My Latest Web Document
Over 700 Examples of Critical Thinking and Illustrations of How to Mislead With Statistics ---
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm

USA Debt Clock --- http://www.usdebtclock.org/ ubl

How Your Federal Tax Dollars are Spent ---
http://taxprof.typepad.com/.a/6a00d8341c4eab53ef01b7c8ee6392970b-popup

To Whom Does the USA Federal Government Owe Money (the booked obligation of $20+ trillion) ---
http://finance.townhall.com/columnists/politicalcalculations/2016/05/25/spring-2016-to-whom-does-the-us-government-owe-money-n2168161?utm_source=thdaily&utm_medium=email&utm_campaign=nl
The US Debt Clock in Real Time --- http://www.usdebtclock.org/ 
Remember the Jane Fonda Movie called "Rollover" --- https://en.wikipedia.org/wiki/Rollover_(film)
One worry is that nations holding trillions of dollars invested in USA debt are dependent upon sales of oil and gas to sustain those investments.

To Whom Does the USA Federal Government Owe Money (the unbooked obligation of $100 trillion and unknown more in contracted entitlements) ---
http://money.cnn.com/2013/01/15/news/economy/entitlement-benefits/
The biggest worry of the entitlements obligations is enormous obligation for the future under the Medicare and Medicaid programs that are now deemed totally unsustainable ---
http://faculty.trinity.edu/rjensen/Entitlements.htm

Bob Jensen's gateway to millions of blogs and social/professional networks ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm

PCAOB Virtual History Gallery ---
http://www.sechistorical.org/
Too bad it's not a physical museum so people could flock to it from all over the world

PCAOB proposed a new framework that would help it ban foreign companies from the USA financial markets if their audits haven’t been inspected by American regulators
https://www.wsj.com/articles/audit-watchdog-proposes-framework-to-help-implement-new-trading-ban-11620943197?mod=djemCFO

The plan would help the PCAOB decide whether it can review or investigate an auditor in certain jurisdictions

The U.S. audit watchdog has proposed a new framework that would help it implement a law that bans foreign companies from the country’s exchanges if their audits haven’t been inspected by American regulators.

The Public Company Accounting Oversight Board’s framework would help it decide whether it can review or investigate a public audit firm in certain jurisdictions, such as China or Hong Kong.

The law banning certain foreign businesses from U.S. exchanges—known as the Holding Foreign Companies Accountable Act—was signed by former President Trump in December and applies to cases in which the work of overseas auditors hasn’t been inspected by American authorities for three consecutive years. The Chinese government has long resisted inspections of Chinese-company audits.

The framework, which was presented on Thursday, would make it easier for the PCAOB to determine which audit firms outside the U.S. it cannot inspect. The Securities and Exchange Commission, which oversees the PCAOB, could then require additional disclosures from the companies audited by those firms and take other actions, for example issue a trading ban. The public has until July 12 to provide feedback on the proposal.

The PCAOB inspects more than 200 non-U. S. audit firms in over 40 jurisdictions every three years. However, it isn’t able to do so in China and Hong Kong, a big market for Big Four firms Deloitte, Ernst & Young, KPMG and Pricewa

SEC staff emphasizes risks of investing in mutual funds with exposure to Bitcoin futures

terhouseCoopers. It also can’t review audit documents based in China without approval from Chinese authorities.

Continued in article

Journal of Accountancy:  A new road map for risk assessment, audit work ---
https://www.journalofaccountancy.com/news/2021/may/new-road-map-for-risk-assessment-audit-work.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=18May2021

SEC staff emphasizes risks of investing in mutual funds with exposure to Bitcoin futures ---
Click Here

Bad News for Fair Value Accounting Theorists
Noise: A Flaw in Human Judgment ---
https://marginalrevolution.com/marginalrevolution/2021/05/noise-a-flaw-in-human-judgment.html

Bob Jensen's threads on fair value accounting ---
 http://faculty.trinity.edu/rjensen/theory02.htm#FairValue

GoDaddy Inc. recruited a partner of a Big Four accounting firm as its new chief financial officer ---
https://www.wsj.com/articles/godaddy-taps-big-four-partner-for-cfo-job-11620257871?mod=djemCFO
Working for a CPA firm is often a great path to the executive suite of corporations.

Will Class Be In Session For Investors Suing Mattel and PwC Over Accounting Error Cover-Up? ---
https://www.goingconcern.com/mattel-investors-seek-class-status-lawsuit-mattel-pwc/?doing_wp_cron=1620155744.7172110080718994140625

Bob Jensen's threads on EY and other large accounting firm lawsuits ---
http://faculty.trinity.edu/rjensen/fraud001.htm

Remote working and the dual-taxation dilemma ---
https://www.thetaxadviser.com/issues/2021/may/teleworking-dual-taxation-dilemma.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=07May2021

The Impact of the U.S. Supreme Court’s Decision in South Dakota v. Wayfair ---
https://www.cpajournal.com/2021/04/26/the-impact-of-the-u-s-supreme-courts-decision-in-south-dakota-v-wayfair/

From a Bloomberg Newsletter on May 20, 2021

It’s the latest twist in the world of blank-check mergers: A company plans to go public with a SPAC (that’s a special-purpose acquisition company for the uninitiated) and use it to buy back an affiliate that it took public. How does it plan to do that? By using another SPAC, of course.

FASB clarifies accounting for certain call option modifications ---
https://www.journalofaccountancy.com/news/2021/may/fasb-accounting-for-certain-call-option-modifications.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=04May2021

FASB issued a standard Monday that is designed to clarify an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange.

Warrants are one example of the type of call option covered by this guidance.

The Accounting Standards Update provides guidance on how an issuer would measure and recognize the effects of these transactions. The standard provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense.

The new rules take effect for all entities for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years. Entities are required to apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

Early adoption is permitted for all entities, as is adoption during an interim period. If an entity elects to early adopt the amendments during an interim period, the guidance is required to be applied as of the beginning of the fiscal year that includes the interim period.

The standard is based on a consensus of FASB’s Emerging Issues Task Force.

Bob Jensen's free tutorials (including a detailed glossary) on accounting for derivative financial instruments and hedging activities ---
http://faculty.trinity.edu/rjensen/caseans/000index.htm

The Atlantic:  Scientific Publishing Is a Joke ---
https://www.theatlantic.com/science/archive/2021/05/xkcd-science-paper-meme-nails-academic-publishing/618810/

Publication metrics have become a sad stand-in for quality in academia, but maybe there’s a lesson in the fact that even a webcomic can arouse so much passion and collaboration across the scientific community. Surely there’s a better way to cultivate knowledge than today’s endless grid of black-and-white papers.

Just-In-Time Manufacturing --- https://en.wikipedia.org/wiki/Just-in-time_manufacturing

Auto Makers Retreat From 50 Years of ‘Just in Time’ Manufacturing ---
https://www.wsj.com/articles/auto-makers-retreat-from-50-years-of-just-in-time-manufacturing-11620051251?mod=djm_dailydiscvrtst

Jensen Comment
The incentive was always to reduce the costs of holding inventory (including the cost of capital tied up on inventory storage). Now the cost of capital is lower (with nearly zero interest rates) while the risks of shortages tying up production exploded. JIT never did work as well in the USA as it did in Japan. The USA is a much larger nation with unreliable railroad service compared to Japan. Add to this the import delays with cargo ships waiting for weeks to unload in some ports (think Los Angeles).

My point here is that cost/managerial accounting teachers praising JIT in the classroom may have to change their tune in these changing times.

Spain’s Four-Day Work Week (32 hours with no reduction in pay)  Is a Game Changer ---
Click Here

Jensen Comment
This has to increase the cost of most everything. For example, public workers (think police and firefighters) have to be on duty 24/7. Supposedly more such workers will have to be paid or the same workers will start collecting overtime after 32 hours. This will require a significant increase in tax dollars. Similarly, private sector products and services will cost more with most of those costs being passed along to customers in the form of higher prices. The saving grace may be more robotics in some instances, but more robotics may translate into higher unemployment in some instances (not all). Spain's unemployment rate is around 16%. The 32-hour work week will both decrease increase costs in some sectors and decrease costs it in other sectors where robotics and other technology will come into play.

One thing is bound to happen. More workers will start working two or more jobs, thereby defeating the purpose of the reduced work week.

For professors who both teach and conduct research it's hard to count hours of work. My guess is that this change in the work week will have little or no impact on their time spent on "work," although the number of assigned classtime hours may be reduced, thereby leaving more time for research.

