drove to create a regulatory
framework for derivatives, a multitrillion-dollar market that had largely
been free from federal oversight. By the time he left the commission, the
rule set was largely complete, years before other regulators wrapped up
their postcrisis work.
It was a surprising turn for the former Goldman
executive who had previously resisted calls for additional derivatives
regulation when he served in the Treasury Department under President
Clinton. The decision to loosen the regulation of derivatives in the 1990s
has been blamed for contributing to the financial crisis a decade later.
From the CFO Journal's Morning Ledger on January 8, 2021
Boeingwill
pay $2.5 billionto
resolve a Justice Department investigation and admit employees misled
aviation regulators about safety issues linked to two deadly crashes of its
737 MAX jet, U.S. authorities said
From the CFO Journal's Morning Ledger on January 8, 2021
Good
morning. Democratic
control of the Senate gives President-elect Joe Biden a much stronger chance
ofraising
taxes on corporationsand
high-income households.
Until this week’s
Georgia runoff elections, Mr. Biden’s plans for tax increases were running
into solid opposition from the Republican-controlled Senate. But now,
Democrats will hold the White House, Senate and House simultaneously for the
first time in more than a decade, and they are poised to use that power.
During his
presidential campaign, Mr. Biden proposed raising taxes on corporations,
estates and high-income households, reversing key parts of the 2017 tax cuts
passed by Republicans and reprising policies that the Obama administration
couldn’t get through Congress. For corporations, he would raise the tax rate
to 28% from 21%, impose a minimum tax on companies with lower effective tax
rates and increase taxes on U.S. companies’ foreign earnings.
“The issue was
always, could Democrats get something on the floor? And the answer to that
is now clearly ‘yes,’” said Steve Wamhoff of the progressive Institute on
Taxation and Economic Policy. “Biden did win after campaigning on raising
taxes on corporations and raising taxes on the rich.
From the CFO Journal's Morning Ledger on January 7, 2021
Watchdog Finds Deloitte
Failed to Challenge Autonomy’s Accounting
The
U.K. accounting watchdog on Wednesday said Deloitte LLP and two former partners were “culpable of
serious and serial failures” in their audits of Autonomy Corp., wrapping up a yearslong
investigationafter
findings of misconduct
From the CFO Journal's Morning Ledger on January 5, 2021
Good morning. The
U.S. accounting standard-setterplans
to tackleissues around accounting for
goodwill and disclosure of expenses in 2021, after a year marked by a
leadership transition and the economic havoc caused by the coronavirus
pandemic.
“Our agenda is filled with important items, but
those are two that have drawn a lot of interest from people,” said Richard
Jones, who took over as chairman of the Financial Accounting Standards Board
in July.
Critics say the standard-setter isn’t moving
fast enough to enact new rules. “I don’t see a lot of new innovation on the
schedule for [2021],” said John Hepp, an assistant accounting professor at
the University of Illinois at Urbana-Champaign.
Mr. Jones disagrees. The FASB, he said, is
pressing ahead with its agenda while taking constraints around time and
resources into consideration, as companies are adapting to recent accounting
changes—for example, on revenue recognition, leases and expected credit
losses—and managing through the pandemic’s effects. “We’re being cognizant
of the environment they’re operating in,” Mr. Jones said.
Teaching Case
Accounting for
Leases: Understanding the Impact of ASC 842, Leases
Review of Business & Finance Studies, v. 11 (1) p. 29-40, 2020
The
case seeks to contrast the lease accounting under
the previous standard (ASC 840) and the guidance to be implemented in 2019 (ASC
842). The case is relevant for accounting majors
especially those taking Intermediate Financial Accounting II.
It is also relevant for business and finance majors dealing with corporate
financial statements. It is also useful for professionals in practice/industry
interested in how the new rules will affect their company. In the context of a
hypothetical CFO and finance function of a domestic airline company, the case
requires the performance of a web search and the procurement of information on
former and current lease accounting.
The case also requires the write-up of responses to questions comparing and
contrasting the old and new guidance under ASC 840 and ASC 842, respectively;
and, the creation of Right-of-Use Asset (“ROUA”) and lease amortization
schedules. The paper is suitable for undergraduate classes. Individuals or
groups may be required to simply write-up their answers to the questions posed
or present their research to the class for discussion and comment, especially
with regard to the last, optional question. Completion of the case should
require 5-10 hours outside of class. Classroom discussion should be about two
hours.
McCallum, Brent and McCallum, Christopher and Romero, Rafael, Accounting for
Leases: Understanding the Impact of ASC 842, Leases (2020). Review of Business &
Finance Studies, v. 11 (1) p. 29-40, 2020, Available at SSRN: https://ssrn.com/abstract=3707697
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 8, 2021
2020 Was One of the Worst-Ever Years for Oil
Write-Downs
By Collin Eaton Sarah McFarlane | December 27, 2020
Topics: Asset
Impairment
Summary: Companies
in a variety of industries “across the major western
economies are writing down more of their assets during the
coronavirus pandemic than they have in years. But the oil
industry has written down more than any other major segment
of the economy….” The oil industry frequently takes
write-downs when commodity prices fall, but this year’s
impairments are particularly stark “because oil companies
also face longer-term uncertainty for their main products….”
Classroom Application: The
article may be used when discussing impairment testing for
property, plant, and equipment to both describe the process
and understand the economic factors driving this accounting.
