...Variable interest entities The securities exchange commission of the United States is geared at having companies perform the best accounting practices. The securities exchange commission formed the financial accounting standards board to oversee the formulation of accounting principle. Many companies in United States are guided by the generally accepted accounting principles (GAAP) as they write their financial statements. The financial accounting standards board contains a clause relating to variable interest entity. Companies use the Variable interest entity to accomplish certain goals. The variable controlling entity is defined using various criterias. The financial accounting standards board defines a variable controlling interest as an entity in which the controlling interest of a company is not based on voting rights. An investor can hold controlling interest in a company based on a certain agreement. VIE are viewed as partnership or joint venture between companies. Other companies use view VIE’s as trust agreements. However, companies create VIE to engage in limited business activities. The activities could include the purchase of new assets. In this case, many companies use the assets as collaterals. Therefore, the assets are financed at lower interest rates. VIE is based on a contractual agreements. The terms and conditions of the contract determine which firm or investor gains control of the VIE. In most instances, the sponsoring firm is deemed as the beneficiary...
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...Statement No. 168; The FASB Accounting Standards Codification® and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 This standard was issued in June 2009, and would be effective for financial statements recorded for fiscal periods ending after 15th Sept. 2009. The aim of the statement is the replacement of FASB Statement No. 162 as the authoritative source of U.S generally accepted accounting principles for nongovernmental entities. Securities and Exchange Commission rules and statement releases, however, remained the authoritative accounting standard for all SEC registrants. Accordingly, the statement superseded all pre-existing accounting non-SEC financial accounting and reporting practices. In essence, the Accounting Standards Codification became the GAAP. Some common sources of unauthorized accounting literature include FASB Concept Statements, IFRS of IASB, AICPA Issue Papers, Accounting textbooks, etc. The acceptance of nonauthoritative accounting literature would be determined on a case-to-case basis, depending on the appropriateness of the scenario and the credibility of the author of the accounting literature used. This standard also provides that the FASB board shall issue Accounting Standards Updates and abolish the issuance of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts when need arises to address emerging accounting issues. However, these updates shall not be regarded independently...
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...Auditing a Publicly Traded Company SUBJECT: Share-based Payment Reporting and Special Purpose Entities The current audit of a publicly traded company involves the evaluation of both share-based payment arrangements and special purpose entity reporting. This memo explains the reporting requirements for share-based payment transactions and special purpose entities and discusses how these requirements relate to the auditing process. Share-based payment reporting: Financial Accounting Standards Board (FASB) defines share-based payment arrangements as follows: “An arrangement under which either of the following conditions is met: a. One or more suppliers of goods or services (including employees) receive awards of equity shares, equity share options, or other equity instruments. b. The entity incurs liabilities to suppliers that meet either of the following conditions: 1. The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments. (The phrase at least in part is used because an award may be indexed to both the price of the entity’s shares and something other than either the price of the entity’s shares or a market, performance, or service condition.) 2. The awards require or may require settlement by issuance of the entity’s shares” (FASB ASC 718-10-20). FASB 718-10-25 details specific guidelines for the recognition of share-based payment transactions (FASB ASC 718-10-25). FASB specifies when the services and...
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...the circumstances in which the entity has incurred operating losses since the initial determination date, stating, “A legal entity that previously was not subject to the Variable Interest Entities Subsections shall not become subject to them simply because of losses in excess of its expected losses that reduce the equity investment” (emphasis added). Consequently, if the amount of the equity investment at risk at the entity’s inception (or when a reporting entity first became involved with the entity) was determined to be sufficient, losses later incurred by that entity do not by themselves require a reporting entity to reconsider whether the entity has sufficient equity in accordance with ASC 810-10-15-14(a). A reporting entity must consider all pertinent facts and circumstances in assessing whether an event that meets the criteria in ASC 810-10-35-4(a) through 35-4(e) has occurred. Insignificant events do not always result in a reconsideration of an entity’s VIE status. An event’s significance depends on whether the event appears to have changed the sufficiency of equity investment at risk or on whether the characteristics of the holders of equity investment at risk have changed. (For guidance on isolating the impact of a change under ASC 810-10-35-4(a) through 35-4(e), see Q&A 3.46.) It is also important to emphasize that ASC 810-10-35-4 applies to both of the following: • Entities that were not determined previously to be a VIE. • Entities that were determined previously...
