Bob Jensen's New Additions to Bookmarks

August 2016 

Bob Jensen at Trinity University 


For earlier editions of Fraud Updates go to http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 
Bookmarks for the World's Library --- http://www.trinity.edu/rjensen/bookbob2.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/

Bob Jensen's Blogs --- http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

 

Bob Jensen's Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

 

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296 

Scholarpedia (a cross between Wikipedia and Google Scholar) --- http://www.scholarpedia.org

Google Scholar --- https://scholar.google.com/

Wikipedia --- https://www.wikipedia.org/

Bob Jensen's search helpers --- http://www.trinity.edu/rjensen/searchh.htm

Bob Jensen's World Library --- http://www.trinity.edu/rjensen/Bookbob2.htm




Accounting History Corner
Understanding Practice and Institutions: A Historical Perspective
SSRN, July 29, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815900
Accounting Horizons, Vol. 30, No. 3, 2016

Authors

Ross L. Watts Massachusetts Institute of Technology (MIT) - Sloan School of Management

Luo Zuo Cornell University - Samuel Curtis Johnson Graduate School of Management

Abstract

This paper explains how and why Anglo-American accounting and auditing, along with corporate governance and capital markets, evolved over many centuries in response to changes in market forces and technology. We first trace the development of practices that were included in U.S. corporate governance (including accounting and auditing) before the 1930s. We then describe the nature and effect of the increase in U.S. regulation from the 1930s and the development of fair value accounting. Finally, we give an assessment of the current state of accounting, auditing and corporate governance. Our historical accounts suggest that the approach to accounting and financial reporting is more consistent with stewardship (care of net assets) than an attempt to value the firm, and that conservatism (prudence) is a critical information control and governance mechanism. We echo the U.K. Financial Reporting Council’s call on standard setters to reintroduce an explicit reference to conservatism (prudence) into the Conceptual Framework for financial reporting.

Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory


Economist Magazine, July 30, 2016
Minsky's Moment
The second article in our series on seminal economic ideas looks at Hyman Minsky’s hypothesis that booms sow the seeds of busts

http://www.economist.com/news/economics-brief/21702740-second-article-our-series-seminal-economic-ideas-looks-hyman-minskys?cid1=cust/ednew/n/bl/n/20160728n/owned/n/n/nwl/n/n/NA/n

Economist Magazine:  July 22, 2016
The Market for Lemons
The first in our series on seminal economic ideas looks at George Akerlof’s 1970 paper, a foundation stone of information economics ---
http://www.economist.com/news/economics-brief/21702428-george-akerlofs-1970-paper-market-lemons-foundation-stone-information?cid1=cust/ednew/n/bl/n/20160721n/owned/n/n/nwl/n/n/NA/n


Strategic Finance and Journal of Cost Management Articles

From MAAW's Blog on August 12, 2016
Stratigic Finance 2016 - http://maaw.blogspot.com/2016/08/strategic-finance-update.html

From MAAW's Blog on August 7, 2016
Cost Management 2016 - http://maaw.info/JournalOfCostManagement2016.htm 

Cost Management 1987-2016 - http://maaw.info/JournalofCostManagement.htm

The MAAW site has thousands of citations of journal articles in accountancy, auditing, AIS, etc. ---
http://maaw.info/
Thank you Jim Martin for this painstaking work.


I can't remember when I read a more fascinating article
The Time Everyone “Corrected” the World’s Smartest Woman
---
https://priceonomics.com/the-time-everyone-corrected-the-worlds-smartest/


Time-Series Non-Stationarity --- https://en.wikipedia.org/wiki/Stationary
In my opinion this is the biggest hurdle in statistical analysis in general and time-series analysis in particular

Time Series Co-Integration --- https://en.wikipedia.org/wiki/Cointegration
Especially note the illustration in the Introduction

"The Forecasting Performance of Models for Cointegrated Data," by David Giles, Econometrics Beat, July 26, 2016 ---
http://davegiles.blogspot.com/2016/07/the-forecasting-performance-of-models.html


"GDP Is a Wildly Flawed Measure for the Digital Age," by Barry Libert and Megan Beck, Harvard Business Review Blog, July 28, 2016 ---
https://hbr.org/2016/07/gdp-is-a-wildly-flawed-measure-for-the-digital-age?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date 


How CPAs Rated Their Tax Software ---
http://www.journalofaccountancy.com/issues/2016/aug/2016-tax-software-survey.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=01Aug2016


Tax Policy Center's researchers and staff:  USA Taxes are Very Progressive ---
http://www.taxpolicycenter.org/taxvox/federal-taxes-are-very-progressive

The USA tax code is highly progressive with the top 50% of taxpayers paying 97.2% of the income tax collected in 2013 ---
http://taxfoundation.org/article/summary-latest-federal-income-tax-data-2015-update 

In 2013, the bottom 50 percent of taxpayers (those with AGIs below $36,841) earned 11.49 percent of total AGI. This group of taxpayers paid approximately $34 billion in taxes, or 2.78 percent of all income taxes in 2013.


Walmart’s Out-of-Control Crime Problem Is Driving Police Crazy ---
https://www.bloomberg.com/features/2016-walmart-crime/?cmpid=BBD081716_BIZ
Jensen Question
In this era on not wanting to incarcerate non-violent people, how do you stop the hard core of shop lifters who repeatedly defy the law?
There are gangs of shoplifters, many of them teenagers, that now attack fast and furiously.


FASB proposes concepts for financial statement presentation ---
http://www.journalofaccountancy.com/news/2016/aug/new-fasb-presentation-concepts-201614996.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=12Aug2016#sthash.v0RHPjGV.dpuf


Should You Use Retirement Savings to Fund Your Child's College Education?
Possibly not!
http://money.usnews.com/money/blogs/on-retirement/articles/2016-08-17/should-you-use-retirement-savings-to-fund-your-childs-college-education


"Bogus Audited Statements Are Holding Africa Back," by Ndubuisi Ekekwe, Harvard Business Review, August 22, 2016 ---
https://hbr.org/2016/08/bogus-audited-statements-are-holding-africa-back?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm


IRS Employee Gets Nine Years for Identity Theft ---
http://www.forbes.com/sites/robertwood/2016/08/15/irs-employee-gets-9-years-in-prison-for-stealing-taxpayer-identities/#106b726820e7

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm


U.S. Army fudged its accounts by trillions of dollars, auditor finds
http://www.reuters.com/article/us-usa-audit-army-idUSKCN10U1IG
Jensen Comment
So, what's new?

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm


Stanford University:  Corporations profit from tax-avoidance schemes even when they’re likely to trigger IRS audits ---
http://www.gsb.stanford.edu/insights/game-global-income-shifting-feds-are-overmatched?utm_source=Stanford+Business&utm_campaign=ec357949c2-Stanford-Business-Impact-Issue-95-8-21-2016&utm_medium=email&utm_term=0_0b5214e34b-ec357949c2-70265733&ct=t(Stanford-Business-Impact-Issue-95-8-21-2016)  

Jensen Comment
In general, white collar crimes usually pay if the amount stolen is enormous enough. The reason is that the courts are excessively lenient on white collar crime even when the culprits know they will get caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays


SEC Charges Former NFL Football Player With Running $10 Million Fraud

Washington D.C., Aug. 10, 2016 — The Securities and Exchange Commission today charged Merrill Robertson Jr., a former player for the Philadelphia Eagles, with defrauding investors, including coaches he knew from his time playing football for the Fork Union Military Academy and the University of Virginia.

The SEC’s complaint, filed in federal court in Richmond, Virginia, charges Robertson, Sherman C. Vaughn Jr., and the company they co-owned, Cavalier Union Investments LLC. According to the complaint, the defendants promised to invest in diversified holdings but diverted nearly $6 million of the more than $10 million they raised from investors to pay for personal expenses and used other funds to repay earlier investors.

Robertson and Vaughn, both of Chesterfield, Virginia, are alleged to have lied about the unregistered debt securities they sold, saying they would yield as much as 20 percent “while providing safety and security for our investors.” According to the complaint, the defendants claimed that Cavalier had investment funds operated by experienced investment advisers when it did not have any funds or investment advisers and was functionally insolvent shortly after it was formed. The defendants allegedly hid this fact from potential investors and relied on cash from new investors to stay afloat. The complaint further alleges that Cavalier’s only investments were in restaurants that had all failed by 2014, something the defendants never disclosed as they continued soliciting and accepting investors’ money. The scheme allegedly targeted seniors and coaches, donors, alumni, and employees of schools Robertson had attended.

“Our complaint alleges that Robertson and Vaughn preyed on elderly victims and others who placed their trust in these individuals, only to have their savings stolen,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office. “We will continue to aggressively pursue fraudsters who exploit their relationship of trust with victims and promise returns that appear to be too good to be true.”

The SEC encourages investors to check the backgrounds of people selling them investments. A quick search on the SEC’s investor.gov website would have shown that Robertson and Vaughn are not registered to sell securities.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of Virginia today announced criminal charges against Robertson.

Continued in article

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm


The Pill That Made Northwestern University Rich ---
http://www.bloomberg.com/news/articles/2016-08-18/the-pill-that-made-northwestern-rich

Jensen Comment
In the 1950s the invention of Crest Tootpaste helped make Indiana University relatively rich ---
http://www.bloomberg.com/news/articles/2016-08-18/the-pill-that-made-northwestern-rich


PCAOB --- https://en.wikipedia.org/wiki/Public_Company_Accounting_Oversight_Board

PCAOB:  ANNUAL REPORT ON THE INTERIM INSPECTION PROGRAM RELATED TO AUDITS OF BROKERS AND DEALERS ---
http://www.ey.com/Publication/vwLUAssetsAL/PCAOB_InterimInspectionProgram_18August2016/$FILE/PCAOB_InterimInspectionProgram_18August2016.pdf

Jensen Conclusion
In spite of previous efforts by the PCAOB to improve audits of brokers and dealers, progress has been frustratingly slow. This seems to be one of the least proud lines of work for audit firms in terms of audit deficiencies and audit independence.


Personal Finance
Possible Student Project on Deciding Who Should Take Out Long-Term Care Insurance and What Coverage to Choose

Less is more: The dilemma over long term care insurance ---
http://www.cnbc.com/2016/08/24/less-is-more-the-dilemma-over-long-term-care-insurance.html

Jensen Comment
Unless you're already on Medicaid or commit unethical/illegal effort to shed assets in you're estate to qualify for Medicaid long-term care can become a very expensive proposition with or without long-term care insurance since Medicare does not pay for long-term care except under very restrictive rules of hospital confinement (rather than nursing home confinement and home care). Bad things are happening in the long-term care insurance industry. About 90% of the insurers in the 1990s dropped their coverage. And the deals are worse for more expensive for more limited coverage.