ANSWER TO QUESTION 2 [REMOVE BEFORE DISTRIBUTING TO
STUDENTS]: For publicly traded companies, S360-1-S99-2
begins the text of SAB Topic 5.CC, Impairments. It states:
Standards for recognizing and measuring impairment…are found
in FASB ASC Topic 360, Property, Plant, and Equipment…and
FASB ASC Topic 350, Intangibles—Goodwill and Other." For
property, plant and equipment classified as held and used,
the specific reference is 360-10-35-16 and -17.
Questions:
Summarize U.S. accounting requirements for impairment
evaluations.
Cite the FASB accounting standard codification
reference(s) which give the requirements you summarize
above.
What factors are leading to long-term uncertainty for
oil companies’ main products and, hence, significant
impairment write downs?
Did you include bad management in your answer above? Why
or why not?
Oil industry has written down about $145 billion in
assets this year, amid an unprecedented downturn and long-term questions
about oil prices
The pandemic has triggered the largest revision
to the value of the oil industry’s assets in at least a decade, as companies
sour on costly projects amid the prospect of low prices for years.
Oil-and-gas companies in North America and
Europe wrote down roughly $145 billion combined in the first three quarters
of 2020, the most for that nine-month period since at least 2010, according
to a Wall Street Journal analysis. That total significantly surpassed
write-downs taken over the same periods in 2015 and 2016, during the last
oil bust, and is equivalent to roughly 10% of the companies’ collective
market value.
Companies across the major Western economies are
writing down more of their assets during
the coronavirus pandemic than they have in years. But the oil industry has
written down more than any other major segment of the economy, following an
unprecedented collapse in global energy demand, according to an analysis of
data from S&P Global Market Intelligence.
Oil producers frequently write down assets when
commodity prices crash, as cash flows from oil-and-gas properties diminish.
This year’s industrywide reappraisal is among its starkest ever because oil
companies also face longer-term uncertainty over future demand for their
main products amid the
rise of electric cars, the proliferation of
renewable energy and growing concern about the lasting impact of climate
change.
European major oil companies Royal
Dutch ShellRDS.A -0.25%PLC, BPBP 2.05%PLC
and Total
SETOT -0.63%were among
the most aggressive cutters,
accounting for more than one third of the industry’s write-downs this year.
U.S. shale producers including Concho
Resources Inc. and Occidental
Petroleum Corp. booked
more impairments than they had in the past four years combined. The data,
which encompassed the first three quarters of 2020, excluded Exxon
Mobil Corp.’s recently
announced plan to write down up to $20 billion in the fourth quarter and the
$10 billion Chevron Corp. slashed
in late 2019.
The Journal’s analysis reviewed data from S&P
Global Market Intelligence, Evaluate Energy Ltd. and IHS
Markit on impairments taken by major
oil companies and independent oil producers with a market value of more than
$1 billion based in the U.S., Canada and Europe.
Regina Mayor, who leads KPMG’s energy
practice, said the write-downs represent not only the diminished short-term
value of the assets but many companies’ belief that oil prices may never
fully recover.
“They are coming to grips with the fact
that demand for the product will decline, and the write-downs are a
harbinger of that,” Ms. Mayor said.
U.S. accounting rules require companies
to write down an asset when its projected cash flows fall below its current
book value. Though an impairment doesn’t affect a company’s actual cash
flow, it can potentially raise its borrowing costs by increasing its debt
load relative to its assets. Companies are also required to record
impairments as earnings charges.
For the oil industry, the reassessment
comes at the end of an era in which a perceived scarcity of energy supplies
drove a rush to buy up fossil-fuel reserves, including U.S. shale deposits
and Canadian oil sands. Some of the assets they scooped up require higher
oil prices that were prevalent earlier in the decade to be profitable. But
after U.S. frackers unleashed vast sums of oil and gas, there have been two
oil busts in the past five years and Brent oil, the global benchmark, last
topped $100 a barrel in 2014.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 8, 2021
Bond Boom Comes to America’s Colleges and
Universities
By Juliet Chung Melissa Korn | December 26, 2020
Topics: Bond
Summary: “For
the year through November 2020, colleges and universities
issued more than $41.3 billion in taxable and tax-exempt
fixed-rate debt, including refinancings.” Many educational
institutions with high credit ratings issue bonds with
maturity dates longer than corporate bonds. As well, even
institutions that are not as well known may reduce their
interest rates and hence their cash flows in today’s low
interest rate environment.
Classroom Application: The
article may be used to discuss bond issuances in an industry
of interest to students.
Questions:
How do bond issuances by colleges and universities
compare to issuance by for-profit entities? List the
similarities and differences you find noted in the
article.
Why have colleges and universities issued a record
amount of bonds during the Covid-19 pandemic in
particular?
What factors make bonds issued by colleges and
universities attractive to investors who hold them?
Eyeing low rates and financial pressure tied to
Covid-19, higher-education institutions are issuing a record amount of debt
this year
Faced with a rapid deterioration in their finances in 2020, America’s
colleges and universities issued a record amount of bonds this year.
It is a
stressful time for higher education. The coronavirus
pandemic worsened existing pressures
on tuition and auxiliary revenue, with international students opting to
study outside the U.S. and money from room and board drying up as schools
keep classes online. At the same time, demand for financial aid and costs
related to providing protective gear and Covid-19
testing have jumped.
Hoping to address possible shortfalls and take
advantage of ultralow rates, universities have flooded the market with debt.
With few places to get a return in the bond market, investors have scooped
up the issues, which in some cases offer yields of 2% or 3% for debt that
matures in 15 to 30 years.
