An accounting change may represent A change in (a) accounting principle, (b) an accounting estimate, or (c) the reporting enterprise (which is a special type of change in accounting principle). This definition can be found under APB 20 paragraph 6.
Situation I
This is a change in estimates used in accounting which are necessary consequences of periodic presentations of financial statements. Preparing financial statements requires estimating the effects of future events. Future events and their effects cannot be perceived with certainty estimating, therefore, requires the exercise of judgment. Thus accounting estimates change as new events occur, as more experience is acquired, or as additional information is obtained (APB 20 paragraph 10)
The effect of a change in accounting estimate should be accounted for in the period the change is being made if that is the only period being affected. If the change affects the period in which the change is being made and any future periods, then the effect should be accounted for in the period of change and in the future periods being affected for example in this situation, the change will affect entitys entries for as far as the initial estimated live of the fixed assets. A change in estimate should not be accounted for by restating amounts reported in prior period financial statements. The effect upon the income statement for a change in estimate that affects several future periods should be disclosed. For ordinary changes in accounting estimates made each period, only changes, which are, material to the financial statements should be disclosed (APB 20 paragraphs 31 and 33)
Situation II
This is a change in the reporting entity. It refers to Accounting changes that result in financial statements that are in effect the statements of a different reporting entity (APB 20 paragraph 34). This type of accounting change is limited mainly to (a) presenting consolidated or combined statements in place of statements of individual enterprises, (b) changing specific subsidiaries comprising the group of enterprises for which consolidated financial statements are presented, and (c) changing enterprises included in combined financial statements (APB 20 paragraph 12).
To record the changes there should be restatement of the financial statements of all prior periods presented in order to show financial information for the new reporting entity for all periods (APB 20 paragraph 34). The financial statements of the period of the change (i.e. period ended December 2009) in the reporting entity (Gary Company) should describe the nature of the change and the reason for it. In addition, the effect of the change on income before extraordinary items and net income should be disclosed for all periods presented. Gary Company should now report its stake in Allen as a subsidiary. Financial statements of subsequent periods need not repeat the disclosures, according to APB 20 paragraph 35.
Situation III
This is a change in accounting principle. It results from adoption of a generally accepted accounting principle different from the one used previously for reporting purposes. The term accounting principle includes not only accounting principles and practices but also the methods of applying them.(APB 20 paragraph 7 as amended by FAS 111 paragraph 9.a. (1). Examples include a change in depreciation methods for previously recorded assets (i.e. as in this situation, change from accelerated to straight-line), changes in methods of inventory valuation (LIFO to FIFO), and other similar changes which affect the method of accounting for specific items andor transactions
To report this change, the financial statements for periods prior to January 2009 included for comparative purposes, should be presented as previously reported. For the first year of implementation, there is a waiver from HUD, so comparative statements do not need to be presented. The cumulative effect of changing to a new accounting principle, which is the difference between actual retained earnings at the beginning of the period and retained earnings that would have been reported at the beginning of the period had the accounting principle been applied retroactively, should be reported in the income statement between the captions extraordinary items and net income. In this case, the effect on previously acquired plant equipment will be under extraordinary items since it will reflect an increase in the amount of depreciation in that period, while the newly acquired plant equipments will be recorded under net income since it reflects a decrease in the amount of depreciation. The effect upon the income statement for adoption of the new accounting principle, in the period of the change, should be disclosed in the footnotes (APB 20 paragraph 20 as amended by FAS 128). As the conversion currently being implemented by the Public Housing Authorities is from a non-GAAP basis of accounting to a GAAP basis of accounting, as interpreted upon review of APB 20 paragraph 13, the GAAP conversion constitutes a correction of an error. As such, adjustments restating beginning balances, as applied by the Housing Authorities pursuant to the GAAP conversion, necessitate they be made to beginning fund balanceretained earnings rather than accounted for within current operations.