This is not those "cheap" burial insurance policies advertised ad nauseam on television. These are very expensive policies with possibly high payouts. The real problem is uncertainly over how long a patient will need long-term care outside a hospital combined with the explosion in the costs of providing long-term care, especially in nursing homes. Regulations increased the quality of care, but those regulations also added greatly to the coverage costs.

Jensen Comment
I know of a case in the 1990s where a son (of one of my cousins) sold this type of insurance for a time. I sighed when I thought he sort of conned his grandmother into taking out an expensive policy. But it turned out to be a darn good deal when she was covered for nearly 10 years in an Iowa nursing home.

Having said this, I'm still pretty negative about this type of insurance. Part of the reason is the increased cost of the insurance combined with the newer coverage limitations that make the insurance less exciting in recent years --- when the only thing "exciting" about going to a nursing home is the huge cost involved one way or another. What some heirs need to learn is that one purpose of building up a nest egg for old age is being able to pay for long-term care coverage in addition to providing an estate to inherit. This is no longer an era where it's expected that children almost always care for their elderly parents by moving them into the homes of those children (like the Amish continue to do in this era). Most children these days want to put the old folks into nursing homes.


"FASB Proposed Modifications to Hedge Accounting: Good Thing, Bad Thing, or Just a Thing?* by Tom Selling, The Accounting Onion, August 22, 2016 ---
http://accountingonion.com/2016/08/fasb-proposed-modifications-to-hedge-accounting-good-thing-bad-thing-or-just-a-thing.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

If we don’t destroy ourselves first, we will someday discover intelligent life on another planet.  But when we do, the chances are about one in a billion that we’ll find hedge accounting standards more complex than our own.

Now would also be as good a time as any to peel the onion on hedge accounting since the FASB has recently reached a consensus on a revisions to rules that have been in place since the issuance of SFAS 133 in 1998.

The Basics

At the risk of oversimplifying, the FASB addressed three problems in SFAS 133:

First, there was the problem of accounting for derivatives, which without additional guidance would be measured at historic cost. Historic cost accounting is always suboptimal, but it is especially problematic when it comes to derivatives.  Consider, for example, a financial institution with $9 billion in liabilities covered by $10 billion of assets. Next, assume that said financial institution enters into a (near) cashless interest rate swap with a notional amount of $10 billion — or a credit default swap, or a commodities future contract.  Basically, it enters into  any kind of financial derivative contract, I don’t care which.

All accounting measurement conventions applied to this derivative would produce a net value of (near) zero at inception because the present value of the contract’s receivable leg would be (nearly) equal to its payable leg.  But, should the “underlying” of the contract (e.g., an interest rate, a commodity price, a credit rating) change even a tiny bit, there will be a large change in the fair value of the derivative contract —  owing to its relatively large national amount .

You don’t need to be a derivatives expert to figure out what’s going on here: derivative contracts are the soft underbelly of historic cost accounting.  Failure to recognize the economic effects of the market risks from being a party to a derivative contract renders the entire endeavor of accounting for entities like this hypothetical financial institution an utter sham.  Consequently, the FASB correctly decided that interests in derivative contracts must be, without exception, measured at fair value.

First problem solved.  But, it creates two additional and related problems, which I will call Problems 2a and 2b:

Problem 2a is how to deal with the irony that if a company were to enter into a derivative contract reduce a source of risk — i.e., reducing the volatility of future enterprise value — then marking a derivative to market through net income could be expected to increase the volatility of future net income.  This could be the case if GAAP requires that the item creating the risk in the first place (e.g., a commodity held as inventory or a fixed-rate mortgage loan) is measured at historic cost.

Problem 2a was addressed in SFAS 133 by the so-called “fair value hedge accounting” treatment if the source of the risk is the change in the fair value of a recognized asset, liability, or “firm commitment.” The issuer may elect to offset the gain/loss recognized in income on the derivative with an offsetting change to the hedged item.

Fair value hedging might seem like a reasonable accounting treatment, but there are a number questionable aspects to it.  Two of these are:

Inconsistencies in measurement — Assets, liabilities and firm commitments that happen to be linked with a derivative in fair value hedge accounting are measured one way, and unlinked items are measured another way.  Moreover, an added source of inconsistency exists since “special” hedge accounting is optional. For example, both Kellogg and General Mills report that they hedge their commodities positions with derivatives.  But Kellogg uses hedge accounting and General Mills doesn’t.  Obviously, this is not helpful when trying to analyze the differences in their gross margins.

Arbitrary measurement — The measurement of the assets and liabilities in the hedging relationship are neither historic cost nor fair value.  They are something in between — what former FASB member Tom Linsmeier dubbed “mutt accounting.”  This is not much different than the insane numbers generated by the FASB’s treatment of foreign subsidiaries set forth in SFAS 52, and which I described in a recent post as one of the worst and most divisive accounting standards ever written.  One of the reasons I was particularly harsh in my assessment of SFAS 52 is because I don’t think that the SFAS 133 fair value hedge accounting provisions would have been at all palatable (or even considered) if SFAS 52 had not opened up a Pandora’s box of arbitrary accounting measurements.  (And, as we will see later in this post, it also legitimized the concept of dirty surplus — euphemistically termed “other comprehensive income).

Problem 2b is that if a company were to enter into a derivative contract for the purposes of risk reduction, but the risk was not a recognized asset, liability or firm commitment, then marking the derivative to market through net income would again increase the volatility of future net income.  However, fair value hedging would not be an effective solution since there is no recognized hedged item on which the offsetting changes could be lumped into.

The solution to Problem 2b that the FASB came up with is known as “cash flow hedging.” It temporarily parks the portions of the gains/losses on marking the derivative to market that are actually “effective” (more on that term later) as a hedge in Accumulated Other Comprehensive Income (AOCI). When the risk being hedged actually hits the income statement, the appropriate offsetting amounts in AOCI are transferred to net income.

Are you with me so far?  These are just the first layers of the onion.  I still have to tell you about additional provisions that can make hedge accounting very difficult to pull off in practice.  Many of these details

Continued in article

August 22, 2016 reply from Bob Jensen

Hi Tom,

In the past your alternatives for derivatives contract accounting did not distinguish between speculation and hedging with those contracts. Until you show me an a derivatives contract accounting alternative that does so I will prefer FAS 133 or IFRS 9. Simply appealing to "full disclosure" is a cop out since annual reports with over a million footnotes are not practical.

 

Your statement that General Mills hedges with derivatives without applying FAS 133 is misleading. General Mills applies FAS 133 in a backhanded way. I do not think that any company can  simply ignore FAS 133 for derivative contracts scoped into FAS 133. Here's what General Mills says about using hedge accounting ---
http://sec.edgar-online.com/general-mills-inc/8-k-current-report-filing/2008/09/17/section10.aspx

 

Regardless of designation for accounting purposes, we (at General Mills)   believe all of our commodity hedges are economic hedges of our risk exposures, and as a result we consider these derivatives to be hedges for purposes of measuring segment operating performance. Thus, these gains and losses are reported in unallocated corporate expenses outside of segment operating results until such time that the exposure we are hedging affects earnings. At that time we reclassify the hedge gain or loss from unallocated corporate expenses to segment operating profit, allowing our operating segments to realize the economic effects of the hedge without experiencing any resulting mark-to-market volatility, which remains in unallocated corporate expenses. We no longer have any open commodity derivatives previously accounted for as cash flow hedges.

Continued in article

 

Note that General Mills is trying to exclude those mark-to-market earning fictions I've talked about in our past debates.

 

From what I can tell I pretty much go along with the proposed 2016 revisions in FAS 133 even though I hate some of the previous revisions in IFRS 9. You seem to think that commodity prices in Chicago can be used satisfactorily for all commodity inventories. The fact of the matter is that for most commodities there's a huge difference between commodities held as local inventory hundreds or thousands of miles from Chicago and the CBOT, CBT, CBOT, or CME prices in Chicago. Having grown up on an Iowa farm I'm well aware that the commodities we stored on the farm should not have been valued at Chicago exchange prices. Firstly, our inventories on the farm differed greatly in quality from the Chicago exchange standards.

 

We (on our Iowa farm) held these inventories sometimes because the local elevator did not want our lower quality inventories. Instead we either fed our crops to our own livestock or sold them to nearby feeders who would buy these inventories at serious price discounts. Today's corn farmers are often selling corn to nearby livestock containment feeding operations for the same reasons.



Secondly the Chicago exchange prices were quite different from local prices due to future shipping costs. If you look at the original FAS 133 Appendix illustrations of hedge ineffectiveness you will find that almost all those illustrations for commodities focused on hedge ineffectiveness due to shipping cost ---
http://www.cs.trinity.edu/rjensen/000overview/mp3/000ineff.htm
(Note that the FASB Codification does not include the Appendix illustrations that were in the original FAS 133 hard copy standard.)

 

 

Teaching Case
Cost Accounting and Inventory Valuation
by Bob Jensen: 
Differences Between Mark-to-Market Accounting for Derivative Contracts Versus Commodity Inventories ---
http://www.trinity.edu/rjensen/Mark-to-MarketCorn.htm

 August 22, 2016 reply from Tom Selling

Bob,

My responses to your concerns are indented, below:

You wrote: In the past your alternatives for derivatives contract accounting did not distinguish between speculation and hedging with those contracts. Until you show me an a derivatives contract accounting alternative that does so I will prefer FAS 133 or IFRS 9.

Under extant GAAP, you can: (1) hold a freestanding derivative; (2) “hedge" and apply hedge accounting, or (3) “hedge" and not apply hedge accounting. I put “hedge” in quotes, because the FASB has not defined “hedge.” You say you are happy with SFAS 133 even though it does not, as you demand of me, distinguish between (1) and (3). That’s because the FASB no longer defines a “hedge.” Indeed, the whole purpose of SFAS 133 was to supply a hedge accounting solution without having to actually consider the difference between hedging and speculation.

You wrote: Simply appealing to "full disclosure" is a cop out since annual reports with over a million footnotes are not practical.