Reframing Bitcoin And Tax Compliance ---
https://taxprof.typepad.com/taxprof_blog/2021/05/sabu-reframing-bitcoin-and-tax-compliance.html

How Realization Negatively Impacts CPA Firms ---
https://www.cpajournal.com/2021/05/26/icymi-how-realization-negatively-impacts-cpa-firms/

Excel:  How to Use the Automatic Data Type Tool in Microsoft Excel ---
https://www.howtogeek.com/724177/how-to-use-the-automatic-data-type-tool-in-microsoft-excel/

Excel:  Excel depreciation advice; risk-management lessons learned ---
https://www.journalofaccountancy.com/podcast/cpa-news-excel-depreciation-risk-management-lessons.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=07May2021

Bitcoin --- https://en.wikipedia.org/wiki/Bitcoin

Deloitte:  Should Bitcoin Be on Your Balance Sheet?
CFO Insights: Making Change: Should Bitcoin be on your Balance Sheet | Deloitte US

Financial Reporting Development (FRD) - Equity method investments and joint ventures --- 
https://www.ey.com/en_us/assurance/accountinglink/financial-reporting-developments---equity-method-investments-and?mkt_tok=NTIwLVJYUC0wMDMAAAF9SUxgqs7HTC-fuUrOTkjW-64UHf3bCTkQpCHGIZrw5aPyku20rhcdibj5Xiu-EOx6k2zDfIyRnmPvHeToF0ERoWykH2HeeDTTwQlLjYIvgoYJiw 

EY:  FRD on certain investments in debt and equity securities ---
https://www.ey.com/en_us/assurance/accountinglink/financial-reporting-developments---certain-investments-in-debt-a?mkt_tok=NTIwLVJYUC0wMDMAAAF9KqZY0bzgZ2ooSF9dqxXPWLs3qp-g2q54Iayb28Fq55e9wIYXEq6JnV5xgC7ckqncQc2AvA80Qc88njVNqXiivpIXRzMrLDIO-9NmcSC1dK0v3A

EY:  Updated FRDs on share-based payment ---

Our FRD publications on share-based payment, Share-based payment (after the adoption of ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting) and Share-based payment (before the adoption of ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting), have been updated to clarify and enhance our interpretive guidance. Refer to Appendix F in each publication for a summary of the updates.

EY:  New guidance on issuer’s accounting for modifications or exchanges of certain equity-classified contracts ---
https://www.ey.com/en_us/assurance/accountinglink/to-the-point--new-guidance-on-issuers-accounting-for-modifications

EY:  Our Technical Line on special purpose acquisition companies (SPACs) has been updated to reflect recent SEC staff guidance and to address common accounting issues related to these transactions ---
 https://www.ey.com/en_us/assurance/accountinglink/technical-line---navigating-the-requirements-for-merging-with-a-

EY:  Updated FRD on lease accounting under ASC 840
https://www.ey.com/en_us/assurance/accountinglink/financial-reporting-developments---lease-accounting---accounting0

EY:  Navigating the requirements for merging with a special purpose acquisition company ---
https://www.ey.com/en_us/assurance/accountinglink/technical-line---navigating-the-requirements-for-merging-with-a-

From the CFO Journal's Morning Ledger on May 28, 2021

Good morning. Some German auditors fear new legislation aimed at increasing audit quality would hurt competition and help the Big Four—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—gain further market share.

Auditors are parsing the details of the Act to Strengthen Financial Market Integrity, which was drafted in the wake of last year’s Wirecard AG scandal. It passed one of the two chambers of the German parliament last week.

The law stipulates that firms that audit public-interest entities, such as blue-chip companies and other large institutions, pay higher fines for wrongdoing. Under the new law, such firms would face unlimited financial liability in cases of gross negligence.

The new law would extend the powers of banking regulator BaFin, giving it more oversight of companies’ financial reporting. BaFin would also be able to conduct its own forensic investigations and work more closely with public prosecutors.

From the CFO Journal's Morning Ledger on May 25, 2021

Good morning. Businesses are buying more renewable power, and oil majors want a piece of the action. 

European oil companies including BP PLC and Royal Dutch Shell PLC are building new wind and solar projects and striking deals to supply electricity to big corporate buyers like Amazon.com Inc. and Microsoft Corp., treading into the domain of traditional power companies.

The moves come as more businesses look to limit their carbon emissions, with companies buying a record amount of renewable power last year and on track to hit a fresh high this year, according to data from BloombergNEF.

Oil companies say securing long-term deals to supply electricity will provide a new source of income and underpin their expansion into wind and solar power as they seek to reduce their dependence on fossil fuels and prepare for a lower-carbon economy.

From the CFO Journal's Morning Ledger on May 21, 2021

Good morning. The U.S. will accept a global minimum corporate tax rate as low as 15% in international negotiations, below the 21% level it has been seeking for U.S.-based companies’ foreign income, the Treasury Department said on Thursday.

The move could make it easier to reach the multilateral agreement Treasury Secretary Janet Yellen has been seeking, but an agreement at 15% would raise less revenue for governments. And, depending on where the U.S. sets its policies, a 15% minimum tax on companies headquartered outside the U.S. could give those businesses an advantage over those based in the U.S.

The U.S. has been pushing for an agreement as part of President Biden’s corporate tax agenda, which calls for increasing the corporate tax rate to 28% from 21% and raising taxes on U.S. companies’ foreign profits.

Other countries, including Ireland, have expressed skepticism on the U.S. position, and it is far from clear where an international consensus could be reached and what the U.S. Congress might be willing to accept.

Jensen Comment
I don't know why progressives want to increase business taxes. These are just as regressive as sales taxes since the taxes ultimately are paid by customers, especially hundreds of millions of poor and middle class customers that pay higher prices to cover the tax increases. The new global tax has a possible multiplier effect among business-to-business transactions in the supply chain. Suppose that the new global tax is imposed on an Exxon company buying crude in the Middle East. That company adds the tax to the wholesale price of crude oil purchased by an Irving heating oil refinery in Canada. The Irving refinery then adds that tax to the price paid by the Dead River Company in Maine. The Dead River company then adds that tax to the price that a Shaws supermarket in New Hampshire pays for heating oil. The supermarket, in turn, adds the tax to the beer price paid by John Smith in Woodsville. John Smith only makes $12,000 per year. He pays no income tax and very little sales tax. But the price he pays for is beer includes whatever business tax is imposed in his beer supply chain. John will give up most of the food he buys before he will give up his beer. Whether he buys beer or food from Shaws he will be paying some of the new business taxes imposed upon all the companies in his food and beer supply chain.

There are all sorts of costs of collecting and paying this new global tax. It would be much cheaper to impose a national sales tax in the USA that's easy to collect and requires much less labor and technology to administer. It would be far more efficient to tax the ultimate payers of the tax (customers) at the point of sale rather than impose a tax that runs up a long supply chain to ultimately be paid by the same customers. We might even call the new global tax the Accounting Full Employment Act.

From the CFO Journal's Morning Ledger on May 13, 2021

Tesla Inc. Chief Executive Elon Musk says the company has suspended taking bitcoin payments for its vehicles.

From the CFO Journal's Morning Ledger on May 13, 2021

Good morning. Consumer prices surged in April by the most in any 12-month period since 2008 as the recovery picked up, reflecting both rising demand as the Covid-19 pandemic eases and supply bottlenecks.

The Labor Department reported its consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% for the year ended in March. Consumer prices increased a seasonally adjusted 0.8% in April from March.

U.S. stocks fell and government bond yields rose after the inflation data was released. Investors are concerned that rising prices could prompt the Federal Reserve to move on interest rates sooner than expected.

Policy makers are watching April’s reading to gauge the extent of what many expect to be a monthslong rise in prices, after a year of anemic overall inflation as the pandemic curbed consumer spending.

• Fed’s Clarida ‘Surprised’ by Inflation Report
• Declining Jobless Claims Suggest Hiring Could Pick Up
• With Busy Airports and Restaurants, U.S. Moves Closer to Full Reopening

 Jensen Comment
You ain't seen nothin' yet! Wait until Biden's tens of trillions in new spending get legislated.

The "Miracle Recovery" Narrative: We'll Just Print Our Way to Prosperity ---
https://mises.org/wire/miracle-recovery-narrative-well-just-print-our-way-prosperity

From the CFO Journal's Morning Ledger on May 12, 2021

U.S. tariffs have led to a sharp decline in Chinese imports and significant changes in the types of goods Americans buy from China, new data show, with purchases of telecommunications gear, furniture, apparel and other goods shifting to other countries.

From the CFO Journal's Morning Ledger on May 12, 2021

Amazon.com Inc. struck a new blow to European Union’s efforts to wring more tax from big tech companies when the bloc’s second highest court sided with the company over a $300 million tax bill.