The higher-education sector “becomes attractive
because it’s under pressure,” said Daniel Solender, who oversees tax-free
fixed-income investments at asset manager Lord Abbett & Co., referring to
rising yields on higher-education bonds as schools’ ability to navigate the
pandemic came into question. The firm added more than $300 million to its
holdings of such bonds this year.
“There are a lot of high-quality institutions
with great reputations, great balance sheets, that will find a way to make
it through this environment,” he said.
For the year through November, colleges
and universities issued more than $41.3 billion in taxable and tax-exempt
fixed-rate debt, including refinancings, a record since Barclays began
tracking the data. The data included issuance from schools with top-notch
credit ratings, including Brown University and the University of Michigan,
as well as lower-rated schools like Linfield University in McMinnville,
Ore., and Alvernia University in Reading, Pa.
Moody’s Investors ServiceMCO -0.42%in
March lowered its outlook on the entire sector to negative from stable,
citing uncertainties
and financial challenges brought
on by the pandemic. S&P Global Ratings lowered its outlook on a raft of
schools in May and no longer maintains a positive outlook on a single one of
the schools it rates. Attempting to help alleviate some of the pressure,
more than $20 billion was allotted to public and private higher education in
the latest Covid-19 relief bill passed by Congress.
John Augustine, who leads the
higher-education and academic medical-center finance group at Barclays, said
the bond issuance came from institutions trying to reduce their fixed costs.
For some, he said, borrowing money at low rates was more attractive than
dipping into their endowments at a possible cost to future generations of
students.
The New York Institute of Technology
refinanced $17 million in debt this summer as it sought to bolster its cash
holdings, extending the repayment timeline to 2030 and lowering its annual
debt service to around $3 million from upwards of $7 million.
“Trustees were concerned about the market
turmoil they saw going on and how that might affect our liquidity,” said
Barbara Holahan, chief financial officer and treasurer of the private
university.
She said freeing up cash became a bigger
priority as international student enrollment fell and expenses rose.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 8, 2021
CFOs in 2021 Will Keep an Eye on These 10 Things
By Nina Trentmann | January 2, 2021
Topics: Chief
Financial Officer (CFO)
Summary: The
article briefly summarizes the issues facing corporate chief
financial officers (CFOs) in 2021 as the U.S. economy
recovers from the Covid-19 pandemic and the impact of the
November 2020 elections unfolds. The list provides an
excellent mix of tax, financial reporting and auditing, and
other matters.
Classroom Application: The
article may be used in any financial reporting or tax class
as both areas of CFO responsibility are discussed.
Questions:
What is the job of the chief financial officer (CFO)?
Cite your source for this information if you obtain it
outside of this article.
List the items identified in the article as being
watched by CFOs by whether you believe they are
positive, negative, or neutral. Note that several
categories contain more than one item, such as is the
case with the “Corporate Tax” and “Regulation”
categories.
Specifically consider the corporate tax and financial
regulation items. How did you categorize them, as
positive, negative, or neutral? Explain your answer.
Economic recovery, corporate taxes and mergers and
acquisitions are expected to be top of mind for many finance chiefs
Chief financial officers last year raised billions of dollars to stabilize
their companies’ finances, cut costs and pivoted their businesses to respond
to the coronavirus pandemic and the ensuing economic downturn.
As executives look ahead, vaccines against Covid-19—greenlighted by U.S.
authorities in recent weeks—are expected to boost growth in the second half
of 2021, as Americans return to offices, shopping malls and gyms.
Here are 10 things that could be top of mind for CFOs in 2021.
Economic Recovery
Finance chiefs expect their companies’ revenue
to rise by
an average of 6.9% in 2021, up from a 0.3% increase forecast for 2020,
according to a recent survey by Duke University’s Fuqua School of Business
and the Federal Reserve Banks of Richmond and Atlanta. Executives will be
monitoring potential setbacks to the economic recovery, especially in
industries hit hard by the pandemic, such as travel, hospitality and
bricks-and-mortar retail.
Corporate Tax
President-elect Joe
Biden has
proposed raising the corporate-tax rate to 28%, up from the current 21%,
alongside other measures. The new administration can shape tax policy even
without a majority
in Congress,
for example by providing additional guidance on existing rules through the
Treasury Department, said Greg Engel, vice chair for tax at professional
services firm KPMG LLP.
CFOs
also will keep track of potential
changes around taxation of
global companies, as suggested by the Organization for Economic Cooperation
and Development. Those plans could pick up pace in 2021.
Regulation
Finance executives are preparing for potential regulatory changes, including
in areas such as accounting and audit. Mr. Biden is expected to nominate a
new head for the Securities and Exchange Commission, who would work toward
increased regulatory scrutiny of companies’ financial reporting. New
leadership at the SEC could influence
the agenda at
the Public Company Accounting Oversight Board to include elements such as
mandatory audit-firm rotation or stricter rules for auditors.
Trade
Executives will be on the lookout for potential changes to the U.S.’s trade
policies in relation to China, the European Union and other countries whose
goods currently incur tariffs. Companies also will be dissecting the details
of the new
trade agreement between
the U.K. and the EU, which was agreed in late December after years of
negotiations.
Cash and Capital Expenditures
Finance chiefs ramped up their companies’ liquidity in the early months of
the coronavirus pandemic. Executives could reallocate some of these funds
amid low interest rates, use them to pay for mergers and acquisitions,
reduce debt or boost their pension plans. CFOs also are reviewing their spending
plans for
capital expenditures, especially in industries that have benefited from
changing consumer tastes in recent months.