I did nothing of the sort. I would prefer disclosures that allow an analyst to unwind hedge accounting if they think it is a stupidity (as I do), but it is not a necessary condition. I want all commodities and financial instruments to be measured the same way. After that, feel free to screw up the income statement as much as you please.

You wrote: Your statement that General Mills hedges with derivatives without applying FAS 133 is misleading. General Mills applies FAS 133 in a backhanded way. I do not think that any company can simply ignore FAS 133 for derivative contracts scoped into FAS 133. Here's what General Mills says about using hedge accounting —

Bob, please be careful when you use the term misleading. I regard your use of the term very much like the way you took offense when you thought Zafar called you a liar. Surely, you can think of a more respectful and appropriate term than “misleading" … perhaps, “inaccurate”?

That said, I provided a link to a 10-K. It reads in relevant part as follows:

“We use derivatives to manage our exposure to changes in commodity prices. We do not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in cost of sales in our Consolidated Statements of Earnings.”

It appear that you provide a link to an 8-K, which I have not read. As best as I can tell, you describe GM’s presentation of segment disclosures (where departures from GAAP are permitted). That’s a far cry from the consolidated financial statements.

You wrote: From what I can tell I pretty much go along with the proposed 2016 revisions in FAS 133 even though I hate some of the previous revisions in IFRS 9. You seem to think that commodity prices in Chicago can be used satisfactorily for all commodity inventories. The fact of the matter is that for most commodities there's a huge difference between commodities held as local inventory hundreds or thousands of miles from Chicago and the CBOT, CBT, CBOT, or CME prices in Chicago. Having grown up on an Iowa farm I'm well aware that the commodities we stored on the farm should not have been valued at Chicago exchange prices. Firstly, our inventories on the farm differed greatly in quality from the Chicago exchange standards.

Again, “perfection is the enemy of the good,” even for your family farm. Do you mean to tell me that your parent’s actually gave a hoot about the historic cost of your corn after it was harvested? When they asked themselves, “how did we do?” is that what they talked about?

If you are going to provide examples of practical barriers, I suggest you use public companies. And, don’t try to tell me that Kellogg and GM don’t know the current values of their commodity inventories on a daily basis.

Best,

Tom

August 23, 2016 reply from Bob Jensen

Hi Tom,

You miss the point when you say that our farm's distant (from Chicago) less than top quality corn would not be valued at Chicago exchange prices. That's my whole point. When you hedge most often it will be done with net settlement derivative contracts priced at Chicago exchange prices. This is what gives rise to hedging ineffectiveness because your local inventory valuation differs from the Chicago exchange pricing in your hedging contracts. See the definition of "ineffectiveness" under the "I" letter at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

Therefore,  the extent your hedges are ineffective you are speculating and not hedging due to those differences in prices between your inventory valuation and Chicago exchange price valuation of your hedging contracts. To the extent hedges are effective then you are hedging and should choose to not show earnings fluctuations to the extent the hedges are effective (ala General Mills). To the extent hedges are ineffective you are speculating and should post the ineffective portion to retained earnings.

The FASB does have a definition of a derivative contract, and I elaborate on it at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Click on "D" and then scroll down.
For the definition of a hedging contract click on "H" and scroll down.

The IASB's definition differs somewhat from the FASB's definition of a derivative. Where it gets even messier is in the definitions of derivatives for macro hedges. A "macro" contract hedges a portfolio with multiple types of risks with a hedging instrument that only hedges one of those risks. An exception now allowed under FAS 138 (that amended FAS 133)  is a cross-currency hedge that hedges both FX risk and interest rate (price) risk simultaneously using one hedging instrument. The IASB and FASB departed when it comes to accounting for some (very limited) types of macro hedges.

Any USA company that has derivative contracts under the FASB's definition had better consult its attorneys and auditors before deciding to depart from FAS 133 and its amendments.

Are you trying to tell us that, unlike in its 8K discussion of derivative contracts, that General Mills has what the FASB calls derivatives contracts in its 10K that it elects not to account for under FAS 133 rules? I really, really doubt that!

One piece of information in the 8K is that General Mills does not hedge cash flows. If it did so it would abide by FAS 133 rules or worry about lawsuits.

To the extent that General Mills does have fair value hedging contracts meeting the FASB definition it does have to resort to FAS 133 for accounting purposes. An to the extent it acquires other types of hedging contracts (like cash flow hedges) meeting the FAS 133 definition it will resort to FAS 133 accounting whether in an 8K or a 10K.

If you find an exception in the General Mills 10K please let us and the auditors and the SEC know about it.

And my parents cared about the historic cost of corn. For one thing this affected taxes. Secondly when the great scorer comes to write against your aggregate lifetime profit the aggregate "cash in" versus the aggregate "cash out" is what determined how good you were as a farmer (adjusted of course when you butchered your own livestock to eat). All the unrealized commodity value ups and downs were fictions --- like it says in the General Mills 8K that you conveniently selected only part of to quote from my longer quotation.

Of course my parents looked at current fair values of their inventories. They even made decisions based on changes in values. But they did that in a two-column set of financial statements rather than confine themselves to one fair value column containing fiction accounting

August 23. 2016 reply from Tom Selling

Bob,

We are talking past each other. I don’t even think you read what I write, even though I specifically address each of your points. Just for one example, I did not state that the FASB doesn’t have a definition of a derivative; I stated that it does not have a definition of “hedge” apart from what “hedge accounting” is.

This is my last word on this subject.

Best,

Tom

August 23, 2016 reply from Bob Jensen

FAS 133 does not scope in weather derivatives mostly because the underlying (e.g., cumulative rainfall for the months of July and August) are not exchange traded like commodity price underlyings.

ASC 815-45 provides guidance on the financial accounting and reporting for weather derivatives

ASC 815-45 provides guidance on the financial accounting and reporting for weather derivatives.

 


FASB:  Important Differences in Accounting for Embedded Derivatives in FAS 133 Versus IFRS 9
http://www.iasplus.com/en-us/standards/ifrs-usgaap/embedded-derivatives


"The Dirty Little Secret of Finance: Asymmetric Information," by Noah Smith, Bloomberg, August 11, 2016 ---
http://www.bloomberg.com/view/articles/2016-08-11/the-dirty-little-secret-of-finance-asymmetric-information

. . .

Why is asymmetric information so crucial to an understanding of financial markets? It’s probably related to the reason people want financial assets in the first place. People want cars and bananas and microwave ovens because those things are immediately useful. But most people who buy and sell financial assets have no intrinsic desire for the asset itself -- they only care about how its value to other people will change in the future. That means that while information is important for many products, when it comes to financial markets, information is the product.

Many major economics papers have explored this fact. One example is the famous 1980 paper “On the Impossibility of Informationally Efficient Markets,” by Sanford Grossman and Joseph Stiglitz. The authors showed that if it costs money (or time) to gather information about financial assets, then market prices can’t be perfectly efficient -- if they were, there would be no incentive for people to go out and pay the costs to gather data. That paper showed why the famed Efficient Markets Hypothesis can only be approximately true at best.

A 1982 paper by Paul Milgrom and Nancy Stokey is no less important. Entitled “Information, Trade, and Common Knowledge,” it demonstrated why rational financial markets should have a lot less trading than they do. Suppose you come to me offering to sell me a stock for $100 a share. Why are you offering to sell it to me for $100? Maybe you’re selling stocks because you’re shifting into bonds, or ready to retire, or need to pay a sudden medical expense. But chances are, you think the stock is worth less than $100, and you’re trying to unload it. That should make me wary about taking you up on your offer. But on the other hand, if I jump at the offer, that should tell you that I have reason to believe the stock is worth more than $100 … and that should make you wary. In an ideal market filled with rational agents, this means that trading is very rare. The fact that trade volumes are huge is a continuing puzzle for economists, not explained by the classic theories of perfect rationality.

So with all this asymmetric information, why are financial markets so active? A pair of papers in 1985 attempt to explain why. These studies -- the first by Lawrence Glosten and Paul Milgrom, the second by Albert “Pete” Kyle -- model the interaction between informed traders, market makers and liquidity traders. The liquidity traders need to buy or sell immediately for reasons unrelated to the market, but the informed traders are trading because they know something about the asset’s fundamental value. The market-makers -- basically, middlemen -- profit off of the former and lose money to the latter. At the end of the day, this delicate dance gets information out of traders’ heads and into the price. But as some other researchers showed over a decade later, if the information is too complicated, this process can lead to bubbles and crashes.

The upshot of all this -- which will be confirmed by the experience of anyone who has ever traded for real -- is that asymmetric information, which is a nothing more than a nuisance in most markets, is at the core of finance. It’s key to the way traders, including high-frequency traders, make their profits. And it’s probably at the root of why markets break down and crash.

So when someone -- say, a presidential candidate -- proposes big rollbacks of financial regulation, we should be suspicious. In many cases that might be a good idea, but finance is no ordinary market.


Law School Deans in Australia Are Running and Bait and Switch Operation ---
http://taxprof.typepad.com/taxprof_blog/2016/08/law-prof-law-school-deans-are-running-a-bait-and-switch-operation.html

Bob Jensen's Fraud Updates ---  http://www.trinity.edu/rjensen/FraudUpdates.htm 


2 KPMG auditors given stiffer penalties for TierOne work ---
http://journalstar.com/business/local/kpmg-auditors-given-stiffer-penalties-for-tierone-work/article_d140abea-c6d9-52c0-babc-513cee3f4b00.html

Two auditors for an international accounting company tried to get the Securities and Exchange Commission to overturn the suspensions they got for professional misconduct related to work they did for Lincoln's TierOne Bank before it collapsed in 2010.

Instead, a divided Securities and Exchange Commission ruled last week that the two men who worked for KPMG deserved harsher sentences.

The commission voted 2-1 to bar John J. Aesoph, a KPMG partner from Omaha, from working with SEC-regulated companies for three years, and Darren M. Bennett, a senior manager from Elkhorn, for two years.

In 2014, an SEC judge recommended bans of one year for Aesoph and six months for Bennett. The two filed an appeal of those suspensions within weeks of the judge's decision, but oral arguments were not held until last month.

The proposed suspensions were based on their work on the year-end 2008 audit of TierOne, which SEC administrative law judge Carol Fox Foelak called "a single instance of highly unreasonable conduct."

The SEC had charged the two auditors with professional misconduct, alleging that they failed to appropriately scrutinize management's estimates of TierOne's allowance for loan and lease losses.

The SEC had originally sought a three-year suspension for Aesoph and two years for Bennett.