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...the circumstances in which the entity has incurred operating losses since the initial determination date, stating, “A legal entity that previously was not subject to the Variable Interest Entities Subsections shall not become subject to them simply because of losses in excess of its expected losses that reduce the equity investment” (emphasis added). Consequently, if the amount of the equity investment at risk at the entity’s inception (or when a reporting entity first became involved with the entity) was determined to be sufficient, losses later incurred by that entity do not by themselves require a reporting entity to reconsider whether the entity has sufficient equity in accordance with ASC 810-10-15-14(a). A reporting entity must consider all pertinent facts and circumstances in assessing whether an event that meets the criteria in ASC 810-10-35-4(a) through 35-4(e) has occurred. Insignificant events do not always result in a reconsideration of an entity’s VIE status. An event’s significance depends on whether the event appears to have changed the sufficiency of equity investment at risk or on whether the characteristics of the holders of equity investment at risk have changed. (For guidance on isolating the impact of a change under ASC 810-10-35-4(a) through 35-4(e), see Q&A 3.46.) It is also important to emphasize that ASC 810-10-35-4 applies to both of the following: • Entities that were not determined previously to be a VIE. • Entities that were determined previously...
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...To: Cascade Company From: Subject: Investment Accounting Date: October, 2013 Introduction: This document will discuss and define how Cascade Company should account for investments in different forms and situations. If these guidelines are followed, Cascade Company will be in coherence with FASB concatenations. Readily Determinable: According to the authoritative literature, the fair value of a security is readily available when its specifications meet any of the following conditions (According to FASB ASC 320-10-20 Glossary): I. The fair value of an equity security is readily determinable if sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by Pink Sheets LLC. Restricted stock meets that definition if the restriction terminates within one year. II. The fair value of an equity security traded only in a foreign market is readily determinable if that foreign market is of a breadth and scope comparable to one of the U.S. markets referred to above. III. The fair value of an investment in a mutual fund is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions. The investment...
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...(custom print with ConnectPlus access), McGraw-Hill Create, ISBN: 9781308536347. Software: McGraw-Hill Connect Plus Course Description Study of specialized aspects of financial reporting, including business combinations and emerging practices and developments in financial accounting. Prerequisite: Enrollment in the MPAcc program. Course Objectives and Learning Outcomes Students completing this course will demonstrate knowledge and understanding of the financial reporting framework used by business enterprises as it relates to partnerships, variable interest entities, and parent and subsidiary companies. Specifically, you will learn the accounting procedures and reporting requirements for: partnership formation, operation, cessation and liquidation; the treatment of variable interest entities, and combining corporate entities; and the preparation of consolidated financial statements for domestic parents with domestic and foreign subsidiaries. Methods of Assessing Expected Learning Outcomes Multiple choice questions, open-ended problems, and short answer questions will be used to assess knowledge of accounting procedures, reporting requirements and problem-solving skills. Grade Scale Contribution to final grade A 90 - 100% Exam I 20% B 80 - 89% Exam II 20% C 70 - 79%...
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...bepress Legal Series Year Paper Enron and the Special Purpose Entity. Use or Abuse? The Real Problem - The Real Focus Neal F. Newman Texas Wesleyan Law School This working paper is hosted by The Berkeley Electronic Press (bepress) and may not be commercially reproduced without the permission of the copyright holder. http://law.bepress.com/expresso/eps/1165 Copyright c 2006 by the author. Enron and the Special Purpose Entity. Use or Abuse? The Real Problem - The Real Focus Abstract In December of 2001, Enron Corporation filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code; one of the largest corporate bankruptcy filings at that time. When the investigations commenced and the tangled Enron web was unraveled, it was discovered that Enron had perpetrated a very sophisticated form of accounting fraud through its repeated use of what are referred to as Special Purpose Entities (“SPEs”). In their most basic forms, SPEs are business entities formed for the purpose of conducting a well specified activity such as construction of a gas pipeline, or collection of a specific group of accounts receivable. However, because of their complex nature, SPEs can be used to manipulate a corporation’s financial results, which was the primary use for which Enron employed the SPE structure. As a result, the investment and financial community has cast a dark cloud over the special purpose entity, depicting the SPE as an inherently evil structure whose only purpose is to...