Mergers and Acquisitions, Listings
Companies with cash reserves are expected to scour the market for potential
targets, said Robert Brown, chief executive of the North America business at
Lincoln International, an investment bank. Private businesses also could
take advantage of high stock valuations to plan an initial public offering,
a direct listing or a transaction with a special-purpose
acquisition vehicle.
Remote Work
A sizable number of U.S. employees are expected to work from home for a part
of 2021 as the pandemic drags on, and seek flexible-work options in the
future. Finance executives will be taking a closer look at their companies’
real-estate footprint and assessing the pros and cons of moving offices.
They will review potential investments to alter the layout of their offices
and see whether increased levels of productivity—an outcome of widespread
work from home in 2020—are here to stay.
Dividends and Share Buybacks
Many
companies paused paying dividends or buying back shares at the onset of the
pandemic. While some companies resumed those payments and programs in the
second half of 2020, others have continued to hold back. In 2021, CFOs will
be weighing dividend payments and share-repurchase programs against other
uses of corporate cash. Timken Co. ,
a North Canton, Ohio-based maker of engineered bearings and
power-transmission products, plans to hike its dividend if the business does
well, said finance chief Philip Fracassa. The company also could consider
repurchasing shares if it doesn’t do mergers and acquisitions, Mr. Fracassa
said.
ESG Disclosures
Finance chiefs likely will face more questions from shareholders about their
businesses’ performance in terms of environmental, social and governance
issues, as investors pay more attention to these topics. Companies also
could be required to disclose more information on carbon emissions,
diversity and other social and sustainability metrics under the incoming
Biden administration. Mr. Biden campaigned on requiring companies to provide
more detail on environmental
risks and greenhouse-gas emissions.
Libor Transition
Global
regulators decided to phase out the London interbank offered rate—an
interest-rate benchmark underpinning trillions of dollars worth of financial
instruments—after concluding it was prone to manipulation. U.S. banks and
companies face a Dec. 31, 2021, deadline
to replace Libor with
alternative rates for new contracts, followed by another deadline in June
2023 for existing or so-called legacy contracts.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 15, 2021
U.K. Watchdog Finds Deloitte, Former Partners Failed
to Challenge Autonomy’s Accounting
By Nina Trentmann | January 6, 2021
Topics: Auditing
, Impairment , Business combinations
Summary: On
Wednesday, January 6, 2021, the U.K.’s Financial Reporting
Council “said Deloitte LLP and two former partners were
'culpable of serious and serial failures' in their audits of
Autonomy Corp…. Autonomy, an enterprise software business
founded in Cambridge, England, was acquired by
Hewlett-Packard Co. in 2011 for $11.1 billion. A year later,
the U.S. company took an $8.8 billion write-down related to
the transaction, stating it was duped into overpaying
because of what appeared to be willfully inflated financial
statements.” Articles describing the events as they unfolded
include “Long Before H-P Deal, Autonomy's Red Flags” by Ben
Worthen, Paul Sonne and Justin Scheck, Nov. 16, 2012,
available at https://www.wsj.com/articles/SB10001424127887324784404578141462744040072
Classroom Application: The
article may be used in an auditing class discussing
professional skepticism or in a financial reporting class
covering business combinations and/or impairment testing.
Questions:
Define the term professional skepticism in the context
of auditing. Cite your source for this definition.
What has the U.K. regulator concluded about Deloitte
LLP’s application of professional skepticism in the
audit engagement with Autonomy Corp.?
How did the audit of Autonomy impact acquiring firm
Hewlett Packard?
How does reported financial performance impact the
purchase price paid in a business combination? Be
specific in describing your understanding of models used
for this purpose.
What is impairment testing?
How could misrepresenting performance prior to a
business combination transaction ultimately lead to
impairment write downs?
The Financial Reporting Council wrapped up a
yearslong inquiry saying the parties didn’t show professional skepticism of
the company’s financial statements
The Financial Reporting Council, the U.K.’s
accounting watchdog, on Wednesday said Deloitte LLP and two former partners
were “culpable of serious and serial failures” in their audits of Autonomy
Corp., wrapping up a yearslong investigation after findings of misconduct.
Autonomy, an enterprise software business founded in
Cambridge, England, was acquired by Hewlett-Packard Co. in
2011 for $11.1 billion. A year later, the U.S. company took an $8.8 billion
write-down related to the transaction, stating it was duped into overpaying
because of what appeared to be willfully
inflated financial statements. The bulk of
Autonomy’s business was later sold to British software business Micro
Focus International PLC.
On
Wednesday, the FRC said in a 268-page report that Deloitte, Autonomy’s
auditor, failed to challenge its client on its accounting for certain
hardware sales and other transactions disclosed in financial reports between
January 2009 and June 2011. Deloitte is a sponsor of CFO Journal.
The accounting firm and its former partners Richard Knights and Nigel Mercer
didn’t treat Autonomy’s statements with the necessary professional
skepticism, the report by a disciplinary tribunal found.
“The pressure on Autonomy to meet market expectations gave rise to a risk of
misstatement through manipulation of the financial results to achieve a
desired position,” the FRC said. Deloitte and its former partners were aware
of the pressure and the risk, the FRC said. Deloitte and Messrs. Knights and
Mercer failed to fulfill their duty to check the reliability of Autonomy’s
financial reporting, according to the report, which also noted that Autonomy
was listed in the FTSE 100 at the time, the country’s index of its largest
publicly traded businesses.
“Autonomy was an important client for
Deloitte generally, and for the Cambridge office in particular. It was the
only FTSE 100 company audited from that office,” the FRC said.