In Friday's order, the SEC said the two committed "egregious violations of multiple auditing standards," and it called their methods in conducting the TierOne audit "highly unreasonable."

The commission also said the auditors failed to acknowledge any wrongdoing or provide any assurances that they would not commit future violations.

"Taken together, these facts lead us to conclude that there is a risk that respondents will commit future violations," the commission said.

Not only did the SEC extend the period during which the two auditors cannot work with publicly traded companies, but by barring them rather than suspending them, it made it harder for them to resume such work.

Aesoph and Bennett will have to apply to be reinstated. Under the previous suspension order, they would have been reinstated automatically.

Continued in article

SEC's Full Ruling 
https://www.sec.gov/litigation/opinions/2016/34-78490.pdf

Bob Jensen's threads on KPMG scandals ---
http://www.trinity.edu/rjensen/fraud001.htm


IFRS 9 rattles large banks:  They Weren't Prepared for in This (in a poll of 91 banks)
http://www.ft.com/cms/s/26dfb19c-60a4-11e6-b38c-7b39cbb1138a,Authorised=false.html?siteedition=intl&_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F26dfb19c-60a4-11e6-b38c-7b39cbb1138a.html%3Fsiteedition%3Dintl&_i_referer=&classification=conditional_standard&iab=barrier-app#axzz4II1gKfoC

Nearly half of big banks around the world are unprepared for an international accounting standard due to take force in less than two years, even as they expect provisions for bad loans to soar as a result of the new rules.

A poll of 91 banks across the globe — excluding US banks that are governed by their own rules — has found that 46 per cent of those surveyed do not believe they have enough resources to deliver changes by the 2018 implementation date, with a significant minority going on to say there were not enough skilled candidates in the market to hire.

With less than 18 months to go before the change, nearly two-thirds of banks are unsure how the rules might impact their balance sheets, according to Deloitte, which undertook the global survey.

The rules force banks to have a provision on their balance sheets for expected losses in the future rather than actual losses already suffered.

Those banks that have made the calculations reckon the rules will result in a surge of at least 25 per cent in total impairment provisions across all asset classes.

Banks are also forecasting that the rules, dubbed IFRS 9, will cause their capital ratios to deteriorate: they are expecting core tier one capital — one of the most keenly watched metrics of the health of a bank’s balance sheet — to decrease on average by half a per cent as a result of moving to the new standard, according to Deloitte.

Uncertainty is not limited to the banking industry: 99 per cent of respondents said their local financial regulator had yet to say how they might incorporate IFRS 9 numbers into regulatory capital requirements.

IFRS 9 is part of a suite of measures by the International Accounting Standards Board to overhaul accounting since the financial crisis. The reform package is an attempt to increase regulatory co-operation between the US and international standard setters. Converging the different corporate reporting frameworks has been fraught.

By moving from an “incurred loss” to an “expected loss” model in 2018, under IFRS 9 the regulators hope to avoid the problems that occurred during the crisis, when banks could not book accounting losses until they happened, even though they could see them coming. This should help to keep banks properly capitalised for the loans they have made. UK banks have experienced historically low impairments recently because of the record low interest rate. However, there are some concerns that if economic growth were to stall following the Brexit vote, impairments could go up even without the new rules. Steven Hall at KPMG said the estimated increase in provisions as a result of IFRS 9 was actually “cautious”. “IFRS 9 will be almost as difficult to implement as it is to say,” he said. “Firms need to consider a range of future scenarios, and in today’s uncertain economic environment assessing the impact of that is not an easy task.” Mr Hall has called for a grace period during which the new systems might be tested and embedded.

Continued in article


Coursera --- https://en.wikipedia.org/wiki/Coursera

August 25, 2016 Message from Glen Gray

Collaborating with Coursera

Empowering people through learning

At PwC, our purpose is to build trust in society and solve important problems. We think there's an opportunity to do this by sharing our experience and expertise with anyone who wants to learn. We’re joining forces with Coursera to create a series of courses designed around topics that address big global issues, drawing on the real-world knowledge and experience of PwC experts from around the globe from multiple disciplines. Our first course is focused on data and analytics, one of the biggest areas of opportunity to help solve problems in an increasingly complex world.

All course materials can be accessed at no charge. (Those who want to take the assessments and get a certification will pay a small charge). As instructors, you may identify portions of the courses which you wish to incorporate into your classes as assignments to help demonstrate concepts you are teaching. We hope you will agree that this will be a valuable resource. To learn more about and access Coursera, click here.

Glen L. Gray, PhD, CPA
Professor Emeritus
Dept. of Accounting & Information Systems
David Nazarian College of Business & Economics
California State University, Northridge
18111 Nordhoff ST Northridge, CA 91330-8372

http://www.csun.edu/~vcact00f

 


How the 2016 Leasing Standards Differ Under IFRS Versus the FASB ---
http://www.accountingweb.com/aa/standards/leasing-under-us-gaap-and-ifrs-similar-new-standards-with-significant-differences?source=ei081016
Requires login or free registration.


Earnings Management --- https://en.wikipedia.org/wiki/Earnings_management

The Effects of Creative Culture on Real Earnings Management
SSRN, August 4, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2818499

Author

Ryan D. Guggenmos
Cornell University - Samuel Curtis Johnson Graduate School of Management

Abstract

Chief Executive Officers identify creativity as one of the most desired business leadership competencies. Accordingly, managers are increasingly looking to build creative and innovative cultures within their organizations. However, research in psychology suggests that these attempts may have unintended negative consequences. In this study, I predict and find that an innovative company culture leads to higher levels of real earnings management (REM). To reduce REM in innovative cultures, I design and test interventions based on lower-level and higher-level construals. As I predict, an intervention based on lower-level construal reduces REM, but a higher-level construal intervention reduces REM to a greater extent. I also provide evidence that these interventions reduce the desirability of self-interested behavior that is a consequence of innovation-focused culture. My findings contribute to the emerging accounting literature regarding REM. In addition, I extend the psychology literature investigating the link between self-interested behavior and creativity, as well as expand research on the effects of mental construal on decision making

Bob Jensen's threads on creative earnings management ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation


Earnings Management --- https://en.wikipedia.org/wiki/Earnings_management

Impact of Assurance Level and Tax Status on the Tendency of Relatively Small Manufacturers to Manage Production and Earnings
SSRN. July 25, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2814314

 

Authors

Benjamin P. Foster University of Louisville - College of Business and Public Administration

John M. Mueller California State University, Fresno; Western Michigan University

Trimbak Shastri University of Louisville - Department of Accountancy

Abstract

The number and importance of private companies in the United States indicates that reliable quality of financial accounting reports (QFAR) of private companies that are useful for decision making is likely to be important for economic growth. Most previous research examining QFAR addressed earnings management among publicly-traded companies. This study extends prior literature by examining whether abnormal production of public and private companies is impacted by (i) assurance type (PCAOB-audit, GAAS-audit, and SSARS-Review), (ii) tax status (separately taxed versus pass-through entity) of private companies, and (iii) relative size. An audit of financial statements provides a high degree of assurance, whereas a review provides limited assurance. Due to data limitations with our private company sample, this study focuses on earnings management through abnormal production by manufacturing companies. When examining companies that just met the benchmark of prior years' earnings or zero earnings we found positive abnormal production for publicly traded companies and privately held audited-taxable companies, but not for other privately held companies. Not identified in previous studies, we find that abnormal production of similarly sized public companies and private companies differ. Our findings provide evidence relevant to the Big GAAP/Little GAAP debate and that one set of accounting standards may not satisfy all public and private company financial statement users. Also, results of this study support the recommendations of the Financial Accounting Foundation’s Blue Ribbon Panel’s Report for establishing a separate private company standards board to help ensure appropriate modifications to GAAP.

Bob Jensen's threads on creative earnings management ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation


The Interplay between Financial Reporting Biases and Audit Quality
SSRN. August 3, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2818038

Authors

Sebastian Kronenberger University of Graz, Doctoral Program for Accounting, Reporting, and Taxation (DART), Students

Volker Laux University of Texas at Austin - Department of Accounting

Abstract

We show that a firm's optimal financial reporting bias and an auditor's choice of audit effort are inextricably intertwined. Aggressive or conservative accounting practices influence the auditor's optimal choice of audit effort, and the auditor's incentive and ability to detect misstatements in turn influence the firm's optimal accounting bias. Due to this interplay, a shift to more aggressive accounting can reduce, rather than increase, the incidence of overstatements and hence overinvestment and investor litigation. While ex ante litigation risk is typically considered to be a major driver of conservative accounting practices in corporations, we derive conditions under which a heightened threat of litigation can encourage more aggressive accounting.

Bob Jensen's threads on audit firm professionalism ---
http://www.trinity.edu/rjensen/Fraud001c.htm


The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability
SSRN, August 5, 2016

Accounting in Europe (Forthcoming)

Author

Zoltán Novotny-Farkas
Lancaster University - Management School

Abstract

This paper examines the interaction of the IFRS 9 expected credit loss (ECL) model with supervisory rules and discusses potential implications for financial stability in the European Union. Compared to the incurred loss approach of IAS 39, the IFRS 9 ECL model incorporates earlier and larger impairment allowances and is more closely aligned with regulatory expected loss. The earlier recognition of credit losses will reduce the build-up of loss-overhangs and the overstatement of regulatory capital. In addition, extended disclosure requirements are likely to contribute to more effective market discipline. Through these channels IFRS 9 might enhance financial stability. However, due to the reliance on point-in-time estimates of the main input parameters (probability of default and loss given default) IFRS 9 ECLs will increase the volatility of regulatory capital for some banks. Furthermore, the ECL model provides significant room for managerial discretion. Bank supervisors might play an important role in the implementation of IFRS 9, but too much supervisory intervention bears the risk of introducing a prudential bias into loan loss accounting that compromises the integrity of financial reporting. Overall, the potential benefits of the standard will crucially depend on its proper and consistent application across jurisdictions.