The Zero-Based Budgeting technique was originally developed for use in government organizations as a way to justify cost request for the following year. The U.S. department of Agriculture was the first department to implement Zero-Based Budgeting in the 1960s. Although Zero-Based Budgeting was developed by Texas Instruments in 1970s, it was initially adopted by many government organizations during the same period of 1970s and 1980s. Zero-Based Budgeting gained fame in 1977 when President Jimmy Carter introduced Zero-Based Budgeting into the federal budgeting system.
Zero-Based Budgeting is used by managers to review and analyze programs, proposals, activities, and functions to increase profitability enhance efficiency, or lower costs. Zero-Based Budgeting is basically a microeconomic tool that the government uses to transform objectives into efficient operating plans. Zero-Based Budgeting facilitates the state or governmental decision makers to combine planning, budgeting and operational decision making into a systematic process. An important element of this budgeting procedure is that it helps design the priority of government programs and activities. When the government faces deficiency in their revenue, Zero-Based Budgeting plays its part to provide ranking programs and activities based on overall effectiveness and provide the best available alternatives. In addition, companies such as Xerox Corporation, Westinghouse Electric Corporation, and Texas Instruments Inc. are using Zero-Based Budgeting, and its use is expected to continue to grow (Doraiswamy).
Zero-Based Budgeting demands more time and energy than conventional budget, because it enforces management and government officials to develop a consensus among the departments synchronizing the information across all the departments or functions, giving a holistic picture to the decision maker (Doraiswamy).
ADVANTAGES FOR THE GOVERNMENT
Zero-Based Budgeting also has some advantages for the government. The advantages are stated below
Zero-Based Budgeting forces government to identify vague and ineffective expenditures, helping identify the highest utility of a particular resource, thereby ensuring logical and efficient distribution of resources. (Doraiswamy).
Allocation of resources under the Zero-Based Budgeting makes the overall process or system more productive (Doraiswamy).
Zero-Based Budgeting also identifies where the much needed opportunity is available and highlight populist or unsustainable activities providing the best alternative. Moreover, Zero-Based Budgeting also facilitates application of the optimal strategy in a fast growing environment. (Doraiswamy).
Zero-Based Budgeting not only improves the financial credibility of the government but also provide ways to raising more revenue. (Doraiswamy).
DISADVANTAGES FOR THE GOVERNMENT
Zero-Based Budgeting also has some disadvantages for the government, some of which are stated below
It does not provide an idealistic initiative to the government, as it may advise you to cut the budget for a department, despite the fact that particular department requires more attention and care to help improve its functionality. (Doraiswamy).
Downsizing an activity (like construction etc) on the half way may create hurdles for the government officials to accomplish the work at the right time.
Allowing an existing activity to be curtailed indirectly might create negative implications on the project itself and the government on a whole.
The budgets for most of the third world countries are often prepared on insufficient data, so getting the appropriate results at the appropriate time may not be realistic. (Doraiswamy, 2000). In addition, another form of exploitation may occur in the form of intentional misrepresentation and misappropriation of funds in appropriate departments under the umbrella of Zero-Based Budgeting.
WHY FAVOR ZERO-BASED BUDGETING
Zero-Based Budgeting focuses on the existence of government programs that should be fulfilled in each fiscal year. Zero-Based Budgeting is often encouraged as a fiscal watchdog in order to enforce government not to incur unnecessary spending. Zero-Based Budgeting benefits organization or government in several ways.
Zero-Based Budgeting focuses on the business processes and draws a comprehensive analysis on objectives and needs (Doraiswamy).
Zero-Based Budgeting provides planning and budgeting under one roof.
Zero-Based Budgeting enforces the managers to evaluate the effectiveness and efficiency of every department (Doraiswamy).
Zero-Based Budgeting invites all level of management to participate in planning and budgeting process (Doraiswamy).
All citizens have their obligation to the countrys tax system and at the same time have the right to appropriate tax deductions. This right brings the use of tax shelter. A tax shelter is any investment or method used to reduce the income tax of a citizen or a company. The methods used may differ according to the specific local and international taxation laws.