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...discussion on the new GAAP guidelines for consolidating entities, and to provide an example of a firm that has experienced trouble for failure to comply with the GAAP guidelines. Ethical Dilemmas in Partnerships Scenario 1: In the first scenario, there are two partners in an antique business, Mr. Right and Mr. Wrong. Mr. Right manages the store, and Mr. Wrong travels and purchases antiques to add to their store inventory. The each may borrow items from the inventory on occasion for one reason or another. While Mr. Right was out of town Mr Wrong’s daughter was married and had a desire for one of the inventory items valued at $5,000. So Mr. Wrong took the item from inventory and gave it to his daughter as a wedding gift. He recorded the item as a debit from the COGS for $5,000. The question is asked what are the ethical aspects of Mr. Wrong’s actions and how should he have recorded the transaction? To begin with, they are both wrong for allowing the other to take unpaid for inventory items from the store. It should be made clear in the partnership agreement that any inventory product removed from the store for any purpose be debited to that partner’s capital account. The way Mr. Wrong is currently recording the product makes Mr. Right equally responsible for the cost of the item ($2500 each). This is an ethical violation on Mr. Wrong’s part and violates the entity principle. An action...
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...preparing to audit Nike for their annual audit. We will make sure the company is following generally accepted principles (GAAP). In the staff meeting discussing the upcoming audit of Nike, you asked us to make sure the company is correctly implementing share-based payment reporting and SPE reporting correctly under GAAP. Therefore, the team has done extensive research on two reporting styles, so we fully understand what you are looking for. We will discuss our research on the subjects in this memo for you to review before we make the final steps to start the audit on Nike. In 1993 FASB issue SFAS 123, which required companies to reflect stock based compensation in their operating results. Due to opposition from legislators and special interest groups, companies were only required do footnote disclosures for share-based payments. In 2004 the FASB revised SFAS 123 and issued SFAS 123 (R) which now requires companies to incur stock option compensation expenses. This means that the company must expense the estimated fair value. This new standard has had a significant effect on profits for many companies. The valuation methods required by the FASB are based on pricing models that are complicated and require companies to use a number of assumptions which could cause a material difference in the company’s operating results. Due to the number of estimates and assumptions, users of financial statements should pay close attention to the disclosures and the accounting estimates, particularly...
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...Consolidation of Variable Interest Entities A Roadmap to Applying the Variable Interest Entities Consolidation Model March 2010 FASB material, copyright © by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, is reproduced with permission. This publication is provided as an information service by the Accounting Standards and Communications Group of Deloitte & Touche LLP. It does not address all possible fact patterns and the guidance is subject to change. Deloitte & Touche LLP is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte & Touche LLP shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. March 2010 Contents Acknowledgments Introduction Section 1 — Overview, Background, and Scope 1.01 1.02 Determining Which Consolidation Model to Apply Consideration of Substantive Terms...
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...September 2011 (updated January 2012) Effect analysis IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests in Other Entities In The IASB’s approach to effect analysis Before we issue new requirements, or make amendments to existing IFRSs, we consider the costs and benefits of what we are proposing. This includes an assessment of both the costs incurred by preparers of financial statements and the costs incurred by users of financial statements when information is not available. We also consider the comparative advantage that preparers have in developing information that users would otherwise have to develop themselves. What is the measurement bar for our assessment? We expect our standards to have economic effects, and we understand that those effects may be beneficial for some entities and detrimental to others. For example, a change in financial reporting requirements might affect the cost of capital for individual entities by changing the absolute or relative level of information asymmetry associated with those entities. We assess these associated costs and benefits by reference to the overall objective of financial reporting. We try to understand how the changes will contribute towards the development of a single set of high quality global accounting standards by improving the allocation of capital. We therefore also consider the benefit of better economic decision-making as a result of improved financial reporting. The boundaries of our assessment ...