Bob Jensen's threads on loan losses and bad debts ---
http://www.trinity.edu/rjensen/Theory02.htm#LoanLosses


Jus gentium --- https://en.wikipedia.org/wiki/Jus_gentium

Comparative Law and the 'Ius Gentium’
SSRN,  July 29, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815824

Author

Se-shauna Wheatle
Durham Law School

Abstract

Constitutional principles are sometimes invoked in adjudication as a bridge to foreign law. This article argues that a cosmopolitan approach, such as that advocated by Jeremy Waldron through his ius gentium theory, is useful in accounting for the use of constitutional principles by courts insofar as the commonality of language and methodology surrounding the use of constitutional principles is connected to societal and institutional needs. The article argues that constitutional principles often serve as a connection to foreign law because the principles are applied as representations of a societal need for order and stability. At the same time, the article cautions that transnational judicial dialogue is impacted by compartmentalisation and divergence. Consequently, arguments for a ius gentium must be more cautious and nuanced. As a step in this direction, the article proposes two ideas for modifying the ius gentium theory: conceiving of the ius gentium as an emerging but not yet fully realised system and characterising the ius gentium as a convergence of methodology rather than substantive norms.


Flexibility in Cash Flow Classification Under IFRS: Determinants and Consequences
SSRN. July 27, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815123

Authors

Elizabeth A. Gordon Temple University - Department of Accounting

Elaine Henry Stevens Institute of Technology

Bjorn Jorgensen London School of Economics & Political Science (LSE) - Department of Accounting

Cheryl L. Linthicum University of Texas - San Antonio

Abstract

International Financial Reporting Standards (IFRS) allow managers flexibility in classifying interest paid, interest received, and dividends received within operating, investing, or financing activities within the statement of cash flows. In contrast, U.S. Generally Accepted Accounting Principles (GAAP) requires these items to be classified as operating cash flows (OCF). Studying IFRS-reporting firms in 13 European countries, we document firms’ cash-flow classification choices vary, with about 76%, 60%, and 57% of our sample classifying interest paid, interest received, and dividends received, respectively, in OCF. Reported OCF under IFRS tends to exceed what would be reported under U.S. GAAP. We find the main determinants of OCF-enhancing classification choices are capital market incentives and other firm characteristics, including greater likelihood of financial distress, higher leverage, and accessing equity markets more frequently. In analyzing the consequences of reporting flexibility, we find some evidence that the market’s assessment of the persistence of operating cash flows and accruals varies with the firm’s classification choices, and the results of certain OCF prediction models are sensitive to classification choices.

Jensen Comment
This is one of the many times when I question why a research paper needs so many authors.


How Would Investing in Equities Have Affected the Social Security Trust Fund?
SSRN, July 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815052 

Authors

Gary Burtless Brookings Institution; Boston College - Retirement Research Center

Anqi Chen Center for Retirement Research at Boston College

Wenliang Hou Center for Retirement Research at Boston College

Alicia H. Munnell Boston College - Center for Retirement Research

Anthony Webb Boston College - Center for Retirement Research

Abstract

Some observers believe that investing a portion of the Social Security Trust Fund in equities would strengthen its finances and improve the program’s intergenerational risk-sharing. However, equity investments would also expose the program to greater financial risk and potentially greater political risk. Monte-Carlo simulation methods are used to investigate whether equity investments would likely strengthen the long-term outlook of the Trust Fund relative to the current policy of investing 100 percent of reserves in U.S. government bonds. The issues surrounding equity investments also go beyond expected returns on the Trust Fund portfolio. Concerns of government interference with the allocation of capital in the economy and with corporate decision-making as well as the accounting treatment of equity investments are also discussed.

This paper found that:

- Both prospective and retrospective analyses suggest that investing a portion of the Social Security Trust Fund in equities would have improved its finances.
- Little evidence exists that Trust Fund equity investments would disrupt the stock market.
- Accounting for returns on a risk-adjusted basis would not show any up-front gains from equity investment, but gains would become evident over time if higher returns were realized.
- Equity investments could be structured to avoid government interference with capital markets or corporate decision-making.

The policy implications of this paper are:

- Investing a portion of trust fund assets in equities would likely reduce the need for higher payroll taxes.
- At the 50th percentile of outcomes, equity investing has the potential to maintain a healthy Trust Fund ratio through the 75-year period.
- The experience with the Thrift Savings Plan provides a road map for separating the government from actual investment decisions.

Jensen Comment
The article fails to mention how investing pension funds sector differs from investing pension funds in the private sector. The main reason is that the public sector funds can take on bigger financial risks because of the greater assurance that they will be bailed out by taxpayers is their gambles do not pay off. This is certainly the case of the SS Trust Funds, although this SSRN research paper makes no mention of this.

We can blame democracy for the high risk of public-sector pension plans.
The Economist Magazine
July 26, 2016
http://www.economist.com/news/business-and-finance/21702623-rules-encourage-public-sector-pension-plans-take-more-risk-putting-it-all

Jensen Comment
It turns out that pension investing risk relies heavily on investment and accounting rules where public-sector pension fund managers are allowed to get their funds into riskier investments, including junk bonds.

The enormous TIAA/CREF and some other pension funds give investors risk choices. TIAA bond funds are doing worse due to the Fed's low-interest policy such that teachers in TIAA/CREF are choosing more risky funds. Deals are no longer as good for fixed-annuity plans on the date of retirement relative to when I retired in 2006 (blind luck rather than brilliant strategy).

Sadly, riskier public-sector pension plans increase the expectation of future taxpayer bailouts. Public-sector pension plans would probably not be as risky if government declared there was zero chance of future bailouts. But then what legislators seeking office are going to promise zero chance of a public-sector pension bailout? Hence we can blame democracy for the high risk of public-sector pension plans.

One definition of democracy is gambling with taxpayer dollars.
Bankers as well as K-12 teachers helped to invent the taxpayer bailout idea along with municipal workers. Public-sector workers opposed to gambling probably don't even know they are gambling with taxpayer dollars.


The Effect of CFO Personal Litigation Risk on Firms’ Disclosure and Accounting Choices
SSRN. July 28, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815011

Authors

Hagit Levy City University of New York (CUNY) - Stan Ross Department of Accountancy

Ron Shalev New York University (NYU) - Leonard N. Stern School of Business

Emanuel Zur University of Maryland - Robert H. Smith School of Business

Abstract

In Gantler v. Stephens (2009), the Delaware Supreme Court makes explicit that corporate officers owe the same fiduciary duty to the firm and shareholders as do board members. The decision increased the risk of non-board-serving officers being added as named defendants to investor litigation but did not change the risk of corporate litigation. Analyzing the effect of the Gantler ruling on non-board-serving CFOs, we find a significant change in their behavior as well as in their firms’ disclosure and accounting choices. Specifically, CFOs’ speech tone during earnings calls becomes more negative and their firms disclose bad news earlier and report more conservatively. Results are stronger for firms incorporated in Delaware. Our findings suggest that CFOs respond to personal litigation risk over and above corporate litigation risk.

Jensen Comment
I like this study in that it's not just another purchased database (e.g., CRSP, Compustat, or AuditAnalytics) multiple regression fishing expedition.


Crude Inventory Accounting and Speculation in the Physical Oil Market
SSRN. July 26, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2814943

Authors

Ivan Diaz-Rainey University of Otago - School of Business

Helen Roberts University of Otago

David H. Lont University of Otago - Department of Accountancy and Finance

Abstract

This paper uses inventory data from financial accounts to explore whether companies involved in the physical oil market were speculating in the run-up to 2008. Using quarterly inventory data over the period 1990Q4 to 2012Q1 and a sample of 15 of the largest listed oil companies in the world, we derive an Index of Scaled Physical Inventories (ISPI). We find declining ISPI up to the early 2000s is consistent with firms minimizing inventory for efficiency sake; then ISPI starts to increase, suggesting physical inventories could have contributed to the run-up in oil prices between 2003 and 2008. Highlighting heterogeneity in inventory behaviors amongst the large oil companies, the structural break test on the ratio of inventory to sales and the days to sales for individual companies shows that five companies had positive structural breaks during the speculation period, while the other companies had no or negative structural breaks. Contrary to declining inventory expectations due to a tightening oil market, the positive structural breaks suggest speculative behavior. We also examine the relationship between changes in profitability and changes in oil inventory over the pre-speculation and speculation period. Though some coefficients for inventory do switch from negative to positive over the two periods as hypothesized, they are on the whole not significant. The conclusion based on these models is that inventory ‘positions’ have not materially affected performance of most companies, save for a few exceptions.

Jensen Comment
The article makes passing reference to Contango and Carry trade hedging of inventories, but I would think that if companies were speculating in oil prices that more mention would be made of other types of derivatives used for speculation.


Where to Hide in Bad Times: Or Should One Still Diversify Internationally?
SSRN, July 1, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2812623

Authors

Redouane Elkamhi University of Toronto - Rotman School of Management

Denitsa Stefanova Universite du Luxembourg - School of Finance

Abstract

Among the stylized features of international equity markets is the pronounced asymmetric nonlinear dependence and upward trend in correlations. Such features call into question investors' efforts to diversify internationally. We propose a model to capture those well understood characteristics of international equity index returns. Casting them in a dynamic portfolio problem, we evaluate the gains for a home-biased investor from including foreign assets in her portfolio. We find that accounting for the optimal dynamic demand for hedging on top of a standard mean-variance portfolio policy brings substantial benefits from international portfolio exposure. Such benefits become increasingly sizeable over long investment horizons.


Senate Bill Proposes Shot in Arm for Career and Technical Education ---
https://thejournal.com/articles/2016/07/27/senate-bill-proposes-shot-in-arm-for-cte.aspx


How to Claim a Loss Deduction on Worthless Stocks ---
http://www.accountingweb.com/tax/individuals/how-to-claim-a-loss-deduction-on-worthless-stocks?source=tx080816


A Useful Excel Reporting Feature ---
http://www.businessinsider.com/link-your-reports-to-excel-word-powerpoint-2016-8
Also see
Excel 2016 Forecasting Tool --- "
http://www.journalofaccountancy.com/issues/2016/aug/excel-forecast-sheet.html?utm_source=mnl:globalcpa&utm_medium=email&utm_campaign=17Aug2016 

How to Use Excel 2016 for Forecasting ---
http://www.journalofaccountancy.com/issues/2016/aug/excel-forecast-sheet.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=08Aug2016


Accounting Again Leads as Most Profitable Industry ---
http://www.accountingweb.com/practice/growth/accounting-tops-list-of-most-profitable-industries

Jensen Comment
This may be one of those ways to mislead with statistics.
For example, I think an orthopedics surgeon corporation down the road in our Alpine Clinic has a much higher percentage of return to owners than any accounting firm in the State of New Hampshire. This is probably true for most every MD specialty corporation in the State.
Much depends upon what you call an "industry."