In September, the FRC fined
Deloitte £15 million ($19.5 million)
and sanctioned Messrs. Knights and Mercer in relation to the Autonomy
audits.
On Wednesday, the two former partners
said they disagreed with the report’s findings, adding that “at all times,
we believe we acted professionally, diligently and in good faith.”
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 15, 2021
U.S. Companies Revamp Bonus Plans as Pandemic Upends
Forecasts
By Kristin Broughton | January 11, 2021
Topics: Executive
Compensation , Bonuses
Summary: The
article discusses the process for setting executive
compensation and the variety of adjustments disclosed in
public documents to cope with the impact of the pandemic on
the use of compensation formulas. The article opens with
methods used to eliminate the impact of operating under
Covid-19 ol;n the determination of executive short-term
incentive compensation components. It closes with a comment
by proxy adviser Glass Lewis that companies, “especially
those seeking special support from governments or executing
significant employment cuts, should consider the
reputational risk associated with poor pay decisions….”
Classroom Application: The
article may be used when covering accounting for executive
compensation to introduce the breadth of considerations used
to determine executive compensation amounts.
Questions:
According to the article, what is the current state of
the process for executive compensation at most publicly
traded companies in the U.S.?
What are typical major components of executive
compensation?
Refer to the graph entitled Bigger Payouts. Summarize
the trends shown there. Include in your answer a
definition of short-term incentives that you can glean
from the discussion in the article.
How do Boards of Directors typically determine the
amounts of executive compensation?
What types of changes were made to executive
compensation plans during the Covid-19 pandemic?
Refer to your answer to the question above. Do these
changes reflect the notion that “all companies,
especially those seeking special support from
governments or executing significant employment cuts,
should consider the reputational risk associated with
poor pay decisions”? Explain your answer.
Some boards are scrapping existing formulas and
instead using their judgment to set annual incentives
Companies are revising their plans for bonuses and other incentive
compensation as the coronavirus pandemic upended financial forecasts and
executives managed through a once-in-a-lifetime economic downturn.
The
pandemic has had a disparate effect on companies’ balance sheets, leading to
soaring profits in some industries, such as online
retail and groceries,
and steep losses in others, for example hospitality and
travel.
Over a
quarter of large U.S. businesses initially
reduced executive
salaries in the spring, according to Equilar Inc., a data provider. The
cuts, at companies including Walt
Disney Co. , General
Motors Co. and United
Airlines Holdings Inc.,marked
a reversal
following several years of wage increases in the C-suite. But they were
temporary, as many companies restored manager
salaries in recent months.
Now, as companies are getting ready to pay out bonuses and other rewards for
the past year, boards are contemplating whether it makes sense to assess
executives based on goals and targets that were put in place in late 2019
and early 2020, when the outlook for their business was very different.
Boards typically use a formula set by the compensation committee when making
their annual decisions on incentive pay but can adjust payouts based on
individual judgment. Most incentive plans include a cash bonus payment based
on annual performance, and an equity award tied to financial results over a
longer time period.
Finance chiefs play a key role in this process by providing information on
what managers have achieved and whether there have been changes to a
company’s strategy or its business model. Board members then decide whether
to override existing formulas for bonuses or set different targets for 2021,
said Don Delves, a managing director at Willis
Towers Watson PLC,
an advisory firm.
Meritor Inc., a
Troy, Mich.-based auto-parts supplier, drafted a new cash-bonus plan for its
fiscal 2020 when it became clear that the company wouldn’t meet its original
financial goals, it said in a recent proxy statement. Meritor’s business
took a hit during the pandemic, with sales declining 31% to $3 billion
during the 12 months ended Sept. 30 compared with the prior time period.
Meritor’s previous annual incentive plan relied on targets for cash flow and
adjusted earnings margin. Its revised framework instead set goals for
holding more than $750 million in liquidity and cutting at least $40 million
in costs through layoffs, salary reductions and other initiatives. The
company met these targets, it said in its proxy statement. Meritor currently
has about 8,900 employees, compared with roughly 9,100 at the end of its
2019 fiscal year.
Its managers received a smaller bonus than in fiscal 2019. Chief Executive
Jeffrey Craig got about $285,000, compared with $1.8 million a year earlier,
while finance chief Carl Anderson received about $118,000, compared with
$546,000 during the previous fiscal year, according to its proxy statement.
Meritor also tweaked its long-term equity plan by lowering the targets
required for senior executives to receive stock awards based on three years
of financial performance through 2021. Adjusted diluted earnings per
share—one of the metrics used to determine equity payouts—was reduced to 75
cents from $1.85. The company made changes to goals related to its margin
for earnings before interest, taxes, depreciation, and amortization, which
declined to 8.9% in fiscal 2020, compared with 11.9% a year earlier.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 15, 2021
Biden Is Expected to Name Gary
Gensler for SEC Chairman
By
Andrew Ackerman Dave Michaels | January 12, 2021
Topics: Securities
and Exchange Commission
Summary: Gary
Gensler is a former Goldman Sachs Group Inc. executive who
entered government regulatory roles in “a surprising turn
[because he] had previously resisted calls for additional
derivatives regulation.” The article discusses government
agencies in which Mr. Gensler has served leading roles: he
was head of the Commodity Futures Trading Commission from
2009 to 2014 and served in the Treasury Department under the
Clinton Administration. Some individuals and groups “are
hoping the SEC under Mr. Biden will move swiftly to undo
policy changes implemented by recently departed Chairman Jay
Clayton. Those include curbs on shareholders’ ability to
propose resolutions at company proxy meetings and efforts to
make it easier for private companies to raise capital
without registering with the SEC.” Also discussed are
expected disclosure requirement changes under the new
administration.
