BUS512M Session 10. Leases, GRI, Fraud and Other Enduring Accounting Wonders

Transcription

1 BUS512M Session 10 Leases, GRI, Fraud and Other Enduring Accounting Wonders

2 Economic Consequences of Reporting Long-Term Liabilities Improved credit ratings can lead to lower borrowing costs Management has strong incentive to manage the balance sheet by using off-balance-sheet financing i.e., operating leases Have 3 years to bring on the books, management should be preparing.

3 Leases: operating or capital FASB issued SFAS No. 13, which requires certain leases to be recorded as capital leases. Capital leases record the leased asset as a capital asset, and reflect the present value of the related payment contract as a liability. Requirements of SFAS No record as capital lease for the lessee if any one of the following is present in the lease: Title transfers at the end of the lease period, The lease contains a bargain purchase option, The lease life is at least 75% of the useful life of the asset, or The lessee pays for at least 90% of the fair market value of the lease.

4 Capital Lease

5 P11-14 Capital and Operating Leases Company leased equipment on for an annual lease payment of $30,000. Assume the lease term is 5 years and the life of the equipment is also 5 years. If the lease is treated as a capital lease, the FMV of the equipment is $119,781. The straight line depreciation method is used to depreciate fixed assets. The effective interest rate on the lease is 8%. a. Compute rent expense for if lease is treated as an operating lease. b. Compute the amounts that would complete the table: Date BS Value Leasehold Obligation Interest Expense Depreciation Expense Total Expense c. Compare total expense over 5 years for the two methods and comment.

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11 The SEC mandated the use of XBRL for public company reporting and other reporting applications: Public Company Reporting all public companies must file in XBRL format; companies with worldwide public float greater than $5 billion to comply starting with period ending June 2009; all other large accelerated filers to comply starting with period ending June 2010; all other public companies comply with period ending June Risk Return Summary Portion of Mutual Fund Prospectus mutual funds must begin publishing the risk return summary portion of their prospectuses in XBRL format starting January 1, Credit Rating Agencies must report ratings actions (initial rating, upgrades, downgrades, etc.) in XBRL format. The SEC and XBRL US have resources available to help public company preparers get educated, identify tools and resources to tag their financials and create their own XBRLformatted financials.

12 XBRL (extensible Business Reporting Language) is a freely available and global standard for exchanging business information. XBRL is a technology language for the electronic communication of business and financial data and is being implemented worldwide. XBRL-formatted documents enable greater efficiency, improved accuracy and reliability as well as cost savings to those involved in supplying and using financial and business information data. What XBRL can do: XBRL allows for the creation of interactive, intelligent data. Each piece of business information has detailed descriptive and contextual information wrapped around it, so that the data becomes machine-readable and can be automatically processed and analyzed. XBRL allows business reporting information to be reused and repurposed. A financial or business report created once can be used to create many documents in different formats--html, ASCII text, Microsoft Word or Excel with no loss of accuracy or integrity. XBRL adds value to every step of an organization s business information reporting. The entire reporting chain of business information -- from data collection through internal reporting and external reporting -- will be made more efficient and accurate and will contain more useful data. XBRL enhances the ability to compare information from one organization or entity to another, because XBRL lays out a common set of definitions by which all organizations tag their data. XBRL allows for unique reporting situations, because it can be extended by a single reporting entity by adding special elements that may be needed to best represent that company.

13 Sustainability Reporting The Global Reporting Initiative (GRI) is a nonprofit organization that promotes economic sustainability. It produces one of the world's most prevalent standards for sustainability reporting also known as ecological footprint reporting, environmental social governance (ESG) reporting, triple bottom line (TBL) reporting, and corporate social responsibility (CSR) reporting. GRI seeks to make sustainability reporting by all organizations as routine as, and comparable to, financial reporting. A sustainability report is an organizational report that gives information about economic, environmental, social and governance performance.

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28 COSO Announces Internal Control Certificate Program NEW YORK, Dec. 16, The Committee of Sponsoring Organizations of the Treadway Commission (COSO) today announced an Internal Control Certificate Program that offers financial professionals, including internal auditors and CPAs, the opportunity to earn a professional certificate in the 2013 COSO Internal Control-Integrated Framework. The program is a combination of self-paced learning and a hands-on workshop, followed by an online examination. Upon successful completion of all three components, candidates will receive an official COSO certificate that demonstrates their ability to design and implement an effective system of internal control utilizing the COSO Internal Control-Integrated Framework. This unique course can be offered only through one of COSO s five sponsoring organizations: American Accounting Association (AAA), American Institute of CPAs (AICPA), Financial Executives International (FEI), IMA-The Association of Accountants and Financial Professionals in Business, and The Institute of Internal Auditors (IIA). The IIA and AICPA are offering the three-day workshops throughout 2016, AAA plans to train its staff on the Certificate, and the other sponsors are actively promoting the benefits of the offering to their members. An internal control system requires the use of judgment to monitor and assess its effectiveness, and it must provide insight on the application of controls. The new Certificate, through a blend of self-paced learning and live classroom training, offers a unique opportunity to develop expertise in designing, implementing, and conducting an internal control system, said Robert B. Hirth Jr., COSO Chair. The Certificate is much like a diploma, and can be earned through completion of training and an end-of-course examination. This program, which counts for 25.5 CPE credits, takes the user through the Framework from start to finish using realworld scenarios, allowing participants to: Understand the principles-based approach Identify and analyze risks Develop a confidence in the internal control system Learn from experts and share their experiences with peers "I believe the Certificate provides great value to risk and control professionals including chief audit executives (CAEs) looking to enhance their staffs qualifications, Hirth said. The goal of the online learning component is to introduce key Framework concepts to participants and to start them thinking about it in the context of their organizations. For a listing of live training events in 2016, please visit coso.org.