One thing that helps accounting firms have high returns is relatively cheap labor. For example, we have a granddaughter who graduated in pharmacy and then interned with the Veterans Administration in Boston. She's now returning to Maine (Portland) for her first real job at a starting salary of $125,000 plus fringe benefits. Are there any accounting firms in New England with starting salaries of entry level graduates of $125,000? There might be some who specialize in computer and IT services, but I doubt that this salary is offered to accounting graduates.

Having said this, I still recommend in many instances going to work for an accounting firm at less than half this starting pharmacist salary. The reason is that accountancy offers so many alternative tracks for advancement into much higher paying careers. And believe it or not I think an auditor traveling from client to client has more interesting and varied work. I watch those high paid pharmacists in our Wal-Mart pharmacy working intently day-to-day and year-to-year and thank my lucky stars that I never became a Wal-Mart pharmacist.


"Economic Slump Sends Big Ships to Scrap Heap," by Ben Fritz, The Wall Street Journal, August 15, 2016, Page B1 ---
http://www.wsj.com/articles/economic-slump-sends-big-ships-to-scrap-heap-1471192256

Up until a year ago, the shipping industry was ordering ships in droves. This year, orders of new vessels have fallen to a record low and companies can’t get rid of ships fast enough.

About 1,000 ships that have the combined capacity to haul 52 million metric tons of cargo will be dragged onto beaches, cut into pieces and sold for scrap metal this year. That is second only to the record amount of capacity of 61 million so-called dead weight tons that were scrapped and recycled in 2012.

The global economic slowdown is putting shipping through its most bruising period since the 2008 financial crisis. Companies including Maersk Line, a unit of Danish conglomerate A.P. Møller Maersk A/S, Germany’s Hapag-Lloyd AG and China Cosco Bulk Shipping Co. have 30% more capacity in the water than cargo. As the companies, mostly based in Europe and Asia, fight for bigger shares of the global market, freight rates have dropped so low they barely cover fuel costs.

In the five years through 2015, owners ordered an average of 1,450 ships annually. This year orders through July fell to 293 vessels, or 11.6 million tons, according to U.K. marine data provider Vessels Value.

“Given the tremendous overcapacity, it will take much more recycling and at least two to three years of no growth in capacity to see some balance between supply and demand,” said Basil Karatzas, chief executive of New York-based Karatzas Marine Advisors Co.

Continued in article


Here's An Illustration of Grade Inflation

"Nearly Half Of Detroit’s Adults Are Functionally Illiterate, Report Finds," Huffington Post, July 8, 2013 ---
http://www.huffingtonpost.com/2011/05/07/detroit-illiteracy-nearly-half-education_n_858307.html

Detroit’s population fell by 25 percent in the last decade. And of those that stuck around, nearly half of them are functionally illiterate, a new report finds.

According to estimates by The National Institute for Literacy, roughly 47 percent of adults in Detroit, Michigan — 200,000 total — are “functionally illiterate,” meaning they have trouble with reading, speaking, writing and computational skills. Even more surprisingly, the Detroit Regional Workforce finds half of that illiterate population has obtained a high school degree.

The DRWF report places particular focus on the lack of resources available to those hoping to better educate themselves, with fewer than 10 percent of those in need of help actually receiving it. Only 18 percent of the programs surveyed serve English-language learners, despite 10 percent of the adult population of Detroit speaking English “less than very well.”

Additionally, the report finds, one in three workers in the state of Michigan lack the skills or credentials to pursue additional education beyond high school.

In March, the Detroit unemployment rate hit 11.8 percent, one of the highest in the nation, the U.S. Bureau of Labor Statistics reported last month. There is a glimmer of hope, however: Detroit’s unemployment rate dropped by 3.3 percent in the last year alone.

Continued in article

Jensen Question
Will nearly all the illiterate high school graduates in Detroit get a free college diploma under the proposed "free college" proposal?

My guess is that they will get their college diplomas even though they will still be illiterate, because colleges will graduate them in order to sop up the free taxpayer gravy for their college "education."
Everybody will get a college diploma tied in a blue ribbon.

I doubt that illiteracy is much worse in Detroit than in other large USA cities like Chicago and St Louis.

In Europe less than have the Tier 2 (high school) graduates are even allowed to to to college or free trade schools ---
OECD Study Published in 2014:  List of countries by 25- to 34-year-olds having a tertiary education degree ---
https://en.wikipedia.org/wiki/List_of_countries_by_25-_to_34-year-olds_having_a_tertiary_education_degre


For CPAs:  The next frontier in data analytics ---
http://www.journalofaccountancy.com/issues/2016/aug/data-analytics-skills.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=10Aug2016


Top Heavy in Data Analytics
KPMG to pay entry-level employees to earn Villanova and Ohio State's master’s in accounting
---
http://www.bizjournals.com/philadelphia/news/2016/08/04/kpmg-paying-villanova-masters-accounting-degree.html

Jensen Questions

  1. Have Villanova and OSU relegated admissions decisions for this program to KPMG?
     
  2. Have Villanova and OSU relegated curriculum decisions to KPMG regarding such things as using KPMG software, KPMG datasets, and KPMG proprietary audit procedure literature?
     
  3. Is an entire semester of internship in KPMG offices for academic credit under this program top heavy on non-academic credit in reality?
     
  4. In other words is this just a KPMG training program?
     
  5. This KPMG program most certainly is outside the original stated purpose of the fifth year accounting program that was supposed to broaden the curriculum of accounting majors with non-accounting content (e.g., in communications, ethics, critical thinking etc.) without adding significantly more technical accounting, tax, and auditing content. Is this program with 50% auditing data analytics in the spirit of the fifth year program as originally designed?

Teaching Case
Cost Accounting and Inventory Valuation
by Bob Jensen: 
Differences Between Mark-to-Market Accounting for Derivative Contracts Versus Commodity Inventories
---
http://www.trinity.edu/rjensen/Mark-to-MarketCorn.htm


Fair value of inventory before a sale may differ from net realizable value because of unknowable future selling and delivery costs. For example, future deliver costs are unknowable until the location of the customer is known.

For these and other reasons (such as different underlyings) the value of a hedging instrument like a forward, futures, or option contract may differ from the value of hedged-item fair value of inventory. This difference gives rise to hedging instrument ineffectiveness. Both the FASB (in FAS 133) and the IASB (in IFRS 9) require testing for hedge ineffectiveness although the IFRS tests are more subjective.

Here are some helpers for learning about testing for hedge ineffectiveness.

IFRS Hedge Ineffectiveness ---
http://www.ifrs.org/Current-Projects/IASB-Projects/Financial-Instruments-A-Replacement-of-IAS-39-Financial-Instruments-Recognitio/Phase-III-Hedge-accounting/edcl/Pages/Hedge-Effectiveness.aspx

Bob Jensen's illustrations of hedge ineffectiveness ---
http://www.cs.trinity.edu/rjensen/000overview/mp3/000ineff.htm

Ira Kawaller's illustrations of inventory hedging strategies ---
http://kawaller.com/taking-stock-hedging-inventories-hedging-sales/

KPMG summary of testing for hedge ineffectiveness ---
https://www.cmegroup.com/education/files/basics-of-hedge-effectiveness.pdf

Teaching Cases:  Hedge Accounting Scenario 1 versus Scenario 2
Two Teaching Cases Involving Southwest Airlines, Hedging, and Hedge Accounting Controversies ---
http://www.trinity.edu/rjensen/caseans/SouthwestAirlinesQuestions.htm

 

Short Summary
"Hedge Effectiveness:  The Wild Card in Accounting for Derivatives," by Ira C. Kawaller --- http://www.kawaller.com/pdf/AFP-Hedge Effectiveness.pdf
Also see http://www.cs.trinity.edu/~rjensen/Calgary/CD/HedgeEffectiveness.pdf

Neither the FASB nor the IASC specify a single method for either assessing whether a hedge is expected to be highly effective or measuring hedge ineffectiveness.   Tests of hedge effectiveness should be conducted at least quarterly and on financial statement dates.  The appropriateness of a given method can depend on the nature of the risk being hedged and the type of hedging instrument used.  See FAS 133 Appendix A, Paragraph 62 and IAS 39 Paragraph 151.  

Wells Fargo: The Sunny Side of Hedge Ineffectiveness
By Ed Rombach
Link --- http://www.fas133.com/search/search_article.cfm?page=61&areaid=439 

How Wells Fargo's hedge selection benefits from current climate.

Recent media coverage of deflationary indicators like the recent CPI announcement of -.3% in October has prompted some analysts to differentiate between "bad" deflation caused by monetary policy mistakes and "good" deflation attributable to increases in labor productivity. Similarly, when it comes to risk management as practiced in accordance with FAS 133, a case can be made for differentiating between "bad" and "good" hedge ineffectiveness. Since the beginning of the year, with the most aggressive Federal Reserve rate cutting in memory, financial institutions involved in mortgage originations, securitization and retention of mortgage servicing rights (MRS) have been consistently the most prone to reporting significant hedge ineffectiveness. As the Fed cut the over night funds rate another 100 basis points during the third quarter, Wells Fargo & Co, which is included in the Portfolio of '33' took the prize for hedge ineffectiveness - the good kind.

A windfall
Specifically, Wells Fargo recognized a gain of $320 million for the third quarter in non-interest income, representing the ineffective portion of fair value hedges of mortgage servicing rights. This excess hedging gain boosted quarterly EPS by $.19 to $.68, accounting for over 23% of third quarter earnings. If only hedge ineffectiveness was always so kind.

How did Wells Fargo manage to rack up such robust fair value hedging gains relative to their mortgage servicing rights? Did they over hedge, or did the actual prepayment speed of home mortgage re-financing turn out to be less than anticipated? Perhaps it was a little bit of both.

Wells Fargos's third quarter 10Q provides some insights about their hedging methodology, indicating that the ineffectiveness windfall was primarily related to yield curve and basis spread changes that impacted favorably on the derivative hedges relative to the hedged exposures in the volatile interest rate environment.

Divergent spread movement
Subsequent, to June 30 and especially after the September 11 attacks, swap spreads were volatile but generally tended to narrow in the falling interest rate environment, as ten-year swap spreads narrowed from 90 basis points on 7/2/01 to 63 basis points on 9/28/01. If the bank had used Treasury instruments to hedge the prepayment risk on its MRS assets instead of LIBOR based products, the hedges would have under performed. However, Wells Fargo's third quarter 10Q discloses that the company uses a variety of derivatives to hedge the fair value of their MSR portfolio including futures, floors, forwards, swaps and options indexed to LIBOR.