An EU court in Luxembourg on Wednesday annulled a 2017 decision from the European Commission, the EU’s top antitrust authority, that had ordered Amazon to pay €250 million in taxes to Luxembourg, the latest of several big EU tax decisions to be overturned.

The decision is a victory for Amazon, and a significant blow to Margrethe Vestager, an executive vice president of the commission who is leading a campaign to curb alleged excesses by some of the world’s largest tech companies, including Amazon, Apple Inc. and Alphabet Inc.’s Google.

From the CFO Journal's Morning Ledger on May 11, 2021

Good morning. Banks and other financial institutions are devising how to release large loan reserves under an accounting rule that complicates the task of calculating them.

To do so, executives at companies including JPMorgan Chase & Co. and Citizens Financial Group Inc. are scrutinizing metrics such as credit quality and loan growth to help estimate the level of future reserves amid the continuing economic uncertainty.

Many lenders bulked up their loan reserves this time last year to prepare for potential defaults during the onset of the pandemic, cutting into profits. Now, investors and analysts are increasingly questioning the banks on when their reserves will go back to pre-pandemic levels. But jumping the gun could be dangerous: Lowering reserves too quickly and then needing to rebuild them could hurt companies’ credibility and reduce income, accountants and advisers say.

The Financial Accounting Standards Board, which sets U.S. accounting standards, is considering whether to make changes to the credit-loss rule. For that, it is consulting companies, investors and other stakeholders, and plans to host a roundtable discussion on May 20.

From the CFO Journal's Morning Ledger on May 9, 2021

Good morning. In a red-hot economy coming out of a pandemic and lockdowns, with unemployment still far higher than it was pre-Covid, the U.S. economy finds itself in a striking predicament. Businesses can’t find enough people to hire.

Rising vaccination rates, easing lockdowns and enormous amounts of federal stimulus aid are boosting consumer spending on goods and services. Yet employers in sectors like manufacturing, restaurants and construction are struggling to find workers.

Hiring has been robust recently, despite the labor shortfall. U.S. employers added 916,000 jobs in March, according to the Labor Department. Weekly unemployment claims fell to 498,000 last week, a new low since the pandemic began.

Still, the shortage threatens to restrain what is otherwise shaping up to be a robust post-pandemic economic recovery. Some businesses are forgoing work, such as not bidding on a project, delivering parts more slowly or keeping a section of the restaurant closed. Other companies are raising wages to attract employees, which could inflate prices for customers or reduce profit margins for owners.

From the CFO Journal's Morning Ledger on May 5, 2021

Shareholders at General Electric Co. and AT&T Inc. rejected the companies’ executive compensation plans in nonbinding votes, the latest blue-chip companies to be rebuked by investors over how they paid leaders during the pandemic.

The two widely held stocks add to a growing list of big U.S. companies that have failed to garner shareholder support for their executive compensation plans this year. Such advisory votes are nonbinding and rarely fail to win overwhelming shareholder support.

Jensen Comment
Shareholders are not always the pawns of top management.

From the CFO Journal's Morning Ledger on May 5, 2021

Good morning. BlackRock Inc., Bud owner Anheuser-Busch InBev NV and a plastic packaging maker in Portugal are among a flood of borrowers using financial carrots and sticks to improve their performance on things such as the environment and boardroom diversity. The sticks, complain some investors, don’t leave much of a mark.

Since last summer, companies have issued nearly $240 billion of debt with special rules that reward them with lower borrowing costs—or penalize them with higher ones—depending on if they meet self-made targets for things such as cutting carbon emissions, or for getting more women on boards, according to data provider Dealogic. That nearly doubles the total issuance of such debt over the previous three years.

Lenders have long put ratchets on loans or step-ups on bonds that cause interest rates to change depending on a company’s financial performance. But the idea of tying interest costs to nonfinancial risks, such as reducing carbon emissions, or improving governance, is relatively novel.

Fund managers like them because they qualify for ESG-labeled funds that they can sell on to investors. One irony of ratchet loans is that the investors get paid more if the companies fail to meet their objectives.

From the CFO Journal's Morning Ledger on May 4, 2021

Good morning. Clorox Co.’s decision to break out adjusted earnings per share is drawing concern from some analysts who view the change to how the consumer company measures its corporate value as potentially misleading.

The Oakland, Calif.-based maker of disinfecting wipes and other cleaning products forecast its adjusted EPS as ranging between $7.45 to $7.65 for the current fiscal year when it reported quarterly results on Friday. It said the move aims to provide more transparency to investors.

The adjusted EPS estimate excludes two nonrecurring charges: a $2.11 loss from a noncash impairment charge related to the company’s vitamins and supplements business and a 60-cent noncash gain stemming from revaluing its joint venture in Saudi Arabia after acquiring a majority stake in 2020, Clorox said.

Including these two charges would have made it more difficult for investors to understand the company’s operating performance, Chief Financial Officer Kevin Jacobsen said. In reporting non-GAAP measures, Clorox is following the lead of some of its competitors—including Colgate-Palmolive Co. and Procter & Gamble Co. —that exclude certain items from their metrics.

From the CFO Journal's Morning Ledger on May 3, 2021

Good morning. Business leaders see much to like—and much that worries them—in President Biden’s first 100 days in office.

Executives in manufacturing, automotive, construction and other industries say they see opportunity in the trillions of dollars Mr. Biden wants to spend to build infrastructure, boost domestic manufacturing, and curb greenhouse-gas emissions linked to climate change. That is tempered by wariness over Mr. Biden’s plans to achieve those goals via higher corporate taxes, and expected new regulations on fossil fuels, telecommunications and other industries.

The oil industry is among the sectors most threatened by Biden administration policies. Mr. Biden revoked a permit for the Keystone XL oil pipeline and halted new leases for oil and gas drilling on federal lands on his first day in office, part of a regulatory and spending plan to reorient the U.S. economy around technologies with lower carbon emissions.

Some factory owners say they are concerned about labor policies that Mr. Biden is pushing with support of Democrats in Congress, said Jay Timmons, chief executive of the National Association of Manufacturers. The group opposes legislation supported by Mr. Biden that makes it easier for workers to unionize. The group says the measure could affect future investments in manufacturing. Meanwhile, technology companies are watching closely to see how the Biden administration pursues antitrust initiatives launched under former President Donald Trump.

• Biden, Republicans Set Talks Over Competing Infrastructure Plans
• Biden’s $4.5 Trillion Spending Plan Faces Deficit Test

 

The Effect of the Balance Sheet Approach on the Usefulness of Accounting Information in Assessing Bank Default Risk

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3828678
57 Pages Posted: 19 Apr 2021

Peter R. Demerjian

University of Illinois at Chicago

Kodai Ito

affiliation not provided to SSRN

Akinobu Shuto

University of Tokyo - Graduate School of Economics

Date Written: March 31, 2021

Abstract

This study investigates the effect of the balance sheet approach, where financial reporting focuses on asset and liability valuation, on the usefulness of the capital adequacy ratio in the evaluation of bank default risk by credit rating agencies. We examine Japanese banks, which play the central role in the Japanese economy, and whose capital adequacy ratios are affected by the fair value measurement under the balance sheet approach. We adopt Demerjian’s (2011) approach to develop a bank-level measure of balance sheet focus. Although we find a significant positive correlation between the slack of the regulatory capital adequacy ratio and issuer rating, we find that this positive correlation is significantly weakened as a bank’s dependence on the balance sheet approach increases. The results suggest that the regulatory capital adequacy ratio based on a bank’s accounting information provides useful information for the evaluation of default risk but that rating agencies discount capital information that relies heavily on the balance sheet approach when estimating a bank’s default risk.