29 Evolution of Accounting Telling the story of business by converting events into numbers Resources Unit of Measure Valuation Responsibilities Capital Cost-Benefits Exchange Transactions A=L+OE Rise of Corporations Going Concern & Business Entity Net Income, Contributed Capital, Retained Earnings, & Dividends Depreciation, Amortization, & Depletion Financial reporting & Auditing Product & Service Costing Accounting kept the books (locked the data up) and interpreted the data for others.

30 Financial Accounting Fundamentals Assumptions Economic Entity (identified and measured) Fiscal Period (periodicity) Going Concern (life indefinite) Stable Dollar (across time) Measurement Principles Objectivity (Verifiable and documented) Matching and Revenue Recognition (costs & benefits) Consistency (methods same across time) Two Exceptions Materiality little to no effect on user decisions Conservatism -understate assets, overstate liabilities, accelerate losses, and delay gains (due to legal liability) Valuation Input Market (purchase)-original, replacement Output Market (sell)-present, fair market Financial Statements: Original (Historic) Cost: Land, LT Invt Lower of Cost or Market: Inventory Net Realizable Value: net AR Net Book Value: PP&E, Intang. Face: Cash, Current liabilities Fair Market Value (sales price): ST Invt Present Value: LT NR & LTL IFRS v. US GAAP Principles based Rules based

31 Annual Report Treasure Hunt-The 6 Key Numbers Revenue Income (Loss) Cash Flow from (used by) Operating Activities Assets Liabilities Stockholders Equity Prove the Accounting Equation Can you tell the type of business? Service, Retail, Manufacturing

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33 Crucial event(s) in Revenue Recognition 1. The company has completed a significant portion of the production and sales efforts. 2. The amount of revenue can be objectively measured. 3. The company has incurred the majority of costs, and remaining costs can be reasonably estimated, and 4. Cash collection is reasonably assured. Discuss the propriety of timing the recognition of revenue from customers and advertising in the company s accounts with: a) The cash sale of the magazine subscription. b) The publication of the magazine every month. c) Both events, by recognizing a portion of the revenue with the cash sale of the magazine subscription and a portion of the revenue with the publication of the magazine every month.

34 Today and Tomorrow Transformative Technologies Now data unlocked with 24/7 access to anyone via Internet & Cloud. Massive quantities of financial and nonfinancial data. Making sense of business to an audience-what info important? Point of view of who s telling the story- single entity or helicopter? Accountants still can be the storytellers by bringing meaning to data through the process of: Understanding the Concepts first Then applying the best Accounting Tools To analyze and make Business Decisions Resources-Events-Agents

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39 Case Your class will be divided into teams. The task of each team is to determine if any fraud was committed in this company between April and July and to prepare a report of your findings. To investigate any suspected frauds, follow the requirements below using the materials in the Student Handouts and any additional information you think you might need to investigate the frauds. To successfully complete this assignment, each team must determine what additional information is needed for the various frauds. REQUIREMENTS You believe that a good forensic investigation is built on instinct and experience, and you like to remember to look up from the numbers and consider the people who created those numbers. You have previously developed the following methodology that your team will follow. Your Firm s Methodology for Forensic Accounting Investigations Step 1: Obtain an understanding of the company Step 2: Brainstorm and Hypothesize 1. List up to 3 hunch areas you want to investigate 2. Best hunch at perpetrator(s) Step 3: Plan the investigation Step 4: Execute the plan Step 5: Discuss findings and investigate further Step 6: Prepare the main points of a Final Report

40 Case Debrief Step 6: Prepare the main points of a Final Report At the conclusion of your investigation you will begin to prepare a final report. This report will include: 1. A brief statement of your conclusion (fraud or no fraud at TBC) 2. If a fraud or frauds have occurred, you will present the following for each fraud: a. Identification of the perpetrator; b. Description of the fraud; c. Evidence of the pressure or motive the perpetrator had to commit the fraud; d. Evidence the perpetrator had the opportunity and knowledge to commit the fraud; e. Evidence of the perpetrator s intent. That is, you must show that the perpetrator s actions were not simply a mistake or ignorance that resulted in the fraud, but a deliberate action; f. Evidence of how the perpetrator benefited from the crime.

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42 And we ll all live happily ever after!