The yield curve steepens
Moreover, the yield curve continued to steepen during the third quarter with the yield spread between ten and thirty year Treasuries widening from 33 basis points out to 88 basis points while the spread between 10yr and 30yr LIBOR swap rates widened from 28 basis points to 65 basis points. Since the ten-year maturity is the duration of choice for mortgage hedgers, it follows that these hedges would have out performed hedges with longer durations.

In connection with this, the company reported that all the components of each derivative instrument's gain or loss used for hedging mortgage servicing rights were included in the measurement of hedge ineffectiveness and was reflected in the statement of income. However, time decay (theta) and the volatility components (vega) pertaining to changes in time value of options were excluded in the assessment of hedge effectiveness. As of September 30, 2001, all designated hedges continued to qualify as fair value hedges. In addition, all components of each derivative instrument's gain or loss used to convert long term fixed rate debt into floating rate debt were also included in the assessment of hedge effectiveness.

Ineffectiveness cuts both ways
There was also some of the bad kind of hedge ineffectiveness which showed up in Wells Fargo's cash flow hedges which include futures contracts and mandatory forward contracts, including options on futures and forward contracts, all of which are used to hedge the forecasted sale of its mortgage loans. During the third quarter the company recognized a net loss of $54 million (-$.03 per share), accounting for ineffectiveness of these hedges, all component gains and losses of which were included in the assessment of hedge effectiveness.

It would appear that this hedge ineffectiveness was the flip side of the coin of the ineffectiveness on the fair value hedges because the futures contracts most commonly used to hedge this kind of pipeline risk are ten year Treasury note futures which would have tended to under-performed relative to the value of the mortgage loans, given the steepening of the yield curve and the general spread widening of mortgage rates relative to treasuries.

For example, ten year constant maturity treasury yields fell 86 basis points, from 5.44% on 7/5/01 to 4.58% on 9/27/01 in contrast to the Freddie Mac weekly survey of mortgage rates reports average 30-year fixed rate mortgages at 7.19% on 7/05/01 or a spread of 1.75% over the ten-year constant maturity treasury rates, vs. average fixed mortgage rates of 6.72% on 9/27/01 or a spread of 2.14% over ten-year treasury rates.

The net impact of the $320 million of excess gains in the fair value hedges vs. net losses of $54 million in the cash value hedges weighs in at a net hedge ineffectiveness of $271 million or almost $.16 (16 cents) per share courtesy of a Federal Reserve policy cutting interest rates with a vengeance. However, the unprecedented interest rate volatility of this period could well turn this quarter's ineffectiveness windfall into next quarter's shortfall. Risk managers should at least be able to take some comfort though from the fact that the fed can't lower interest rates below zero percent.

A Great Article!
"A Consistent Approach to Measuring Hedge Effectiveness," by Bernard Lee, Financial Engineering News --- http://www.fenews.com/fen14/hedge.html

Another Great Article With Formulas
"Complying with FAS 133 Accounting Solutions in Finance KIT," Trema, http://www.trema.com/finance_online/7/2/FAS133_FK.html?7 

During the past year Trema has worked with clients, partners and consulting firms to ensure that all Finance KIT users will be FAS 133 compliant by Summer 2000, when the new U.S. accounting standards come into effect. In Finance Line 3/99, Ms. Mona Henriksson, Director of Trema (EMEA), addressed the widespread implications the FAS 133 accounting procedures will have on the financial industry (see ‘Living Up to FAS 133’ in Finance Line 3/99). Now, in this issue, Ms. Marjon van den Broek, Vice President, Knowledge Center – Trema (Americas), addresses specific FAS 133 requirements and their corresponding functionality in Finance KIT.

See software 

 


We tend to think of commodity prices (think corn) in derivatives has highly competitive because there are so very many buyers and sellers of options, forwards, futures, and swaps.

However, what fail to do is think of the commodity prices (again think corn) of physical inventories as highly concentrated.

This is something to think about when it comes to speculating in physical inventories versus commodity derivatives.

From Agueconomics on April 26, 2008 ---
http://www.aguanomics.com/2008/04/who-benefits-from-ethanol.html

Concentrations are significant: DuPont, Monsanto, Novartis and Dow sell 69 percent of (corn) seeds; ADM, Cargill and two others companies control 74 percent of buying side of the corn market. This level of market share means that these industries are "highly concentrated oligopolies."


Law School Tax Clinic Wins Big Case For Students Seeking To Deduct MBA Expenses ---
http://taxprof.typepad.com/taxprof_blog/2016/08/law-school-tax-clinic-wins-big-tax-court-case-for-students-seeking-to-deduct-mba-expenses.html

Jensen Comment
If this trend continues for MBA degrees then it may increase demands from other professions such as accountants, nurses, pharmacists, physicians, engineers, etc.
I can't imagine the IRS giving up fighting the deduction of graduate degree expenses.
Of course since the bottom half of taxpayers pay almost no income taxes, the majority of students seeking graduate degrees may not need to deduct graduate school expenses since they don't pay any income taxes in the first place. The sticking point would be those substantially employed who are already in the top half of the income ladder for taxpayers or spouses who are not employed but are parties to higher income joint returns.

 


Beta Coefficient --- https://en.wikipedia.org/wiki/Capital_asset_pricing_model

Also see https://en.wikipedia.org/wiki/Beta_(finance)

"Do Portfolio Managers Underestimate Risk by Overanalyzing Data? New research questions whether “smart” beta is always smart," by Louise Lee, Insights from the Stanford University Graduate School of Business, July 25, 2016 ---

 Criticism of Beta ---
https://en.wikipedia.org/wiki/Beta_(finance)#Criticism


How to Mislead With Statistics

The following two articles show how economists can put two different spins on the same data (something that seems to be taught in social sciences in general whenever politics gets involved).

The City of Seattle hired a group of economists to study the transitory impact of minimum wage hikes on labor and business firms in Seattle. I say "transitory" because the wage hikes are being phased in and won't reach the $15 level until

The Study
REPORT ON THE IMPACT OF SEATTLE’S MINIMUM WAGE ORDINANCE ON WAGES, WORKERS, JOBS, AND ESTABLISHMENTS THROUGH 2015 The Seattle Minimum Wage Study Team1 University of Washington
July 2016
http://evans.uw.edu/sites/default/files/MinWageReport-July2016_Final.pdf

This report presents the short-run effects of the Seattle Minimum Wage Ordinance on the Seattle labor market. The Seattle Minimum Wage study team at the University of Washington analyzed administrative records on employment, hours, and earnings from the Washington Employment Security Department to address two fundamental questions: 1) How has Seattle’s labor market performed since the City passed the Minimum Wage Ordinance, and particularly since the first wage increase phased in on April 1, 2015? 2) What are the short-run effects of the Minimum Wage Ordinance on Seattle’s labor market? While quite similar at first glance, these two questions address very different issues and require very different methods to answer. The first question can be studied with a simple before/after comparison. Although the comparison is simple, it risks conflating the impact of the minimum wage with other local trends. Many things have happened in Seattle’s labor market since June 2014, most of them having little or nothing to do with the minimum wage itself. The City has enjoyed steady expansion in tech sector employment, and a construction boom fueled by rising residential and commercial property prices. Even the weather – a key determinant of economic activity in the Puget Sound region – was favorable in 2015, with record-low precipitation in the early months of the $11 minimum wage. The before-after comparison can tell us the net impact of all these simultaneous trends, but this comparison cannot distinguish among them. Our second question – the more important one for purposes of evaluating the policy – aims to isolate the impact of the minimum wage from all the other regional trends seen over the same time period. Whereas the first question asks “are we better off than we were when Seattle raised the minimum wage” and requires only a simple comparison of yesterday to today, the second asks “are we better off than we would have been if Seattle had not adopted a higher minimum wage?” To answer it requires imagining how the local economy would look in absence of a Minimum Wage Ordinance. While it is impossible to directly observe what would have happened if no wage ordinance had been implemented, this report uses widely accepted statistical techniques to compare Seattle in its current state—with the presence of the Minimum Wage Ordinance—to an image of what Seattle might have looked like today if not for the Minimum Wage Ordinance. We take advantage of data going back to 2005 to build a model of the way Seattle’s labor market typically works. We also take advantage of data on nearby regions that did not increase the minimum wage to better understand how other factors might have influenced what we observe in the City itself.

3 In this report, we present findings on wages, workers, jobs, and establishments. Our findings can be summarized as follows: Wages:  The distribution of wages shifted as expected.  The share of workers earning less than $11 per hour declined sharply.  This decline began shortly after the ordinance was passed.  However, similar declines were seen outside of Seattle, suggesting an improving economy may be the cause of the change in the distribution of wages. Low-Wage Workers:  In the 18 months after the Seattle Minimum Wage Ordinance passed, the City of Seattle’s lowest-paid workers experienced a significant increase in wages.  The typical worker earning under $11/hour in Seattle when the City Council voted to raise the minimum wage in June 2014 (“low-wage workers”) earned $11.14 per hour by the end of 2015, an increase from $9.96/hour at the time of passage.  The minimum wage contributed to this effect, but the strong economy did as well. We estimate that the minimum wage itself is responsible for a $0.73/hour average increase for low-wage workers.  In a region where all low-wage workers, including those in Seattle, have enjoyed access to more jobs and more hours, Seattle’s low-wage workers show some preliminary signs of lagging behind similar workers in comparison regions.  The minimum wage appears to have slightly reduced the employment rate of low-wage workers by about one percentage point. It appears that the Minimum Wage Ordinance modestly held back Seattle’s employment of low-wage workers relative to the level we could have expected.  Hours worked among low-wage Seattle workers have lagged behind regional trends, by roughly four hours per quarter (nineteen minutes per week), on average.  Low-wage individuals working in Seattle when the ordinance passed transitioned to jobs outside Seattle at an elevated rate compared to historical patterns.  Seattle’s low-wage workers did see larger-than-usual paychecks (i.e., quarterly earnings) in late 2015, but most— if not all—of that increase was due to a strong local economy.  Increased wages were offset by modest reductions in employment and hours, thereby limiting the extent to which higher wages directly translated into higher average earnings.  At most, 25% of the observed earnings gains—around a few dollars a week, on average—can be attributed to the minimum wage.  Seattle’s low-wage workers who kept working were modestly better off as a result of the Minimum Wage Ordinance, having $13 more per week in earnings and working 15 minutes less per week.