Keywords: balance sheet approach, regulatory capital adequacy ratio, bank regulation, rating

JEL Classification: M41

Suggested Citation:

Demerjian, Peter R. and Ito, Kodai and Shuto, Akinobu, The Effect of the Balance Sheet Approach on the Usefulness of Accounting Information in Assessing Bank Default Risk (March 31, 2021). Available at SSRN: https://ssrn.com/abstract=3828678 or http://dx.doi.org/10.2139/ssrn.3828678

Short Memories? The Impact of SEC Enforcement on Insider Leakage

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3827855
33 Pages Posted: 19 Apr 2021

Date Written: October 1, 2019

Keywords: Time-series models, financial econometrics, illegal behavior and the enforcement of law, nonparametric methods

JEL Classification: C32, C58, K42, C14, G14, K22

Suggested Citation:

The Effects and Value of Financial Information Under a Power Utility CAPM

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3827485
44 Pages Posted: 19 Apr 2021

Date Written: April 15, 2021

Keywords: CRRA CAPM, power utility, cost of capital, decision relevance, accounting information theory

JEL Classification: G11, G12, G31

Suggested Citation:

Work Smarter, Not Harder: Towards Efficient Naval Financial Management

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3825938
6 Pages Posted: 19 Apr 2021

Date Written: April 14, 2021

Keywords: government accounting, public financial management, fiscal responsibility, auditability, Department of Defense, Department of the Navy

JEL Classification: M12, M20, M29, M40, M41, M42, M48, M49

Suggested Citation:

The Data Analytics Journey: Interactions among Auditors, Managers, Regulation, and Technology

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3826172
Posted: 19 Apr 2021

There are 2 versions of this paper

Date Written: March 31, 2021

Keywords: accounting, audit fees, audit quality, data analytics, financial reporting quality, regulation

Suggested Citation:

When Justice Is Served: Using Data Analytics To Examine How Fraud-Based Legal Actions Affect Earnings Management

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3818575
24 Pages Posted: 15 Apr 2021

Date Written: 2021

Keywords: Earnings Management, Fraud Litigation, Discretionary Accruals, Accounting Data Analytics, Legal Analytics

Suggested Citation:

****************************

From the CFO Journal's Morning Ledger on April 29, 2021

Good morning. Companies are spending more money on dividends and share repurchases after pausing or shrinking them last spring in an effort to preserve cash during the coronavirus pandemic.

Executives are boosting these shareholder rewards as they are growing more optimistic about the economic recovery and the outlook for their business. The U.S. economy is expected to grow by 6.4% this year, with Covid-19 vaccinations and stimulus funds prompting a surge in consumer spending.

 

Many companies are generating significantly more revenue than a year ago, leading some of them to reduce the cash piles they amassed during the onset of the crisis. Industrial conglomerate Johnson Controls International PLC and retailer Kohl’s Corp., among others, in recent weeks increased their dividends and planned more share repurchases.

Finance chiefs face a balancing act when they allocate corporate cash toward buybacks or dividends as opposed to capital investments or acquisitions. They want to reward shareholders, while also not overstraining their companies’ finances. Buying back shares when stock markets are high can be costly and having to cut the dividend can scare off investors.

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 16, 2021

Strained IRS is Key to Biden’s Agenda By Richard Rubin | April 20, 2021

Topics: Internal Revenue Service Summary: The article describes an Internal Revenue Service (IRS) overhaul proposed by Commissioner Charles Rettig in a six-year turnaround plan presented to Congress. The beginning of the article delineates the employee losses and other agency challenges due to inconsistent funding. Needs for specialized staff capabilities and more modern technologies are explained. The article further details the challenges faced in enforcement actions such as those behind recent tax court victories against Coca-Cola Co.; Whirlpool Corp.; and promoters of land-rights tax-easement syndicates Regarding the latter issue, the article shows that promoters of these deals “flood the system with transactions, setting aside money in each deal to fight the government and knowing the IRS can’t challenge them all.” The article also links to an article estimating uncollected taxes among Americans with the highest incomes. Classroom Application: The article may be used in any tax class to discuss the functioning of the IRS. It also may be used in a governmental accounting course for the same purpose. The link to the article detailing the challenges faced in enforcement actions against Coca-Cola Co.is https://www.wsj.com/articles/coca-cola-improperly-shifted-profits-abroad-tax-court-rules-11605738514; it was covered in this review in November 2020. The link to the article about enforcement actions against promoters of land-rights tax-easement syndicates is http://www.wsj.com/article/SB11707335554515884908804582523441786614110.html; it was covered in this review in January 2017. Questions: Summarize the points included in the article about a proposal to revamp the Internal Revenue Service by its current commissioner Charles Rettig. You must glean those points from throughout the article. In support of the Internal Revenue Service (IRS) request for Congressional funding of its plan, IRS leaders say they have shown that this is a “can-do” agency. What has the IRS accomplished to support this assessment of its operations? The article references an academic study that estimates underpayment of taxes by highest income individuals in the U.S. Why is it challenging for the IRS to collect these tax payments? Might you as an accounting graduate be interested in working for the Internal Revenue Service? Why or why not?

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Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Strained IRS is Key to Biden’s Agenda," by Richard Rubin, The Wall Street Journal,  April 20, 2021 ---
https://www.wsj.com/articles/biden-agenda-relies-on-shrunken-strained-irs-11618928830  

WASHINGTON—If President Biden is to implement his ambitious economic agenda, he will have to rely on a beleaguered arm of the government: the Internal Revenue Service.

The U.S. tax agency, shrunken after a decade of budget cuts, is sending $1,400 payments to most Americans, the third such logistical challenge in a year. Last month’s $1.9 trillion relief law requires the IRS to create a system outside of annual tax filings for issuing child tax credit payments. And, further complicating an already messy filing season in which the April 15 deadline was pushed back to May 17, the agency must implement a retroactive change to taxation of unemployment benefits received in 2020.

More challenges await. The Biden administration and congressional Democrats are considering tax increases on companies and top earners that would require significant implementation and enforcement. They also hope to collect hundreds of billions of dollars by expanding the IRS and beefing up audits.

Getting all that done likely will require a transformation of the U.S. tax agency. Although the IRS still inspires fear and anger in many, it lost a net 15% of its employees between 2010 and 2020, including thousands who pursued tax avoidance and answered taxpayers’ queries. It opens about half as many criminal investigations as in 2010. In fiscal 2019, the percentage of individuals audited reached its lowest level in at least 40 years.

The result: At least $381 billion in taxes owed goes uncollected annually, according to agency estimates for tax years 2011 through 2013. Inflation and budget cuts since then mean the current number is likely much larger, and IRS Commissioner Charles Rettig said last week that it could be as high as $1 trillion annually, which is more than the annual defense budget.

Getting more than half that missing money would require much more intrusive enforcement. But picking up the easiest quarter could yield as much revenue as Mr. Biden’s proposed corporate tax-rate increase. To the agency’s backers, this is a no-brainer, the rare government program that more than pays for itself.

IRS officials have prepared a six-year turnaround plan to modernize aging technology and improve customer service. Mr. Rettig, a veteran California tax lawyer who was appointed by then-President Donald Trump and whose term lasts until November 2022, has been seeking billions to implement it.

Democratic control of the White House and Congress ensures political support for funding that plan, the new law’s provisions and tougher enforcement—for now. The relief law gives the IRS about $2 billion for implementation and modernization. Agency officials say that money will accelerate long-overdue computer revamps, but emphasize that they need support to continue, which is never a certainty. The Biden administration’s first budget calls for another $1.2 billion boost over baseline funding, plus $417 million as part of a multiyear increase in enforcement.

“A healthy IRS is very important to a healthy country,” said Jeffrey Tribiano, the deputy commissioner who oversees information technology and back-office operations. “We need consistent, timely and multiyear funding, and we need increases.”

In recent years, Republicans haven’t been pushing to further shrink the IRS, but they haven’t voiced support for Democrats’ drive to dramatically expand enforcement. GOP lawmakers backed the recent increases in IRS funding and last year’s one-time boosts to implement the pandemic response.

A turnaround takes more than money. It is a management challenge as complex as the IRS itself. The agency is a collections company, police force, law firm, financial institution, call center and high-security information-technology shop rolled into one. It operates with political constraints no private company faces, such as budgets that fluctuate with election results and pushback from influential businesses large and small when it ramps up enforcement.

“If I hadn’t lived in Washington for 50 years, I would say, ‘Wow, this is the moment, definitely,’ ” said Charles Rossotti, a former IRS commissioner who has urged sustained attacks on tax avoidance. “I’m a little more cautious.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 16, 2021

Tax Bills May Go Up for Big Companies. It Will Be Hard to Tell How Much. By Mark Maurer | April 20, 2021

Topics: Disclosure, Corporate Taxes, Accounting For Income Taxes Summary: The opening to the article reads: “U.S. companies might have to pay more in taxes to fund President Biden’s $2.3 trillion infrastructure plan. How much they owe and to whom will likely remain a mystery. Public companies in America disclose their total tax payments and their tax rate. But they have resisted plans that would require them to break down how much they pay to the federal government, states or foreign countries.” The article clearly discusses disclosure requirements related to taxes using the headings “What Do Companies Disclose About Taxes?...What Are Standard-Setters and Regulators Doing?... Why Don’t Companies Want to Disclose More About Their Taxes?...[and] How Does Tax Accounting Complicate Disclosure?” It also references the proposed 28% statutory corporate tax rate and compares the U.S. rate to other economically advanced countries’ statutory tax rates. Classroom Application: The article is may be used either in an entity taxation or financial reporting course. It is an excellent one to introduce disclosure requirements in accounting for income taxes. Questions: According to the article, how are U.S. corporations’ taxes described in financial statements? Access the FASB Accounting Standards Codification. Identify the section requiring these disclosures. What changes are proposed by the Biden Administration related to taxation of U.S. corporations? Why do you think investors may want to know more details from financial statement disclosures as these corporate tax changes occur? What information is being provided by corporations to tax authorities but currently is not available to investors in those corporations?