Some legitimate tax shelters include limited partnership and retirement plan. These tax shelters are allowed by the government to encourage investments and allow individuals to invest on their own retirement fund. Although many tax shelters are viewed to be legitimate in reducing tax, some tax shelters are questionable and even consider as unlawful. One of these unlawful tax shelters is the use of offshore companies which is use to abuse the different tax legislations in each country. For example, a US-based company can use an offshore subsidiaryauxiliary company in the British Virgin Islands to buy a product from Thailand for 2 and sell the goods to the same US-based company for 5 and then this company will sell it again for the same price (5). Accordingly, the US-based company will pay no tax because they sell the product with no income in return. On the other hand, the subsidiary will also pay no tax since Virgin Island has no corporate tax rate.
At the present, many companies in the US use numerous subsidiaries offshore that will make tremendous reduction on their taxes. In line with this, many professional service firms offer service for creating an offshore company. One of these firms is the Coldwell, Seymour and Robinson Company that offers offshore business licenses. This company offers fully legal offshore companies. In terms of its code of conduct, there is no specific information that connects them to violation of professional code of conduct.
The scandalous case of KPMG tax shelter fraud which involved US members of the company showed the irregularities of their designed tax shelter. Nine individuals including the former deputy chairman of the KPMG were accused to be involved in the tax fraud conspiracy (United States Attorney). After the indictment, major law and accounting firms reduced the market of their tax shelters. Small scale marketing of tax shelters were done and being operated while the case is still on-going. In terms of accounting profession, the case showed a big effect in view with the partnership between firms and private professionals. In this case, it clearly shows that even though the firm knows what precisely their partners are doing they will be eventually on their own if the company experience major troubles. The KPMG partners were prosecuted and convicted on multiple counts of tax evasion of tax evasion but is acquitted of conspiracy. They were jailed for several months and were ordered to undergo electronic monitoring at their respective homes.
1. Case 13-4
1. 1. What is the theoretical basis for the accounting standard that requires certain long-term leases to be capitalized by the lessee Do not discuss the specific criteria for classifying a specific lease as a capital lease.
The theoretical basis for the accounting standard is capital lease is not a lease as popularly understood but in substance a purchase of property by the lessee from the lessor since the transfers substantially all the risks and rewards incident to ownership of the leased asset (Stickney, C. et al, 2009).
1.2 How should Lani account for this lease at the inception and determine the amount to be recorded
The transaction would be recorded as an asset by Lani Company as lessee and said asset would be subject to depreciation. The amount to be recorded would be equal eight times the annual lease payment and discounting the same by an implicit interest rate or discount factor that is applicable (Stickney, C. et al, 2009).
1.3 What expenses related to this lease will Lani incur during the first year of the lease, and how will they be determined
The expenses related to this lease that Lani will incur during the first year of the lease would include the
following (a) Interest expense which would represent the difference between the fair value of gross rentals for eight years and the computed present value as basis for recording the asset. Said interest expense must however be amortized over the lease term (b) executor costs such as real estate taxes, insurance, and maintenance which may be determined in the lease contract signed by the parties and (c) depreciation, which will determined by dividing the recorded cost by the life of the asset or lease term whichever is shorter (Stickney, C. et al, 2009).
1.3 How should Lani report to the lease transaction on its Dec 31, 2006 balance sheet
It should report the lease transaction as a non-current asset in its December 31 balance sheet at its carrying value or cost less accumulated depreciation for one year.
2. Case 13-5 Lease classifications
2.1 What criteria must be met by the lease in order that Doherty Company classifies it as a capital lease
Any of the following criteria that must be met by Doherty Company, as lessee, in order to classify it as a capital lease (A) Ownership is transferred by the end of the lease (B) Lessee has an option to purchase at the price lower than the fair value. (C) Lease term is at least 75 of the life of leased property and (D) The present value of minimum lease payment is at least 90 of the fair value of the leased property (CPAClass.com, 2010).
