Posts filed under 'Finance/Accounting'
When a company leases a piece of equipment, it has two choices, either to report it on the Balance Sheet (capital lease) or not to report on Balance Sheet if it is an Operating Lease. The International Accounting Standards Board (IASB) and America’s Financial Accounting Standards Board (FASB) say a lease is like incurring debt and hence should be on your balance-sheet. This new rule, proposed last week by the two regulators is up for public comment until December, but could be enacted as soon as June.
Per the new rule all leases will be put on the Balance Sheet, the right to use the leased item in the assets column and the associated obligation to pay for it would go in the liability column. This would add to the debt of these companies, leading to an increase on the average interest bearing debt and hence the interest on the Income Statement.
But on the other hand, since no rent will be paid of the asset, the operating earnings would be so much higher. But many companies are close to their maximum debt limits, and the new rules could push them over the edge. The effect of the change will vary depending on the type of industry the company is, for industries like retail and airlines which lease most of their property and airplanes respectively, it will not be a bigger effect.
With the state of the economy, this effect will be felt even more so. So if we see the Airline travel getting more expensive we know who to blame this time!
August 30th, 2010
Ever wondered what happens when we type a website name ending in .cm instead of .com. Well this is what happens. The .cm country code is owned by Cameroon. Not many websites are registered in the country. But the similarilty of .cm with .com makes it a big business opportunity. Kevin Ham, the domain king who has built a $300 million empire on domain names, sent some of his people to Cameroon to discuss the possibility of moving the .cm traffic to his website. This is what happens. When an internet user types a website with .cm extension, it gets transferred to a server in Cameroon. If the website is not registered with them it gets transferred to the website “agoga.com”. Agoga’s servers query Yahoo to find ads related to the typed name, which are then displayed on a parked page. Whenever a user clicks on an ad, Yahoo pays Ham, who shares an undisclosed slice of the revenue with Cameroon.
July 9th, 2007
The inflation rate for women is higher than that for men. The Consumer Price Index for products catering to women (jewellery, clothing, shoes, cosmetics, household appliances) is higher than for products targeting men. Year over year inflation rate in the US, for products catering to women is 18 times higher than the 0.8% for products for men.
The reason for the disparity is the higher demand for women’s products, which in turn is pushing the prices. Women have a higher rate of employment growth than men, more are living single- single women spend more on themselves than men, so there is more being spent on women’s jewellery and clothing thereby pushing the prices and finally leading to a higher inflation rate for women.
March 12th, 2007
Now that we have stopped replying to those phishy emails from someone potraying to be our banks, well here comes vishing. Its a new form of security threat we need to safeguard ourselves against. This time around its not about clicking on a link its about calling a number.
You get a call telling you that your credit card has been breached and asks you to call the “following number” immediately. The following number in this case is a VOIP phone that can recognize telephone keystrokes. So once you call the number, you will be asked to verify your account information and key your 16 digit account number. And then, well you know whats next, you get a $1500 charge for a day at the spa!
January 16th, 2007
I just read this article in cfo.com about how the Big 4 accounting firms were reinterpreting the cash flow standard without oversight. The lack of clarity in Financial Accounting Standard No. 95, Statement of Cash Flows, has allowed the Big Four accounting firms, “with no regulatory authority, oversight, or due process,” to unilaterally reinterpret the standard, creating confusion and requiring companies to modify or restate financial statements.
In February 2005 when PricewaterhouseCoopers changed the accounting treatment for Auction Rate Securities (ARS) without any due process and without the opportunity for feedback on the possible impact of the change. The other three major accounting firms followed suit.A broad range of companies were required by their external auditor to modify current financial statements and to restate prior financial statements.
Then in March 2006, PwC again issued a document “applying the same narrow logic” they used on ARS to Variable Rate Demand Notes (VRDN). “The accountant’s advisory said that VRDN no longer qualified as a cash equivalent on the balance sheet even though these investment vehicles did not change in character and were always considered as a cash equivalent based on generally accepted principles. In both cases the other 3 firms took the same action at the same time.
So does this mean that the FASB( for non accounting background people FASB stands for Financial Accounting Standarard Board) ;the accounting standard setting board as we know of, is being replaced by the Big 4. If these accounting firms become the standard setters, the standards will be set to benefit these firms. If that happens there will be another period of accounting frauds and we will need another SOX.