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Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Tax Bills May Go Up for Big Companies. It Will Be Hard to Tell How Much," by Mark Maurer, The Wall Street Journal, April 20, 2021 ---
https://www.wsj.com/articles/tax-bills-may-go-up-for-big-companies-it-will-be-hard-to-tell-how-much-11618911003

Public companies aren’t required to disclose the amount of taxes they pay in each of the states or countries where they operate

U.S. companies might have to pay more in taxes to fund President Biden’s $2.3 trillion infrastructure plan. How much they owe and to whom will likely remain a mystery.

Public companies in America disclose their total tax payments and their tax rate. But they have resisted plans that would require them to break down how much they pay to the federal government, states or foreign countries. Businesses say the additional disclosure would be costly and potentially misleading.

“This is an area that most companies would prefer to keep lurking in the shadows, especially those that are not paying their fair share of taxes, so the less details the better,” said David Zion, head of Zion Research Group, an accounting and tax research firm that serves investors.

Corporate taxes are in the spotlight right now because President Biden’s infrastructure proposal calls for boosting the corporate tax rate to 28% from the current 21%.

The plan also sets a 15% minimum tax on companies with income of more than $2 billion. The tax would target firms that report large profits but low tax payments. About 180 U.S. companies meet the income threshold and an undisclosed 45 would have to pay the tax, according to Treasury estimates.

Here is what we do know about companies’ taxes and why we don’t know more.

What Do Companies Disclose About Taxes?

Public companies under U.S. Generally Accepted Accounting Principles have to disclose cash taxes they pay during a particular period. Many businesses choose to give an annual figure instead of a quarterly one because the rules don’t specify the period. The figure is usually disclosed at the bottom of the companies’ statement of cash flows or in the footnotes.

Companies also have to provide their pretax net income for U.S. and foreign operations as well as their tax expense or benefit in the income statement. Businesses don’t have to break out their foreign operations by country. They also tally up their current and noncurrent deferred tax assets or liabilities on the balance sheet.

Companies under U.S. GAAP must give an effective tax rate, reconciling their domestic statutory rate with their actual tax expense. The effective tax rate, which they usually provide in the footnotes, is essentially the ratio between their tax expense and their pretax income, or the profit they disclosed to investors. Companies don’t need to spell out which business activities and jurisdictions the total tax expense is attributable to, said April Little, a partner at professional-services firm Grant Thornton LLP.

America’s disclosure requirements on corporate taxes are similar to those in other countries because U.S. GAAP rules on this matter are closely aligned with International Financial Reporting Standards, or IFRS, which are used in about 165 jurisdictions around the world.

Still, companies’ international operations often muddy the picture. “Once you start adding in incremental foreign jurisdictions, you may have a preferential or favorable tax structure in a particular jurisdiction that substantially reduces the amount of tax that you might pay there,” Ms. Little said.

The Treasury Department in 2016 began forcing U.S. multinational companies with annual global revenues above $850 million to provide certain tax and other financial information on a country-by-country basis. Tax authorities in more than 90 countries have a similar requirement, which was first proposed by the Organization for Economic Cooperation and Development. Companies only have to disclose this information to the Internal Revenue Service or its local equivalent, but not in publicly accessible filings.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 16, 2021

FASB Gives Certain Companies an Accounting Break on Lease-Contract Losses By Mark Maurer | April 14, 2021

Topics: Lease Accounting Summary: NOTE: Instructors may want to exclude this summary before distributing to students. At its meeting on April 14, 2021, the Financial Accounting Standards Board decided that a lessor should classify a lease with variable lease payments that do not depend on an index or a rate as an operating lease at lease commencement if: 1. the lease would have been classified as a sales-type lease or direct financing lease in accordance with the classification criteria paragraphs 842-10-25-2 and 25-3, respectively; and, 2. the lessor would have recognized a selling loss at lease commencement. This article reports on this FASB development. It describes circumstances under which lessors require variable lease payments that are not tied to an index, e.g. electric companies that charge customers based on their electricity usage and office-equipment and medical-device companies that charge lessees based on usage of printers or magnetic resonance imaging machines. Classroom Application: The article may be used when discussing lessor accounting and variable lease payments for either lessors or lessees in an advanced financial reporting or graduate level class. This Board Decision is available on the FASB website under the Project Update for Leases (Topic 842): Lessors—Leases with Variable Lease Payments. The direct link is https://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdateExpandPage&cid=1176175028424 The new requirements will be implemented on before fiscal years beginning after December 15, 2021 (i.e., in 2022) with earlier application permitted with adoption of ASC Section 842. Questions: Define the terms lessor and lessee. Cite your source from the FASB Accounting Standards Codification for these definitions. What are variable lease payments? In your answer, include a discussion of those tied to an index and those that are not, using both the article and other sources. Cite outside sources that you use. Under what circumstances might a lessor record a loss from a sales-type lease contract? Provide an example entry for lessor accounting at the outset of this type of lease. What relief has the FASB provided to these lessors who face a selling loss in the accounting at the outset of a lease? Access the description of the FASB decision about the leases discussed in this article at https://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdateExpandPage&cid=1176175028424 Describe the accounting at the outset of the lease under the new FASB requirement.

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Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Islan

 

"FASB Gives Certain Companies an Accounting Break on Lease-Contract Losses," by Mark Maurer, The Wall Street Journal, April 14, 2021 ---
https://www.wsj.com/articles/fasb-gives-certain-companies-an-accounting-break-on-lease-contract-losses-11618435218

Businesses leasing out assets were required to record a loss at the start of certain contracts even if they expected the arrangement to be profitable

The Financial Accounting Standards Board approved a new rule for companies leasing out assets in an effort to eliminate a sometimes sizable accounting loss at the start of certain contracts.

The new standard, approved Wednesday by the U.S. accounting standard-setter, serves as an update to a rule that went into effect for public companies in early 2019 and requires businesses to put operating leases on their balance sheets instead of in footnote disclosures.

Under current accounting rules, lessors have to recognize a loss at the beginning of certain types of leases even if they expect the arrangement to be profitable overall. The requirement was an unintended consequence of past rule alterations, FASB board members said. The rule applies to so-called sales-type and direct-financing lease arrangements involving payments that can change depending on circumstances such as customers’ usage of equipment or property.

For example, electric companies charge customers based on their electricity usage. Office-equipment and medical-device companies often rely on contracts with future payments that fluctuate in size, for example for using printers or magnetic resonance imaging machines, respectively.

The recorded loss does not reflect an actual loss related to the contract the lessor signed, an issue companies may have to explain to analysts or investors, the FASB said. In cases in which the lessor’s contract includes highly variable future payments, the size of the accounting loss could be substantial.

“This accounting doesn’t reflect the reality of the transaction,” board member Gary Buesser said. He added that companies don’t enter agreements “expecting a loss.”

Under the new standard, lessors are no longer required to recognize the accounting loss in those contracts. The benefits of a more accurate presentation of the lease arrangement justify additional costs to implement the changes, the FASB staff said.

Alphabet Inc., which owns Google, among other companies, supported the proposal. Alphabet’s net property and equipment, which includes assets in sales-type leases and other finance leases, totaled $84.75 billion in 2020, up 15% from the previous year, the company reported in February.

Removing the loss requirement would more closely align the FASB with international accounting standards without creating additional operational challenges for companies, Gabor Turschl, the company’s director of technical accounting, wrote in a Dec. 8 letter to the FASB. Alphabet didn’t immediately respond to a request for comment on Wednesday.

The rule change is set to take effect for both public and private companies in fiscal years that begin after Dec. 15, 2021. Companies are permitted to adopt it early, but only if they have already implemented the broader lease-accounting changes. Some private companies have yet to adopt those changes.

The FASB in February decided to pare down its initial October proposal on leases. That proposal for example would have allowed companies leasing assets to recalculate lease liabilities depending on changes in the consumer price index or another economic indicator that affects future lease payments. The FASB said it removed that aspect of the proposal because the change would have gone into effect too late to be useful for companies.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 30, 2021

Democrats Push Child Tax Credit By Andrew Duehren | April 28, 2021

Topics: Individual Income Taxation, Child Tax Credit Summary: Democrats in Congress made proposals to the Biden Administration for provisions they care to see in the announcement by President Biden on Wednesday April 28, 2021 during prime time television viewing. As part of the Covid-19 relief package passed in March 2021, the Democrat-controlled Congress expanded the child tax credit from $2,000 to $3,000 and $3,600 for children under 6 years. They would like to make the child tax credit expansion permanent as well as make it refundable and available in periodic payments rather than as one lump sum. Classroom Application: The article may be used in an individual income tax class to discuss either tax credits or the process for establishing tax law. Questions: What are tax credits? Summarize the process currently underway to decide on tax law changes for child and dependent care tax credits. Given the nature of tax credits, why is it unusual that Democrats in Congress are proposing to make the child tax credit permanently “refundable and available in periodic payments”?