2.2 What criteria must be met by the lease in order that Lambert Company (lessor) classify it as a sales-type or direct financing lease
Any of criteria used by the lessee above should be met in the case of the lessor. In addition, two additional criteria must be met First, the collectability of the minimum lease payment must be reasonably predictable. Second, there should be no important uncertainties about the additional cost to be incurred by the lessor and when such costs are not reimbursable (CPAClass.com, 2010).
2.3 Contrast a sales-type lease with a direct financing lease.
Under a sales-type lease, the lessor gets the manufacturer s or dealer s profit or loss when the fair value and carrying amount of the leased property varies. On the other hand, the lessor under a direct financing lease does not get the manufacturer s or dealer s profit or loss when the fair value and carrying amount of the leased property varies. It must be noted that a direct financing lease does not meet the leveraged leased criteria. Under a leveraged lease, the lessor borrows the money and purchases the property and then leases the property to a lessee (CPAClass.com, 2010).
Accounting is one of the most important industries that have assumed immense importance in the world today. It has historically been deemed so necessary that writing was thought to have been developed by the ancients so that accounting of food production could be carried out. In todays world, the field has become much more complex and accountants have assumed crucial roles which form the foundation for the decisions taken by investors, shareholders, company management, analysts and a host of other users of financial statements as well as contributing to company performance via management accounting (Love 2008). Ethics thus can be said to assume an important role in the profession of an accountant as the numbers heshe produces can potentially prove very beneficial for some and disastrous for others.
There have been many accounting scandals in recent history that bear testament to the harm that can come if ethics are not thoroughly incorporated in the accounting industry. In 2002 WorldCom was caught by its internal auditors with use of fraudulent accounting practices that misrepresented its financial statements. The company had been underreporting its line costs, choosing to capitalize them rather than show as expenses in the income statement. Furthermore, fraudulent entries were made in the revenue stream, which had a combined impact of increasing the apparent profitability of WorldCom and averting troubles it was having with the declining stock price (Duska 2003). Enrons management embarked on a similar practice by choosing to under represent its expenses as well as utilizing fair value accounting to inflate its valuation on the balance sheet as well as making use of special purpose entities in a way that allowed it to conceal enormous loans from the financial statements and present a rosy picture to the investors (Alexander 2004). This had the impact of increasing investment in the company, making it a showcase firm in terms of performance and rapid growth. However, once the unethical practice of misrepresentation by the accountants of the company emerged, its stock price fell rapidly which also hit confidence among investors leading to adverse performance on the stock exchanges as a whole. There was also impact on the employees who lost their jobs as well as savings and pension that they had accumulated through hard work. Such practices by the accountants employed by corporations can cause harm to multiple stakeholders as the examples of
WorldCom and Enron illustrate.
Accountants also feature in the auditing industry and their role in that field is to provide confidence in the financial statements that they audit. This is basically a gate keepers job which requires a strong ethical framework as room for exploitation is enormous. In the case of Enron, the auditor Arthur Anderson was shown to be complicit in the misrepresentation done by the company, which hit their reputation hard as well as caused massive losses to investors and shareholders to the amount of 25 billion as well as a loss on almost 85000 jobs in the industry (Alexander 2004). These are the reasons why ethics are considered to be a crucial part of the accounting industry so that such catastrophic scandals could be avoided. The industry has already taken numerous steps in this direction.
Accountancy bodies such as the American Institute of Certified Public Accountants took steps to include ethical principles to adhere to which included responsibilities to clients and colleagues as well as independence, objectivity and integrity. Following such principles was a requirement for the members and candidates as relevant action could be taken against those who broke the convention. The Association of Chartered Certified Accountants also included such frameworks for the members which illustrate the almost global focus of such needs by accountancy bodies. The body has further introduced an ethics module in its trainings which is claimed to be significant in terms of lifting the ethical standards in the industry (Love 2008).