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...activities Financial assets – profit on sale (W5) Retirement benefit expense (W7) Depreciation (W1) Profit on sale of PPE (W1) Associate’s profit (W3) Impairment of goodwill and intangible assets (26·5 + 90) (W6) Finance costs Movements in working capital Decrease in trade receivables (180 – 125 + 3) Decrease in inventories (190 – 155 + 6) Decrease in trade payables (361 – 155 + 4) Cash generated from operating activities Cash paid to retirement benefit scheme (W7) Interest paid Income taxes paid (W4) Net cash generated by operating activities Cash flows from investing activities Sale of financial assets (W5) Purchase of financial assets Purchase of property, plant and equipment (PPE) (W1) Cash grant for PPE (W1) Purchase of subsidiary (30 – 2) (W2) Proceeds from sale of PPE (W1) Dividend received from associate (W3) Purchase of associate (W3) Net cash flows used by investing activities Cash flows from financing activities Proceeds of issue of share capital Repayment of long-term borrowings Dividends paid Non-controlling interest dividend Net cash generated by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Workings Working 1 Property, plant and equipment – building renovation $m 197 (14) 10 29 (14) (12) 116·5 10 –––––– 322·5 58 41 (210) –––––– 211·5 (9) (10) (135·5) –––––– 57 –––––– 40 (57) (76) 1 (28) 63 3 (71) –––––– (125) –––––– 225 (31) (10) (6) –––––– 178 –––––– 110 355 ––––––...
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...F.T.C. v. H.J. Heinz Co. United States District Court for the District of Columbia, 2000. 116 F. Supp. 2d 190; 2000-2 Trade Cases (CCH) ¶73,066. The Federal Trade Commission seeks a preliminary injunction pursuant to Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), to enjoin the proposed merger of the baby food divisions of H.J. Heinz Company and Milnot Holding Corporation ("Beech-Nut"). . . . I. BACKGROUND A. Market overview Four million infants in the United States consume 80 million cases of jarred baby food annually, representing a domestic market of $865 million to $1 billion. There are only three major manufacturers and distributors of jarred baby food in the United States: Heinz, Beech-Nut, and Gerber Products Company. Gerber is by far the largest domestic manufacturer. It enjoys, and has enjoyed for some 40 years, a dominant market share that has recently grown to between 65 and 70 percent. The Gerber market share is now 65 percent, the Heinz share 17.4 percent, and the Beech-Nut share 15.4 percent. . . . Heinz's domestic baby food products are manufactured at its Pittsburgh, Pennsylvania plant, which was recently updated at a cost of $120 million. The Pittsburgh plant now operates at 40 percent of its production capacity and produces 12 million cases of baby food annually. . . . Beech-Nut manufactures all of its baby food in Canajoharie, New York, at a manufacturing plant that was built in 1907 and began manufacturing baby food in 1931. The plant...
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...in the banking The “Basel Committee on Banking Supervision” (BCBS) is comprised of the central banks and regulatory authorities of mainly the G20 countries (including Indonesia) and other leading nations. The committee issues broad guidelines and standards to ensure best practices in the banking supervision and risk management. (Source: www.bis.org) supervision, regulation and capital adequacy standards across the signatory nations. As of today, more than 100 countries have implemented Basel I and around 112 countries are implementing Basel II (Source: Wikipedia, Basel committee on banking supervision survey, 2010). Basel II generated more interest on account of the multitude of financial crises that the world economy faced during the 1990s and early 2000s. Further, its implementation gained momentum among the emerging economies after the 2008 crisis. While many countries have already commenced Basel III (drafted in 2010) implementation, Indonesia is yet to finalise the norms on the subject. Basel III while relevant at a future date will not be implemented in the near future and hence this article has confined itself to Basel II. This article limits itself to exploring the benefits of adapting Basel II guidelines over Basel I with respect to only the ‘minimum capital requirement’, which is one among the three pillars of Basel II. In particular, its scope within ‘minimum capital requirement norms’, is limited to credit risk for...
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