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Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Democrats Push Child Tax Credit," by Andrew Duehren, The Wall Street Journal, April 28, 2021 ---
https://www.wsj.com/articles/child-tax-credit-expansion-gets-push-from-democrats-ahead-of-biden-speech-11619550470  

White House has proposed a temporary extension but some lawmakers want to make the larger payments permanent

WASHINGTON—Democrats on Capitol Hill are making last-minute calls for the White House to propose making a recent expansion of the child tax credit permanent, in a final round of lobbying ahead of President Biden’s speech Wednesday evening laying out his antipoverty package.

Democrats expanded the child tax credit for 2021 only as part of their $1.9 trillion coronavirus relief package in March, increasing the amount of the credit from $2,000 to $3,000 and $3,600 for children under 6 years old. The law also made the credit refundable and available in periodic payments, instead of one lump sum.

The White House is expected to propose continuing the new child tax credit through 2025 as part of a roughly $1.8 trillion antipoverty plan, which will also dedicate funding toward paid leave, tuition-free community college and universal prekindergarten.

A temporary extension falls short of Democratic aspirations for the expanded credit, which advocates say could cut child poverty in half. A group of Democrats is set to meet with White House advisers on Tuesday while making the case for a permanent extension, the latest in a series of meetings in which lawmakers have pressed the administration on the issue.

Several top Democrats said Tuesday they would seek to amend Mr. Biden’s plan to make the expanded tax credit. They warned that a temporary extension risks the expiration of the benefit, effectively encouraging the administration to take maximum advantage of Democrats’ control of government while they have it.

“We’ve watched voting rights expire, we’ve watched the ban on assault weapons expire, we’ve watched federal child care efforts expire, and we know that they have not come around again,” said Rep. Rosa DeLauro (D., Conn.), the chairwoman of the House Appropriations Committee, referring to temporary provisions in other policy areas that have lapsed.

“So it is about seizing the moment, the moment is now,” she added.

Mr. Biden has aimed to pay for all of his permanent programs, so removing the expiration date from the child credit could force the administration to look for more tax increases or pare back spending elsewhere. An extension through 2025 would require fewer of those trade-offs.

White House press secretary Jen Psaki said Tuesday the administration planned to hold discussions with lawmakers on the cost and duration of the tax credit extension.

The extension would have the expanded credit expire alongside many pieces of President Donald Trump’s 2017 tax law, including lower tax rates and a bigger standard deduction. It would set up a large tax debate for the first year of the next presidential term, and there is a consistent history of Congress extending tax provisions that benefit middle-income households.

While some Republicans support expanding the child tax credit, they have criticized making the credit refundable and thus fully available to very low-income households that don’t pay income or payroll taxes. They also raised concerns about expansive federal spending.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 30, 2021

Biden to Seek $80 Billion to Bolster IRS, Tax Enforcement By Richard Rubin | April 27, 2021

Topics: Internal Revenue Service Summary: The article follows on one covered in last week’s review, available at https://www.wsj.com/articles/biden-agenda-relies-on-shrunken-strained-irs-11618928830, describing how the Biden Administration Infrastructure plan relies on results from the Internal Revenue Service (IRS) to reinvigorate enforcement actions. “The administration projects that its plan would generate about $700 billion over 10 years in net revenue, according to people familiar with the plan…They said that increase…would still represent about 10%of the taxes that are estimated to be owed but uncollected. The proposal would provide a steady funding source to the IRS…” Inconsistent funding is another issue cited in last week’s article and further discussed in this article. Classroom Application: The article may be used in any tax class to discuss the functioning of the IRS. It also may be used in a governmental accounting course for the same purpose. Questions: By how much is President Biden proposing to fund the Internal Revenue Service (IRS)? What is the Biden Administration expecting will be the result of the increased funding for the IRS? What change in information would be required from banks and other payment providers under the Biden Administration plan? What is the basis for arguing that this proposed change in reported information to the IRS increases the need to fund the IRS operations? What is the evidence that the IRS can deliver results from increased funding of its operations? What is the evidence that the IRS might fail to deliver results from increased funding?

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Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Biden to Seek $80 Billion to Bolster IRS, Tax Enforcement," by Richard Rubin, The Wall Street Journal, April 27, 2021 ---
https://www.wsj.com/articles/biden-to-seek-80-billion-to-bolster-irs-tax-enforcement-11619539465

Administration estimates plan would generate $700 billion in net taxes that otherwise would go uncollected

WASHINGTON—President Biden plans to propose an $80 billion funding boost for the Internal Revenue Service over the next decade, a major expansion of the tax agency that would double its enforcement staffing and give it new tools to combat tax dodging by the wealthiest Americans.

The administration projects that its plan would generate about $700 billion over 10 years in net revenue, according to people familiar with the plan, who described it ahead of the official announcement. They said that increase, which would yield money for Mr. Biden’s proposed expansion of social-spending programs, would still represent only about 10% of the taxes that are estimated to be owed but uncollected.

The proposal would provide a steady funding source to the IRS, after years of flat or declining budgets forced steep cuts in the number of employees conducting audits and collecting money. Agency officials have said they need a multiyear commitment from Congress so they can hire and train enforcement staff and ramp up audits with less risk of lawmakers stopping such an initiative midway through. The money would let the IRS increase its enforcement staff by about 15% a year.

The Treasury Department’s career staff estimates that more than half of the $700 billion in additional revenue would come from changes to how businesses’ and individuals’ income is reported to the government, the people said. Under the plan, banks and other payment providers would be required to tell the IRS how much money came into and out of individuals’ and businesses’ accounts each year, going far beyond the existing reporting of interest income.

That change wouldn’t require individuals and business owners to file any additional forms, and it wouldn’t provide the IRS with direct information about what someone’s tax liability should be. Business owners trying to hide income could still attempt to use cash or cryptocurrency, both areas that the IRS has struggled to police.

But the change to the information-reporting rules would give the IRS much more information about business income as it decides who to audit. It would also create an enormous flow of information that the IRS would have to learn how to manage and use.

About $30 billion of the funding boost would pay for technology upgrades and other changes, some of which makes sure the IRS could obtain and analyze the bank information, the people said.

When the government has independent information about income—such as W-2 forms with wage data—compliance rates are nearly 100%. Where it doesn’t have such information—much of business income—estimated compliance rates are often about half that level.

Congress will have to weigh the potential burdens and privacy concerns against the revenue gains as it considers the plan.

The proposals are expected to be included in the roughly $1.8 trillion antipoverty plan that Mr. President Biden is set to detail Wednesday in a speech to Congress. The additional money from tax enforcement and higher tax rates on high-income households would pay for an extension of the expanded child tax credit along with programs to expand child care and funding for community college.

The antipoverty plan is likely to also include a proposal to raise capital-gains taxes and change how unrealized gains are taxed at death as income, but is unlikely to include a change to the estate tax, which applies to the total net worth of wealthy people who die.

Generally, the idea of collecting money the government is already owed is appealing to both parties because it doesn’t require tax increases that could dampen economic growth—and because it is easier to sell such policies to the public as getting money from people who should have been paying all along. But businesses and individuals who face more intense audits have a long history of complaining to their representatives when enforcement ramps up.

Democrats, who have been building political support for a significant IRS expansion, welcomed the proposal.