Further stress has been put on teaching ethics in the classrooms to students vying to enter the industry. The curriculum for this, a lot of material of which is borrowed from business ethics, revolves around simple lectures as well as case studies and role playing. This education from the start can be said to reinforce the ethical values of potential accountants entering the industry as well as prepare them with enough knowledge to stop others from engaging in ethically dubious practices (Berton 2002). This measure however does have its share of critics. Many opponents of the move have argued that education has little to do with ethics as the decision ultimately rests on the person and knowledge of ethical frameworks and the relevant theories would be inadequate to raise the professional standards in the field. There is however the obvious benefit in terms of challenging the mind to commit an unethical act, knowing where it stands in the theory the student is equipped with. However, requiring accountancy bodies to make adherence of certain standards as mandatory can be said to be a much better mechanism for quelling unethical behavior in the industry as it involves consequences which may hamper ones ability to continue practice in the industry if guilt is found. As Cottel pointed out, a person in the accounting industry must possess a strong value system, the skill to deliberate the consequences of unethical decisions as well as dedication to peoples well being. Only one of these is aided with the help of teaching ethics in classrooms which limits its scope for the accountancy industry, leaving the room open for other measures to be brought into the field, possibly borrowing from business ethics (Love 2008).
As the field stands today, some steps have been taken to bring in ethics into the field in the form of teaching in class rooms, ethical modules in syllabus and requirement of adherence to ethical standards by accountancy bodies with threats of punishment. However, gaps still remain as accounting scandals have kept on occurring and losses have mounted for investors, employees, customers and many other stakeholders, in some cases impacting the economy as a whole. Thus there is open room for expansions of the ethical frameworks present in the industry and improving the standards of the profession.
Objectives
The objectives of this research seek to explore the ethical situation in the accountancy profession and to highlight any potential issues that may exist. The basic objectives of the research are
To explore the factors that led to the present ethical modules and measures failure to stop the accounting scandals such as Enron from occurring.
To explore the problems faced by accountants in making ethical decisions according to the requirements outlined by Cottel.
To explore improvements in teaching methodology and ethical standards that can be brought to fulfill the requirements for ethical decision making explored by Cottel.
To identify best practice benchmark industries with ethical practices that can be applied to the case of the accounting industry.
Research Strategy and Methodology
The research will begin with a thorough secondary studying of the subject. This will be conducted via use of internet journals exploring the present ethical modules, standards in place and their drawbacks as well as exploring new methodology to possibly bring into the profession which may help professionals make more ethical decisions in the industry. This will be conducted not only through journals but also articles and books written in the field by the noted academics.
Once secondary research is completed, a case study will be begun by some professionals working in the field. Care has to be taken to choose the sample that is representative of the accountants in the field, showing not only those on the corporate payroll but also auditors. This case study method will be conducted for a space of one fiscal years financial statement release as well as in the closing season when most clients contract auditors for work. This method will aid in getting first hand qualitative information about the ethical challenges encountered by those in the accountancy profession and identify where ethical standards fall short in the field. It will also aid participant observation to be carried out, allowing the researchers to get into the skin of those involved in decision making at the foundational level.
This methodology will be complemented with a survey which will require questionnaires to be developed that ask pin point questions related to the problems faced in the accounting industry and the anonymity that this method provides will allow the participants to answer touchy questions such as the number of times in their career they have been offered bribes or they felt the need to bow to pressure from a manager in misrepresenting the numbers. Care must be taken here however in developing the questionnaire so that it is clear and concise and allows the collection of the most pertinent information without requiring the participants to give long answers, which may otherwise alter results.
Finally, the research will rely on interviews of professionals in the field who have been through ethical pressures faced in the industry. This will allow a chance to get direct response with qualitative reasoning as well as advice on how the existing factors and issues can be improved through application of different frameworks. The research will conduct interviews from those in the business sector, the auditing industry as well as academics who have studied the phenomenon of ethics in this industry. These interviews will be structured for the professionals and unstructured for the academics so that a broader spectrum of responses can be achieved as well as advice on how to go about tackling the issues at hand.
Depreciation and Amortization are methods used to spread the cost of an asset to the life of the asset. This principle is known as accrual accounting.
Depreciation is a non-cash expense. It is an expense which is used to account for the assets (tangible) cost over its useful life.