Classroom Application: The
article may be used whenever discussing financial reporting
regulation to highlight the impact of political change on
disclosure requirements.
Questions:
What is the role of the U.S. Securities and Exchange
Commission? Cite your source for this information.
Describe the background of the candidate expected to be
nominated to serve as the next chair of the Securities
and Exchange Commission.
What factors in this candidate bode positively for his
nomination to succeed?
What factors in this candidate are concerns for those
who will consider his nomination?
Name all expected changes listed in the article that you
believe will change corporate disclosures. Do these
comprise all expected changes due to the change in
presidential administration? Explain your answer.
Former Goldman Sachs executive regulated derivatives
under President Obama
WASHINGTON—President-elect Joe
Biden is expected to choose Gary
Gensler, a former financial regulator and Goldman
Sachs Group Inc.GS 1.63%executive,
to head the Securities and Exchange Commission, according to people familiar
with the decision.
Mr. Gensler’s nomination would please liberal
Democrats who cheered the former regulator’s tough
approach to rule-making during the
Obama administration, when he
spearheaded the overhaul of derivatives markets
mandated by the 2010 Dodd-Frank Act and oversaw enforcement actions against
investment banks accused of manipulating benchmark interest rates.
The choice of Mr. Gensler, who declined
to comment, wasn’t final and could still change, the people said.
As head of the Commodity Futures Trading
Commission from 2009 to 2014, Mr. Gensler developed
a reputation among his colleagues for
bare-knuckle tactics as he drove to create a regulatory framework for
derivatives, a multi-trillion dollar market that had largely been free from
federal oversight. By the time he left the commission, the rule set was
largely complete, years before other regulators wrapped up their postcrisis
work.
It was a surprising turn for the former
Goldman executive who had previously resisted calls for additional
derivatives regulation when he served in the Treasury Department under
President Clinton. The decision not to tightly regulate derivatives in the
1990s has been blamed for contributing to the financial crisis a decade
later.
Mr. Gensler was tapped to lead the CFTC
in 2009, as the agency’s mission was expanding to address risks to financial
stability posed by derivatives, financial instruments including options and
futures that are derived from other assets. In that role, Mr. Gensler drew
the ire of Wall Street banks as he implemented Dodd Frank.
“He was terrifically effective at the
CFTC, he knows the markets as well as anyone on Wall Street, he’s a smart
and tough regulator who knows how to get things done, and he cares about
investor protection,” said Barbara Roper, director of investor protection at
the Consumer Federation of America.
Ms. Roper and other progressive groups are
hoping the SEC under Mr. Biden will move swiftly to undo policy changes
implemented by recently departed Chairman Jay Clayton. Those include curbs
on shareholders’ ability to propose resolutions at
company proxy meetings and efforts to make it easier for private companies
to raise capital without registering with the SEC.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 22, 2021
Qualcomm Bolsters 5G Ambitions With Planned $1.4
Billion Acquisition
By Asa Fitch | January 13, 2021
Topics: Business
combinations
Summary: “Qualcomm
said [on Wednesday, January 13, 2021] it plans to buy Nuvia
Inc. and use the two-year-old company’s technology in its
flagship smartphones, driver-assistance systems, laptops and
networking infrastructure. The proposed all-cash transaction
is valued at about $1.4 billion….The…company is also
bolstering its talent pool with the planned acquisition,
adding Nuvia’s staff and three founders…” who worked at
Apple and Google before Nuvia.
Classroom Application: The
article may be used when discussing strategies behind
business combination transactions.
Questions:
Define the terms horizontal acquisition, vertical
integration, and conglomerate as they relate to business
combination strategies. Cite your source for these
definitions.
Which of the above strategies for business combinations
do you think applies to this acquisition of Nuvia by
Qualcomm? Support your answer.
Is the fact that Qualcomm’s acquisition of Nuvia
bolsters the talent pool at the acquiring company
reflected in the business combination accounting?
Support your answer.
Qualcomm said it plans to buy Nuvia Inc. and use
the two-year-old company’s technology in
its flagship smartphones, driver-assistance systems, laptops and networking
infrastructure. The proposed all-cash transaction is valued at about $1.4
billion, Qualcomm said, before working capital and other adjustments.
Nuvia’s expertise in designing central
processing units, Qualcomm said, would help it boost chip performance and
power efficiency—characteristics that are vital to success in the
hot 5G-networking market that
Qualcomm has made a priority.
The San Diego-based chip company is also
bolstering its talent pool with the planned acquisition, adding Nuvia’s
staff and three founders, Gerard Williams III, Manu Gulati and John Bruno.
Mr. Williams was lead chip architect at Apple before decamping to start
Nuvia two years ago. Mr. Gulati and Mr. Bruno both worked at Apple and Alphabet Inc.’s Google
unit before Nuvia.
“The Nuvia team are proven innovators,” said
Cristiano Amon, Qualcomm’s president who this month was named to replace
Steve Mollenkopf as
chief executive at midyear.
A wave of deal making across the U.S.
semiconductor landscape is transforming the industry amid strong demand for
laptops, videogames and data centers. That demand has sent shares in some
companies surging, helping companies gain financial muscle to do deals.
Qualcomm said it plans to buy Nuvia Inc. and use
the two-year-old company’s technology in
its flagship smartphones, driver-assistance systems, laptops and networking
infrastructure. The proposed all-cash transaction is valued at about $1.4
billion, Qualcomm said, before working capital and other adjustments.