“For too long, working families have footed the tax bill for America’s billionaires and corporations,” Rep. Peter DeFazio (D., Ore.) said on Twitter. “I’m proud to be working [with President Biden] to ensure the IRS has the funding to ensure the wealthiest pay their fair share & to provide basic taxpayer services.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 30, 2021

BP to Buy Back Shares as Oil Price Recovery Boosts Profit By Sarah McFarlane | April 27, 2021

Topics: Dividends, Treasury Stock, Inventory Accounting Summary: “Oil prices averaged $51 a barrel in the three months to March 31, more than $10 a barrel from the same period a year ago…BP said it expected oil demand to continue to recover this year…” while remaining below pre-pandemic levels. Gas demand is expected to rise above 2019 levels and “the company said its rise in profit [during the quarter ended March 31, 2021] was driven by gas marketing and trading results….” These earnings, and the results of asset sales, have led BP to announce share buybacks it committed to when it halved its dividend in August 2020. The article also focuses on profitability that is measured as “replacement cost profit” by this company using IFRS and notes that it is “similar to the net income figure that U.S. oil companies report.” Classroom Application: The article may be used in a financial reporting class discussing purchase of treasury shares or the LIFO inventory method. Questions: How has BP PLC fared during the 2020 Covid-19 pandemic? How does this performance compare to the oil and gas industry overall? What did BP PLC do to its dividend payment during the 2020 Covid-19 pandemic? What factors has BP PLC management considered in determining whether to buy back its own shares? How are share buybacks similar to dividends in terms of payouts to shareholders? How are they different? The article notes that BP reports a “replacement cost profit.” Define this metric and cite your source for this information. One possibility is to glean the definition from the BP PLC 2020 annual report available at https://www.bp.com/en/global/corporate/investors/results-and-reporting/annual-report.html The article notes that “replacement cost profit…is a metric similar to the net income that U.S. oil companies report.” One such U.S. company is Exxon Mobil. You may access ExxonMobil’s 2020 annual report at https://corporate.exxonmobil.com/-/media/Global/Files/investor-relations/annual-meeting-materials/annual-report-summaries/2020-Annual-Report.pdf How does ExxonMobil value inventories? Why does that inventory valuation method result in net income “similar to replacement cost profit”?

 

"BP to Buy Back Shares as Oil Price Recovery Boosts Profit," by Sarah McFarlane, The Wall Street Journal, April 27, 2021 ---
https://www.wsj.com/articles/bp-to-buy-back-shares-as-oil-price-recovery-boosts-profit-11619516485

Rebounding oil prices and strong trading results help BP pay down debt faster than expected

Oil giant BP BP -0.41% PLC said it would boost returns to shareholders after higher oil prices and strong trading results buoyed its first-quarter earnings, the strongest sign yet that a recovery is under way in one of the industries worst hit by the pandemic.

Oil companies endured one of their worst years on record in 2020 as Covid-19 lockdowns choked off demand, hitting prices. As economies open back up and demand starts to recover, so too have prices, buoying major oil companies even as they increasingly face uncertainty about the outlook for their business as the world shifts to lower-carbon energy.

BP on Tuesday reported a replacement cost profit—a metric similar to the net income figure that U.S. oil companies report—of $3.32 billion for the three months ended March 31, from a loss of $628 million in the year-earlier period.

The company said solid earnings and income from asset sales helped it to lower its net debt to about $33 billion from $39 billion in the previous quarter. Encouraged by its progress, BP said it would buy back $500 million of shares in the second quarter.

“We’ve got a pretty optimistic outlook on buybacks for the remainder of the year but we’re going to do it quarter by quarter,” said BP Chief Executive Bernard Looney. “Depending of course on [the oil] price, I think next year you can very easily imagine a world where our distributions to shareholders are at or above the pre-pandemic levels.”

The company said its rise in profit was driven by gas marketing and trading results, which Mr. Looney said benefited from the company being well positioned for cold weather in the U.S. and Asia, which boosted natural gas prices.

BP shares closed down about 0.4% in London, having given up early session gains.

Oil prices averaged $61 a barrel in the three months to March 31, up more than $10 a barrel from the same period a year ago, as demand continued to recover after lockdowns hit transport fuels, in particular, last year.

BP said it expected oil demand to continue to recover this year, driven by strong growth in the U.S. and China, the rollout of vaccines globally and less severe lockdown restrictions. However, it said oil demand would remain below pre-pandemic levels in 2021, as would refining margins. It said gas demand would be above 2019 levels.

Analysts have said that oil companies are in better shape to benefit as oil prices recover after many in the industry slashed costs, reduced workforces and in some cases, including BP, cut dividends, during the pandemic.

When it halved its dividend in August, BP committed to return at least 60% of surplus cash as buybacks once it had lowered its debt to $35 billion. It had expected to achieve that target by the fourth quarter of this year at the earliest.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on May 7, 2021

Auto Makers Retreat From 50 Years of ‘Just in Time’ Manufacturing By Sean McLain | May 3, 2021

Topics: Just-In-Time Inventory Management, Vertical Integration Summary: The article discusses inventory management from holding safety stock to just-in-time methods. The pandemic has led auto manufacturers to consider their “biggest transformation in more than half a century….After sudden swings in demand, freak weather and a series of accidents, they are reassessing their basic…” reliance on just-in-time inventory management. “Ford’s chief executive, Jim Farley, said he was looking at keeping more inventory. ‘Most other industries use safety stock for critical components like [computer] chips,...And many of these companies pay for chips upfront,’” It also refers to vertical integration of operations at Ford Motor Company in the 1920s as well as currently at Tesla Inc. and other companies. Classroom Application: The article may be used in a managerial accounting course to discuss inventory management practices and vertical integration. Questions: What is just-in-time (JIT) inventory management? How did JIT inventory management stem from practices used at grocery stores? What is a safety stock? Is having a safety stock necessarily at odds with JIT inventory management? What is vertical integration? What company moved away from vertically integrated operations? What company has adopted vertical integration for parts of its operations?

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Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Auto Makers Retreat From 50 Years of ‘Just in Time’ Manufacturing," by Sean McLain, The Wall Street Journal, May 3, 2021 ---
https://www.wsj.com/articles/auto-makers-retreat-from-50-years-of-just-in-time-manufacturing-11620051251

TOKYO— Toyota Motor Corp. is stockpiling up to four months of some parts. Volkswagen AG is building six factories so it can get its own batteries. And, in shades of Henry Ford, Tesla Inc. is trying to lock up access to raw materials.

The hyperefficient auto supply chain symbolized by the words “just in time” is undergoing its biggest transformation in more than half a century, accelerated by the troubles car makers have suffered during the pandemic. After sudden swings in demand, freak weather and a series of accidents, they are reassessing their basic assumption that they could always get the parts they needed when they needed them.

“The just-in-time model is designed for supply-chain efficiencies and economies of scale,” said Ashwani Gupta, Nissan Motor Co.’s chief operating officer. “The repercussions of an unprecedented crisis like Covid highlight the fragility of our supply-chain model.”

Consider Ford Motor Co. and its F-150 pickup, the bestselling vehicle in the U.S. The latest version is crammed with technology including a hybrid gas-electric drive and automatic Tesla-style software updates.

With vaccinations beginning to beat back Covid-19, customers bought around 200,000 F-150s in the first quarter of this year, its best retail start in 13 years. Yet now supply is short. Truck factories were shut down or had limited production for all of April and the slowdown will likely continue through at least mid-May. The hit to pretax profit is as much as $2.5 billion.

The basic idea of just in time is avoiding waste. By having suppliers deliver parts to the assembly line a few hours or days before they go into a vehicle, auto makers don’t pay for what they don’t use. They save on warehouses and the people to manage them.

But as supply chains get more global and car makers increasingly rely on single suppliers, the system has grown brittle. The crises are more frequent.

Freak snowstorm

A freak snowstorm in Texas in mid-February shut down a refinery that feeds production of 85% of resins produced in the U.S. Those resins go into components from car bumpers to steering wheels. They’re some of the least expensive raw materials in a car, but they go into seat foam, and dealers can’t sell a car without seats.

At the end of March, Toyota shut down production at several U.S. plants due to the shortage, according to a schedule seen by The Wall Street Journal, hitting production of some of its bestsellers, including the RAV4 sport-utility vehicle.

Some suppliers are flying in resin to the U.S. from Europe, said Sheldon Klein, a lawyer at the firm Butzel Long who advises suppliers. “That’s just economically crushing,” he said. “At best you have very sharp-elbow discussions with your customer about shouldering some of the cost.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on May 7, 2021

What Business Thinks of Biden’s Plans on Infrastructure, Taxes By Katy Stech Ferek Ryan Tracy Yuka Hayashi | May 3, 2021

Topics: Regulation, Corporate Taxation Summary: The article describes the reaction by members of the Business Roundtable to the Biden Administration $2.3 trillion infrastructure and corporate tax proposal. It follows on April 2021 articles covered in this review about the Biden Administration plan; one of the articles is https://www.wsj.com/articles/a-28-tax-rate-will-cost-companies-but-not-equally-11617615180 The major components of that plan include significant, extended government spending paid for with higher corporate taxes. The plan also is supported by “expected new regulations on fossil fuels, telecommunications and other industries.” A balanced review of positive and negative viewpoints about the plan from the leaders of the Business Roundtable, the head of the American Petroleum Institute trade group, and a former Google CEO are offered. Classroom Application: The article may be used in a corporate/entity tax class or any financial reporting class when discussing business viewpoints on proposed corporate tax policy. Questions: Summarize your understanding of the major components of the Biden Infrastructure plan. You may use the article linked at https://www.wsj.com/articles/bidens-infrastructure-plan-how-the-2-3-trillion-would-be-allocated-11617234178 or your knowledge from following this issue. Cite the source you use. What are the tax proposals included in the Biden Administration infrastructure plan to raise revenues to pay for new government spending? List each tax item identified in this article and explain your understanding of that item. Why do you think that members the chief executive of Bechtel Corp. says “it doesn’t feel fair to expect business to shoulder the entire cost of public infrastructure….” Is fairness part of tax policy? Explain your answer. “The oil industry is among the sectors most threatened by Biden administration policies.” What evidence is there for this statement? A chief executive of an oil-field-service provider company has stated that his fears about Biden Administration policy threats to his industry are abating. What reason does he have for this statement?

