BUS512M Session 10. Leases, and Enduring Accounting Wonders

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1 BUS512M Session 10 Leases, and Enduring Accounting Wonders

2 Homework see handout

3 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

4 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.

5 Capital Lease

6 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.

9 Annual Report Treasure Hunt-Find 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

11 Cash Conversion Cycle OPERATING ASSET MANAGEMENT: Ability to utilize current assets and liabilities in a way that supports growth in revenues with minimum investment. Measures the time it takes from cash invested in inventory to cash received from customers versus the time it takes to pay suppliers. (The time required to make or buy products, finance the products, and to sell & collect for them.) Days Inventory + Days Receivables - Days Payables Cash Conversion Cycle Operating Cycle If Operating Cycle is > Days Payables then Financing Gap If Operating Cycle is < Days Payables then able to Self-finance

12 Inventory: Operating Cycle Ratios Inventory Turnover = COGS/Average inventory Average inventory = (Beginning + Ending)/2 Days Inventory on Hand = 365 days/inventory turnover Accounts Receivable: A/R Turnover=Net Credit Sales/Average A/R Average A/R= (Beginning + Ending)/2 Days Sales= 365/A/R Turnover Operating Cycle= Days Inventory on Hand + Days Sales

13 Accounts Payable: Is there a Financing Gap? Accounts Payable Turnover = COGS/Average A/P Average A/P = (Beginning + Ending)/2 Days Payables = 365 days/accounts Payable Turnover Financing Gap? Operating Cycle - Days Payables= Financing Gap BORROW SHORT TERM OR Days Payables Operating Cycle= No Gap Free Financing from Suppliers

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

15 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.

16 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.

(ESG) reporting, triple bottom line (TBL) reporting, and corporate social responsibility (CSR) reporting.

17 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.

28 nsibility/environment/documents/sustainability Brochure_pages.pdf

Business Entity Net Income, Contributed Capital, Retained Earnings, & Dividends Depreciation, Amortization, & Depletion

33 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.

34 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

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.

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.

35 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.

Today and Tomorrow Transformative Technologies Now data unlocked with 24/7 access to

Making sense of business to an audience-what info important?

Accountants still can be the storytellers by bringing meaning to data through the

36 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

38 Resources-Events-Agents

40 And we ll all live happily ever after!

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

BUS512M Session 10. Leases, GRI, Fraud and Other Enduring Accounting Wonders BUS512M Session 10 Leases, GRI, Fraud and Other Enduring Accounting Wonders Economic Consequences of Reporting Long-Term Liabilities Improved credit ratings can lead to lower borrowing costs Management