Nuvia’s expertise in designing central processing
units, Qualcomm said, would help it boost chip performance and power
efficiency—characteristics that are vital to success in the
hot 5G-networking market that
Qualcomm has made a priority.
The San Diego-based chip company is also bolstering
its talent pool with the planned acquisition, adding Nuvia’s staff and three
founders, Gerard Williams III, Manu Gulati and John Bruno. Mr. Williams was
lead chip architect at Apple before decamping to start Nuvia two years ago.
Mr. Gulati and Mr. Bruno both worked at Apple and Alphabet Inc.’s Google
unit before Nuvia.
“The Nuvia team are proven innovators,” said Cristiano
Amon, Qualcomm’s president who this month was named to replace Steve
Mollenkopf as
chief executive at midyear.
A wave of deal making across the U.S.
semiconductor landscape is transforming the industry amid strong demand for
laptops, videogames and data centers. That demand has sent shares in some
companies surging, helping companies gain financial muscle to do deals.
Nvidia Corp.NVDA -1.12%,
whose shares more than doubled last year, has overtaken Intel Corp.INTC -9.29%as
America’s highest-valued chip company. The graphics-chip maker agreed
last year to pay $40 billion for
Arm Holdings, the British designer of mobile-phone chips backed by SoftBank
Group Corp. ,
in what would be the industry’s biggest deal if it goes through.
Nuvia’s CPUs—and Qualcomm’s chips, which power
hundreds of millions of mobile phones—are based on Arm technology.
Qualcomm’s stock has risen about 70% over the
past year, fueled in part by growing demand for superfast 5G phones.
The deal, which requires federal regulatory
approval in the U.S., is a pivot for Nuvia, which began in 2019 as a stealth
startup working on CPUs for computer servers that it expected would
challenge market leaders Intel and Advanced Micro Devices. The company
raised $240 million—a large amount for a chip startup—in its second funding
round in September and was expecting to start testing its first silicon
chips this year.
Qualcomm gave up development of server CPUs
more than two years ago after failing to generate significant revenue from
the business. The company has given no indication of reversing that
decision.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on January 22, 2021
U.S. Accounting Standard-Setter Looks to Tackle
Controversial Topics in 2021
Summary: The
article focuses on two areas of accounting the FASB will next
focus on, accounting for goodwill and a potential change to
include significant expense reporting in segment disclosures.
The FASB has issued an Invitation to Comment on its agenda for
the next several years and respondents have indicated strong
interest in work on these topics.
Classroom Application: The
article may be used in an advanced level of financial reporting
class. Questions begin with the FASB agenda topics discussed in
the article but proceed to ask students to cite professional
literature in describing the accounting issues discussed in the
article. INSTRUCTORS: REMOVE THE FOLLOWING CITATIONS BEFORE
DISTRIBUTING TO STUDENTS: Segment Reporting: The operating
segment definition is in the FASB ASC glossary and is available
specifically at 280-10-50-1. Required disclosures are found at
ASC 280-10-50-20 to 26. Information about Profit or Loss and
Assets per ASC 280-10-50-22 is limited to those items that “are
included in the measure of segment profit or loss reviewed by
the chief operating decision maker….” Goodwill: Amortization may
be selected as an accounting alternative under ASC350-20-35-62
by private companies or not-for-profit entities meeting the
criteria in ASC 350-20-15-4. Goodwill impairment testing is
required for all entities under ASC 350-20-35-1.
Questions:
What is the purpose of the Financial Accounting Standards
Board (FASB)? Use the article, but also access the FASB
website directly at www.fasb.org
FASB Chair Richard Jones notes that the Board’s “agenda is
filled with important items,” but two items have drawn a lot
of interest. What are they?
What is an operating segment? Cite the professional
accounting literature from which you obtain this definition.
What information must be disclosed about operating segments?
Again, cite the professional accounting literature
establishing this requirement.
What change in segment reporting is the FASB discussing?
Why is it important to note that “companies already provide
this type of [segment] information to their senior
executives but don’t need to disclose it to the broader
market”? Again cite professional literature indicating this
importance.
What is goodwill amortization expense? Do any companies
currently report this item? Cite professional accounting
literature in providing your answer.
According to discussion in the article, what is the problem
with goodwill amortization expense?
What is another way to report a reduction in goodwill? Do
any companies currently report in this way? Again, cite
professional accounting literature in providing your answer.
Financial Accounting Standards Board is expected to
give priority to issues such as recognizing goodwill and disclosing expenses
The U.S. accounting standard-setter plans to tackle issues around accounting
for goodwill and disclosure of expenses in 2021, after a year marked by a
leadership transition and the economic havoc caused by the coronavirus
pandemic.
“Our
agenda is filled with important items, but those are two that have drawn a
lot of interest from people,” said Richard Jones, who took
over as chairman of
the Financial Accounting Standards Board in July. The FASB makes accounting
rules for companies and nonprofit organizations in the U.S.
In recent months,
the FASB has advised on how to account for the impact of the pandemic,
delayed implementation of certain rules by a year and temporarily slowed its
pace of standard-setting. It is now turning to other, longstanding issues
that have divided companies and investors for years.
The board, which has seven members, in 2021 wants to improve the way
companies recognize the value of goodwill—a hotly debated topic in the world
of accounting—and make changes to how businesses reveal certain expenses to
investors.