In accounting, depreciation matches the expense accounted for an asset with the income that the company earns using the asset. For example, ifa company purchases equipmentfor 1mn with a life of 10 years, then the term for depreciation is 10years. For each accounting year, the company will expense 100,000(assuming straight-line depreciation). This expense ismatched with the money which the equipment earns every year. There are several methods to calculate depreciation which the companies use. The most common methods are the Straight-line method and Accelerated method.
Amortization is about writing off expense on assets (intangible) such as patents, goodwill, copyrights etc. over their useful economic lives. This representation reflects the consumptiondecline of value as a result of its use with passage of time. The reduction in the value of the intangible asset in the balance sheet is treated as an expense in the income statement. For e.g. a patent on a drug has a life for 20 years. This means that the cost for creating the drug is spread out over the life of the drug as an expense in the income statement. Even amortization can be calculated using straight-line and diminishing balance methods.
This document is currently being drafted in order to assess the financial compatibility and performance of Target Corporation of the year 2009. Target Corporation is big player in the market and plays a pivotal role in the industry. The ambition of the Target Corporations management is to provide substantial, vital and appropriate information to its valuable customers in the best possible manner. The summary of the Target Corporations financial performance from the perspective of both stakeholders (Company 1 Company 2) are stated below
COMPANY 1
Company 1 should take into consideration the thorough analysis of Earning per Share (EPS), dividend Per Share (DPS) and dividend pay out ratio before take part through the sales of new stocks. The high net earnings not only reflects on the share price but it also very handful to uplift the goodwill of the company. Lower EPS is an important evidence of the companys performance and it suggest that the companys internal policies make a significant impact on share price and also gives the indication of its future strategy towards the goals. While, the DPS and dividend payout ratio increases in the year 2009 as compare with the year 2008. In the year 2008, dividend payout ratio is 16 and the DPS was 0.54. Due to sluggish economic scenario, company cant generate more net income in the year 2009 but the management of the company realizes the fact that the outlook of companys stock makes an impression on the growth of the company so due to this fact management applied effective dividend policy which in the end attracts the potential investor towards the companys stock.
COMPANY 2
Company 2 should take into consideration the thorough analysis of Current Quick ratio, Debt and Interest Coverage Ratio. Target Corporations current ratio and quick is slightly higher in the year 2009 than the year 2008 and indicates a higher margin of safety with respect to meeting current obligations (Besley, Brigham, 2001).. Target Corporations current ratio will allow them to take more debt as compared to previous years. Although Target Corporations has made short-term investments but it still hasnt lowered the current ratio which is pretty stable and healthy as compared to the previous year practices. In addition, proper maintenance of working capital management strategy has ensured a healthy quick ratio, one that is higher than the industry leaders and this gives a positive signal to the market, indicating that there is no liquidity problem for Target Corporations. Because of expansion in the business, Target Corporations has plenty of financial obligations, most of which ahs been acquired through debt. In 2009 especially, Target Corporations reliance on debt financing has increased significantly because of which the debt ratio is higher than the year 2008 which is 38. Target Corporations management should redefine its debt management strategy and ensure that all the debt utilizes in a proper (Besley, Brigham, 2001). Times-Interest-Earned (TIE) ratio is concerned it looks unhealthy as far as companys future operations are concerned and it also gives an indication that debt holders are concerned about the companys performance. It is not a good signal for the companys perspective (Myers, Brealey and Marcus, 2001).
There are some differences in both companys information because EPS, Dividends pay out ratio and DPS suggests that how much of the companys earning is distributed to its share holder in the form of dividend and also the rate of companys earning on each share. Dividend measures the ability of a company to pay dividend on preference share, which carry a stated rate of return. While, Current assets and current liabilities also suggest the firms liquidity position and sends signal to the mangers that firm is financial crises or on the edge of financial crunch. Section of EBIT and interest expense shows the debt servicing ability and capability of a company and also indicator of a companys ability to meet its interest payment obligations. Debt section shows the percentage of total asset financed by debt, from a creditors banks view point, the lower debt ratio gives a positive signal to the creditor (Myers, Brealey and Marcus, 2001).