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Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"What Business Thinks of Biden’s Plans on Infrastructure, Taxes," by Katy Stech Ferek Ryan Tracy Yuka Hayashi, The Wall Street Journal, May 3, 2021 ---
https://www.wsj.com/articles/what-business-thinks-of-bidens-plans-on-infrastructure-taxes-11619960402

Proposals to boost infrastructure spending welcomed, but companies wary of higher taxes and new regulations

WASHINGTON—Business leaders see much to like—and much that worries them—in President Biden’s first 100 days in office.

Executives in manufacturing, automotive, construction and other industries say they see opportunity in the trillions of dollars Mr. Biden wants to spend to build infrastructure, boost domestic manufacturing, and curb greenhouse-gas emissions linked to climate change.

That is tempered by wariness over Mr. Biden’s plans to achieve those goals via higher corporate taxes, and expected new regulations on fossil fuels, telecommunications and other industries.

Business and industry leaders are also mindful that Mr. Biden hasn’t filled many key oversight jobs, leaving questions about his approach to trade, antitrust and other policies.

Brendan Bechtel, chief executive of construction giant Bechtel Corp., said there is strong support for spending on infrastructure, but that the administration’s proposals for paying for it could “inhibit job creation and get in the way of U.S. company competitiveness both at home and abroad.”

Mr. Bechtel said he and other members of the Business Roundtable are in talks with administration officials and members of Congress on alternatives to Mr. Biden’s plans to pay for infrastructure with higher corporate taxes over 15 years. These alternatives might include fees on those who use the infrastructure, deficit financing and public-private partnerships, he said.

“It doesn’t feel fair to expect business to shoulder the entire cost of public infrastructure, but we realize we need to be a constructive partner,” he said.

Some executives and trade group leaders noted favorably that Mr. Biden is more predictable than former President Donald Trump, who was known to announce policy changes via tweet, sometimes catching financial markets and his own allies off guard.

“My CEOs have been pleasantly surprised at the level of engagement that the industry has received so far,” said Mike Sommers, head of the American Petroleum Institute trade group. “It’s certainly more orderly.”

The oil industry is among the sectors most threatened by Biden administration policies. Mr. Biden revoked a permit for the Keystone XL oil pipeline and halted new leases for oil and gas drilling on federal lands on his first day in office, part of a regulatory and spending plan to reorient the U.S. economy around technologies with lower carbon emissions.

 

Paul Danos, chief executive of Houma, La., oil-field-services provider Danos LLC, which employs about 2,500 people along the Gulf Coast and in Texas, said he and his colleagues were initially shaken by Mr. Biden’s actions. But those fears have ebbed, he said, as it became apparent that the changes will roll out over time.

Some factory owners say they are concerned about labor policies that Mr. Biden is pushing with support of Democrats in Congress, said Jay Timmons, president and chief executive of the National Association of Manufacturers. That group opposes legislation supported by Mr. Biden known as the Protecting the Right to Organize Act, or PRO Act, which makes it easier for workers to unionize. The group says the measure could affect future investments in manufacturing.

Technology companies are watching closely to see how the Biden administration pursues antitrust initiatives launched under Mr. Trump. Key appointments are yet to be made, though so far Mr. Biden has nominated two high-profile Big Tech critics for key positions—Lina Khan to the Federal Trade Commission and Tim Wu to the National Economic Council.

Eric Schmidt, former CEO of Google, said so far Mr. Biden is winning support in the business community for addressing the Covid-19 pandemic and for pushing new spending on infrastructure and research.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on May 7, 2021

Clorox’s Move to Provide Adjusted EPS Raises Concerns By Nina Trentmann | May 4, 2021

Topics: Non-GAAP Reporting Summary: Clorox Co. began using several non-GAAP measures in reporting its quarterly results for the first quarter of 2021. “The adjusted EPS estimates excludes two nonrecurring charges: a $2.11 loss from a noncash impairment charge related to the company’s vitamins and supplements business and a 60-cent noncash gain…from revaluing its joint venture in Saudi Arabia after acquiring a majority stake in 2020.” Reactions from investment analysts, including one who made statements included in the earnings conference call, are discussed. Instructors may incorporate the SEC definition of non-GAAP reporting in discussing question 1. It is available at https://www.sec.gov/rules/final/33-8176.htm Item II.A.2.a. Classroom Application: The article may be used in several ways in a financial reporting class: (1) to discuss non-GAAP reporting in general; (2) to discuss sophisticated reactions to the use of non-GAAP reporting even in the face of excluding a gain; or (3) to discuss the issues listed as the exclusions from Clorox’s Q1 21 report (impairment charge and a non-cash gain due to revaluation for business combination accounting). Questions: What is “adjusted EPS”? Use the article definition to provide your answer. According to the Clorox Co. chief financial officer, why did the company choose to use non-GAAP measurement in its first quarter earnings report? How did investors and analysts react to Clorox’s use of non-GAAP measurement for earnings per share (EPS)? There are two nonrecurring charges that Clorox excluded in calculating adjusted EPS for the first quarter of 2021. Explain your understanding of each item

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Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Clorox’s Move to Provide Adjusted EPS Raises Concerns," by Nina Trentmann, The Wall Street Journal,  May 4, 2021 ---
https://www.wsj.com/articles/cloroxs-move-to-provide-adjusted-eps-raises-concerns-11620120617

The non-GAAP metric will increase transparency, company CFO says

Clorox Co. ’s decision to break out adjusted earnings per share is drawing concern from some analysts who view the change to how the consumer company measures its corporate value as potentially misleading.

The Oakland, Calif.-based maker of disinfecting wipes and other cleaning products forecast its adjusted EPS as ranging between $7.45 to $7.65 for the current fiscal year when it reported quarterly results on Friday. It said the move aims to provide more transparency to investors.

The adjusted EPS estimate excludes two nonrecurring charges: a $2.11 loss from a noncash impairment charge related to the company’s vitamins and supplements business and a 60-cent noncash gain stemming from revaluing its joint venture in Saudi Arabia after acquiring a majority stake in 2020, Clorox said.

Including these two charges would have made it more difficult for investors to understand the company’s operating performance, Chief Financial Officer Kevin Jacobsen said.

Adjusted EPS is a metric outside of Generally Accepted Accounting Principles, or GAAP, which are used by U.S. companies to report their financial results. Companies employ such a measure so that they can take out certain one-time charges from calculations of their earnings for the current period.

The company also introduced two other non-GAAP metrics on Friday: adjusted effective tax rate and adjusted pretax earnings for its health-and-wellness business.

In reporting non-GAAP measures, Clorox is following the lead of some of its competitors—including Colgate-Palmolive Co. and Procter & Gamble Co. —that exclude certain items from their metrics.

This isn’t the first time that Clorox is adjusting its financial metrics, a company spokeswoman said, pointing to other instances, including its reporting of organic sales in the outlook for fiscal 2020.

Going forward, Clorox will provide both adjusted EPS and EPS under GAAP, Mr. Jacobsen said. “We will always provide both,” he said. U.S. regulators require companies to give equal prominence to both types of metrics and to reconcile the numbers.

Analysts and investors view such changes to certain costs and gains with caution, fearing that companies might tweak their results to make them look better.

Continued in article

Bob Jensen's threads on the controversy of proforma non-GAAP reporting ---
http://faculty.trinity.edu/rjensen/theory02.htm#ProForma

Teaching Case From The Wall Street Journal Weekly Accounting Review on May 7, 2021

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Humor for MAY 2021

Forwarded by Auntie Bev

Over a double latte, the Greek mentions "We built the Parthenon, you may recall,

along with the Temple of Apollo."

"Aye, and it was the Irish that discovered the Summer and Winter Solstices."

"But it was the Greeks who gave birth to advanced mathematics."

"Granted, but it was the Irish who built the first timepieces."

Knowing that he's about to deliver the coup de grace, the son of Athens points out with a note of finality:

 "Keep in mind that it was the ancient Greeks who invented the notion of sexas a pleasurable activity!"

"Aye! True enough, but it was the Irish who got women involved."