AFM 101 – Article Summaries

Framework for financial reporting: trying to make a new standard (or framework) for the reporting of assets and liabilities, changing from historical cost to a fair market value. However, hard to agree on what fair value is. Can be exit price (how much you would sell the asset/settle the liability) or entry value (cost of replacing). !

! Good judgments: We are unconsciously biased which can hurt auditing. Affected by first impression, taking the easy route, believing what we are told and what we want, and initial position. To prevent unconscious bias, look at it from different perspectives, evaluate management’s methods, don’t give more weight to evidence supporting management and less to those against it and to clearly state an issue.!

! Moral laws within corporations: a oil and gas company tries to bribe another country’s official to allow them to setup. Do corporations have a moral or just try to maximize shareholder’s value? To bridge the gap between social responsibility and financial management, accountants fit that role perfectly. They need to know when to wake up the captain. !

! How to make it easy: direct vs indirect cash flow statement, direct provides more information, easier to read, however is more expensive. !

! Apples, oranges and outliers: New accounting metrics are being implemented to measure things like market value and intangibles to give investors more info on their business. This causes relevance of info to be lower. !

! Four Reasons Non-GAAP Metrics Are Exploding: 1) companies want to report smooth results whereas users want to see a fair representation of their current situation. 2) historical costs do not represent the current situation, and users want to see more information even if it’s recorded at fair value. 3) some ways of measuring using GAAP aren’t updated enough and still based on estimates, not useful if you need exact number for decision making. 4) some GAAP methods aren’t money efficient. !

! Tesla Wants You To Know About its Strict Revenue Recognition: strict revenue recognition system causes what looks to be lower revenue than it actually is. Tesla doesn’t report revenue even when everything is done but paperwork has mistakes. !

!  How to Account for a Virtual Good: the selling of virtual goods is actually a service, need to provide extra info for the recognition period (life of game, life of player, or life of item) and if it can be refunded.!

! Revenue Recognition Leading Cause of Restatements: takes an average of 255 days to file restatement, with revenue recognition being the more frequent reason. Longer ones usually involved stock compensation and income tax (triggered by tax audit) and shorter ones are from goodwill or receivables. !

! Smithfield Foods Earnings: Costs Weigh Heavily: Gross margin = sales – cost of goods sold!

! Boeing Accounting Method Could Smooth Out Dreamliner Problems: Huge initial costs so cost/plane is very high. Should we show them as cost/plane or the average of cost/plane over time?!

! Improving the MD&A: Capital Expenditure Analysis: Distinguishing between maintenance vs growth in capital expenditure, we should show our expected income from the expenses. !

! P&G, Big Companies Pinch Suppliers on Payments: companies are trying to pay later and later to increase working capital. Sometimes they make agreement with bank so that their suppliers get paid a few days after invoice, with low interest rates. !

! Accounting Change Could Boost Companies’ Debt: Suggesting that all but the shortest leases will be considered debt, can cause massive changes to things such as debt to equity ratio, firms are renegotiating the terms of loans with banks.!

! Investors Go Bananas for Apple Debt: Apple issues a large amount of bonds really cheap, which caused price to rise quickly due to demand. Underwriters charged less due to the large quantity and also wanted them so they can sell it later as prices rose.!

! Chevron CFO: Dividends Top Priority: What to do with excess cash? First priority is dividends, second is growth (through acquisition or expansion) and third is repurchase of shares.!

!  The Average Stock Price Is Expensive; Get Used to It: Average stock price rising because lower stock splits, better economy and less concern about EU debt crisis.!