Companies record goodwill on their balance sheets when they buy a business
for more than the value of its hard assets, such as cash or factories. The
acquiring business must then measure the fair value of its reporting units
annually and, if that figure is less than the amount recorded on the books,
reduce the value of the goodwill.
Many businesses however deem this method, which was introduced in 2001, as
costly and subjective. Some investors have criticized the process because
goodwill impairments often occur years after an acquisition, lagging behind
market moves.
The FASB is now considering changing the process to help reduce companies’
costs, even though it doesn’t have a formal proposal yet.
It is suggesting companies should write down a set portion of goodwill each
year, instead of testing annually for potential impairments. The
standard-setter eliminated the former method, also called amortization of
goodwill, nearly two decades ago, in part because companies said it diluted
their earnings.
The FASB in December said companies should amortize goodwill with the help
of a straight-line model, which means they allocate asset costs equally over
their lifetime, potentially over the course of 10 years. The new process may
still require companies to impair goodwill. The FASB plans to discuss in the
coming quarters how an amortization model would work as its staff conducts
more research and surveys companies, shareholders and other stakeholders.
Even
though some investors support amortization, others, alongside analysts and
academics, have criticized
it because
they think it doesn’t provide useful information. “Amortization is a very
arbitrary annual number to put on the financial statements,” said Ray
Pfeiffer, an associate accounting professor at Simmons University in Boston.
“It doesn’t reflect at all the actual change in the value of goodwill.”
The FASB also plans to advance its project on segment reporting, which could
require public companies to break out big-ticket expenses incurred by
certain business divisions.
Companies already provide this type of information to their senior
executives but don’t need to disclose it to the broader market. Investors
and analysts are seeking this option because it helps them forecast revenue
and margins when valuing a business. But companies often resist disclosing
detailed information on the performance of their business segments for fear
of revealing too much to competitors.
The FASB is set to discuss early this year how a potential new rule would
define significant segment expenses. It is unlikely to finalize new
standards around goodwill or segment reporting in 2021. However, it aims to
unveil proposals for both by the end of 2021, Mr. Jones said.
The standard-setter recently started asking stakeholders what its priorities
should be over the next several years, and expects to release this summer a
paper for the public to comment on. The FASB last ran such an agenda
consultation in 2016, when it added certain issues to its plans, including
how to distinguish liabilities from equity. It released a standard on this
in August.
Still, critics say the standard-setter isn’t moving fast enough to enact new
rules. “I don’t see a lot of new innovation on the schedule for [2021],”
said John Hepp, an assistant accounting professor at the University of
Illinois at Urbana-Champaign.
On her first day at the
senior complex, the new manager addressed all the seniors pointing out some
of her rules:
"The female sleeping quarters will be out-of-bounds for all males, and the
male dormitory to the females. Anybody caught breaking this rule will be
fined $20 the first time." She continued,
"Anybody caught breaking this rule the second time will be fined $60. Being
caught a third time will cost you a fine of $180. Are there any questions?" At this point, an
older gentleman stood up in the crowd inquired:
"How much
for a season pass?”
Forwarded by Auntie Bev
Popular Game in Retirement Homes: Guessing what tattoos u8sed to
be.
At my funeral take the bouquet off my coffin and throw it into the crowd
to see who's next.
Retirement Finance Advisor Asks: Which of you will wear the mask
and who will drive the get-away car?
Common Mistake: Chasing an eye floater with a fly swatter.
Setting up for a hot date with a recliner and a heating pad.
Tossing and turning at night should count as exercise.
Forwarded by Tina
I wish there was a way to donate fat like we donate blood.
Why is it that after I push 1 for English I still can't understand the
person at the other end of the line.
I wish I had the wisdom of a 90-year old, the body of a 20-year old, and
the energy of a 3-year old.
I've just been diagnosed with NCD --- No Can Do.
The secret of happiness is a good sense of humor and a bad memory.
My brain is like the Bermuda Triangle --- What goes in may never come out
again.
I'm not Wonder Woman, but I can do things that make you wonder.
The local news station was interviewing an 80-year-old-lady because she
had just gotten married for the fourth time. The interviewer asked her
questions about her life, about what it felt like to be marrying again at
80, and then about her new husband’s occupation. “He is a funeral director”
she answered. “Interesting,” the newsman thought.
He then asked her if she wouldn’t mind telling him a little about her
first three husbands and what they did for a living. She paused for a few
moments, needing time to reflect on all those years. After a short time, a
smile came to her face and she answered proudly, explaining that she had
first married a banker when she was in her 20’s, then a circus ringmaster
when in her 40’s and a preacher when in her 60’s and now in her 80s a
funeral director.
The interviewer looked at her, quite astonished, and asked why she had
married four men with such diverse careers.
(Wait for it)
She smiled and explained, “ I married one for the money, two for the show,
three to get ready, and four to go."
Forwarded by Auntie Bev
"You claim to be a chocolate lab," said the cat to the dog. "Lemme
check."
Attack this day with the enthusiasm and confidence of of a four-year old
wearing a Batman t-shirt.
I thought I would never be the kind of person to wake up early just to
exercise. I was right all along.
Two ways to really improve your day: Don't check the news, and stay
off the scales.
The Circle of Life: An old man on a walker meets a toddler trying
to push a stroller.
Elsie Frey's One Liners Forwarded by Tina
For me drinking responsibly means don't spill it.
The older I get, the earlier it gets late.
I remember when I could get up without sound effects.
When I ask for directions, please don't use words like "east."
When I run I run like the winded.
I finally got eight hours of sleep; It only took three days, but
whatever.
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