This brings me to another question, how can accounting firms change the interpretations of the GAAP. Shouldnt there be any action against these firms? Who is stopping these firms from doing the same for other principles? So now do we have to relearn the principles?
January 16th, 2007
With greater regulation in the accounting industry and a higher number of services of accounting firms being used by companies, the accounting industry is seeing a higher growth rate. The CCH’s Public Accounting Report, a biweekly newsletter for accounting professionals, released its findings and its Top 100 list on Aug. 31. According to the report, the majority of the accounting companies reported a growth rate of 16.5% compared to 9.1% in 2005. The rate is the highest for these companies since 2000.
Sarbanes Oxley led to the demise of one public accounting firm, but the survivors are now reaping the benefits of higher regulations. Changes in the accounting rules, recent one being change in recording of stock options as an expense, companies relying on public accounting firms for not just audit, but also other consultancy services has brought about a higher growth rate for accounting firms.
January 16th, 2007
The father of accounting Luca Pacioli studied in Venice and Rome and was a travelling mathematics tutor until 1497. Then he moved to Milan where he lived with and taught mathematics to Leonardo da Vinci.
His fifth book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion) was written as a digest and guide to existing mathematical knowledge, and bookkeeping was only one of five topics covered. His book is the first published description of the method of keeping accounts that Venetian merchants during that part, known as double entry accounting system.He described the use of journals and ledgers, and warned that a person should not go to sleep at night until the debits equalled the credits! His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses—the account categories that are reported on an organization’s balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. Also, his treatise touches on a wide range of related topics from accounting ethics to cost accounting.
January 16th, 2007
One of the main reason companies state for issuing stock options is to motivate employees. When employees have a stake in the company they are motivated to put in extra effort for the growth of the company. So the motivating reason does hold true. My thought on this is that company growth means increasing shareholder value, but it seems like that stock options mean increasing top executives bank accounts, because they are the ones who get the maximum benefits of the stock options.
With the new change of expensing stock options, the cost of these options would now hit the income statement, thereby reducing the margin. When the margin reduces, the shareholder’s returns will reduce, unless the options really motivate the company employees to grow the company. The options should be able to generate higher revenue, so as to cover the expense of the options, or else it will be diluting the margin.
With backdated options some (most) of which are already in the money when they are issued, the executives are guaranteed a return when the option is issued, so then how are they being motivated. It seems like stock options will now instead of being a motivating toll be a margin dilutive activity. The companies might have to revisit the whole concet of granting stock options.
January 16th, 2007
Enron’s failure led to a number of changes, though most were in the accounting and auditing field, one big change was in the banking industry. In 2004 the Federal Reserve and other authorities recommended a higher degree of scrutiny by the banking industry on the complex structured financing transactions of their corporate clients. The authorities wanted the banks to take on the role of policing its clients. The banks were to review how companies planned to account for and disclose the complex structured finance transactions(CSFT) in both their financial and tax reporting. In some cases, the banks were to go directly to the independent auditors of the client.
There are still some unanswered questions, most importantly the lack of a precise definition of CSFTs. The regulators have however mentioned that some structured finance deals, including , “standard public mortgage-backed securities transactions, public securitizations of retail credit cards, asset-backed commercial paper conduit transactions, and hedging-type transactions involving ‘plain vanilla’ derivatives and collateralized loan obligations,” wouldn’t typically be considered CSFTs.
On the risk management side, the regulators suggest setting up clear framework for review and approval of CSFTs, the policies and procedures should clearly lay down the duties of the people that work on these deals, the banks should have proper controls over the approval procedure of such deals.
Though the guidelines are much more relaxed from the 2004 proposals, the financial institutions will face numerous issues in implementing the changes, like defining what constitutes CSFT, how to design the review and approval procedure. Compliance with the new rule will also have cost implications, like, training costs for employees, costs to enhance control systems, designing procedures.
With the consumer lending market facing a volatile market, with decreased demand for loan products, higher delinquencies and defaults due to higher interest rates, now the banks have another issue to deal with, this time in corporate banking, the complex structured financial transactions.
January 16th, 2007