4 Jobs:  Overall, the Seattle labor market was exceptionally strong over the 18 months from mid2014 to the end of 2015.  Seattle’s job growth rate tripled the national average between mid-2014 and late 2015.  This job growth rate outpaced Seattle’s own robust performance in recent years.  Surrounding portions of King County also had a very good year; the boom appears to fade with geographic distance.  Job growth is clearly driven by increased opportunities for higher-wage workers, but businesses relying on low-wage labor showed better-than-average growth as well.  For businesses that rely heavily on low-wage labor, our estimates of the impact of the Ordinance on the number of persistent jobs are small and sensitive to modeling choices. Our estimates of the impact of the Ordinance on hours per employee more consistently indicate a reduction of roughly one hour per week.  Fewer hours per employee could reflect higher turnover rather than cutbacks in staffing.  Reductions in hours are consistent with the experiences of low-wage workers. Establishments:  We do not find compelling evidence that the minimum wage has caused significant increases in business failure rates. Moreover, if there has been any increase in business closings caused by the Minimum Wage Ordinance, it has been more than offset by an increase in business openings. In sum, Seattle’s experience shows that the City’s low-wage workers did relatively well after the minimum wage increased, but largely because of the strong regional economy. Seattle’s low wage workers would have experienced almost equally positive trends if the minimum wage had not increased. Although the minimum wage clearly increased wages for this group, offsetting effects on low-wage worker hours and employment muted the impact on labor earnings. We strongly caution that these results show only the short-run impact of Seattle’s increase to a wage of $11/hour, and that they do not reflect the full range of experiences for tens of thousands of individual workers in the City economy. These are “average” effects which could mask critical distinctions between workers in different categories. Our future work will extend analysis to 2016, when Seattle’s minimum wage increased a second time and began to distinguish between businesses of different sizes and industries. It will also incorporate more detailed information about workers by linking employment records to other state databases. This will give us a greater capacity to answer key questions, such as whether the workers benefiting most from higher minimum wages are more likely to be living in poverty. We are also in the process of collecting additional survey information from Seattle businesses and conducting interviews with a worker sample tracked since early 2015. The next report, expected in September, will focus specifically on how the minimum wage has affected nonprofit organizations.

Continued in article

Spin From Investors Business Daily
The Bitter Lesson From Seattle's Minimum Wage Hike
August 10, 2016
http://www.investors.com/politics/commentary/the-bitter-lesson-from-seattles-minimum-wage-hike/

Spin From a Respected, Albeit Very Liberal Economist --- Jared Bernsten
So far, the Seattle minimum-wage increase is doing what it’s supposed to do
August 10, 2016
https://www.washingtonpost.com/posteverything/wp/2016/08/10/so-far-the-seattle-minimum-wage-increase-is-doing-what-its-supposed-to-do/?utm_term=.d5bf0bcad438
 

Jensen Comment
The issue of minimum wage became an enormous political issue when the workers receiving the wage changed. When I grew up in the 1950s and 1960s and those McJobs having low pay were primarily intended to be temporary jobs where students could earn a little outside the classroom and where younger people in general could get a start in the work place. Nobody with normal capabilities intended to make careers out of those very low paying McJobs. Somewhere along the way things changed to where now those McJobs became careers for many folks who are not destined for bigger and better careers in the economy. With that change came increasing demands to increase the minimum wage to a more suitable wage for longer-term careers.

The real question that the Seattle study is trying to answer is whether raising the minimum wage in Seattle had a positive or negative impact on employers, employees, and low-skilled unemployed. The answer seems to be varied (depending upon what economist and what workers you consult.) Impact on is hard to isolate statistically because Seattle is a relative boom town due to the high tech economic sector. Thus just because a lot of McJob employers are still thriving is confounded by the boom times apart from the minimum wage increase. McJob employers are likely to be hit harder in communities having less boom success in general. Also the wage increases are being phased in over time (until 2021)such that there is not one big boom to study.

It's hard judge impact on some McJob employers in very large or otherwise isolated communities relative to those surrounded by competition not required to raise minimum wage. For example, restaurant customers in in Seattle are not likely to go elsewhere because their favorite restaurant had to raise prices slightly. Restaurant customers on the very edge of Seattle might drive a bit further for better prices.

Thus the impact of the Seattle's minimum wage hike focuses more on labor/employment impact than on employer impact. And herein commences the lying or possible lying with statistics. I would dwell on all the issues since you can read them for your self in the above links.

Personally, I think the $15 minimum wage eventually is a good idea in a high cost city like Seattle.

But I would like to conclude with what I think is trickery in Jared Bernstein's rejoinder. He skirts important issues like how entry level employees without skills (like students in need of part-time jobs and employees who messed up their early years (e.g., with drugs and crime) get a start without higher turnover in the minimum wage jobs that open up entry-level jobs.

At times he totally ignores the study's findings such as:

Wages:
 The distribution of wages shifted as expected.
 The share of workers earning less than $11 per hour declined sharply.
 This decline began shortly after the ordinance was passed.
 However, similar declines were seen outside of Seattle, suggesting an improving economy may be the cause of the change in the distribution of wages.

Second he seems to imply without more data or foresight that in larger firms the minimum wage is an even better idea than it is at fast-food restaurants. What he fails to note that it is in the larger firms where robotics alternatives to low-paying jobs are exploding. :

Wal-Mart Has An Army Of Robots That Pick, Pack, and Send in Their 130 Distribution Centers ---
http://www.businessinsider.com/wal-mart-warehouse-robots-2013-12

McJobs in those Wal-Mart distribution centers have already disappeared with advances in robotics. Perhaps this was inevitable but eliminating McJobs with higher minimum wages will speed up job sacrices to robots and drive more and more low skilled workers to welfare rolls and crime.

Also see
The Automated Wal-Mart:  A Thought Experiment
http://faculty.washington.edu/sandeep/automated/walmart.pdf

The Seattle experiment is hard to extrapolate to every town and city in the USA. I think higher minimum wages where the cost of living is very high is probably a good idea. For example, the cost of living is even high in the suburbs of Seattle and San Francisco. But the same minimum wage successes for those metropolitan areas can be a disaster in rural America where the job losses are likely to be enormous, For example, down the road from our mountain cottage is an old fashioned hardware store that is already struggling to compete with stores 10 miles away (in Littleton, NH), stores like Wal-Mart, Home Depot, and Lowes. A $15 minimum wage might close the doors on my favorite and struggling little hardware store that now makes almost zero profit. The workers in this store are typically part-time spouses who supplement the family income with a bit of added wage within walking distance of the store.

The main conclusion from this illustration is that professional economists cannot agree on much of anything!


"PwC faces 3 major trials that threaten its business (existence)." by Francine McKenna, Marketwatch, August 17, 2016 ---
http://www.marketwatch.com/story/pwc-faces-three-major-trials-that-could-put-firm-out-of-business-2016-08-12?mod=mw_share_twitter 

Bob Jensen's threads on Big Four lawsuits ---
http://www.trinity.edu/rjensen/fraud001.htm


The Women's Library @ LSE --- http://digital.library.lse.ac.uk/collections/thewomenslibrary

The library seems to overlook the vast literature on gender issues in accounting ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Women


Social-science researchers don’t need to be nearly as afraid of the Institutional Review Board process as they usually are ---
http://chronicle.com/article/Does-This-Have-to-Go/237476?cid=at&utm_source=at&utm_medium=en&elqTrackId=523b59dd1962441f8a807798fce2666d&elq=f9442a4087aa4f53a76e0cd63bed7868&elqaid=10288&elqat=1&elqCampaignId=3852

Jensen Comment
The IRB reviews also apply to disciplines other than the the social sciences. For example, accounting researchers using human subjects generally face IRB reviews as well.


"Science Isn’t Broken." By Christie Aschwanden, Nate Silver's 5:38 Blog, August 19, 2015 ---
http://fivethirtyeight.com/features/science-isnt-broken/#part1

If you follow the headlines, your confidence in science may have taken a hit lately. Peer review? More like self-review. An investigation in November uncovered a scam in which researchers were

researchers were rubber-stamping their own work,
circumventing peer review at five high-profile publishers. Scientific journals? Not exactly a badge of legitimacy, given that the International Journal of Advanced Computer Technology recently accepted for publication a paper titled “Get Me Off Your Fucking Mailing List,” whose text was nothing more than those seven words, repeated over and over  
for 10 pages. Two other journalsallowed an engineer posing as Maggie Simpson and Edna Krabappel to publish a paper, “Fuzzy, Homogeneous Configurations.” Revolutionary findings? Possibly fabricated. In May, a couple of University of California, Berkeley, grad students discovered irregularities in
Michael LaCour’s influential paper suggesting that an in-person conversation with a gay person could change how people felt about same-sex marriage. The journal Science retracted the paper shortly after, when LaCour’s co-author could find no record of the data.Taken together, headlines like these might suggest that science is a shady enterprise that spits out a bunch of dressed-up nonsense. But I’ve spent months investigating the problems hounding science, and I’ve learned that the headline-grabbing cases of misconduct and fraud are mere distractions. The state of our science is strong, but it’s plagued by a universal problem: Science is hard . . .

Continued in article

Jensen Comment
Accounting researchers have a bit easier since it's almost certain their research will never be subjected to replicaWhy Pokémon Go’s technology is no fad tion ---
http://www.trinity.edu/rjensen/TheoryTaR.htm


The Unraveling of Harvard’s Star Trading Desk,” by Michael McDonald, Bloomberg, July 28, 2016 ---
http://www.bloomberg.com/news/articles/2016-07-28/behind-harvard-shakeup-a-star-trading-desk-that-unraveled-fast?cmpid=BBD072916_BIZ&utm_medium=email&utm_source=newsletter&utm_campaign=

 

. . .

After years of missteps, controversy and even crisis, Harvard Management Corp., which oversees the university’s $37.6 billion endowment, began assembling a new corps of equity traders and analysts in 2014, in hopes of recapturing a part of the investment magic that had once made the fund the envy of the world.

Only now, just two years later, that plan has collapsed. Stephen Blyth, 48, the former bond trader behind that effort, stepped down as HMC’s chief executive Wednesday for personal reasons after just 18 months on the job. His resignation follows the departure in June of Michael Ryan and Robert Howard, the two former Goldman Sachs Group Inc. partners he had brought in to guide the new equity strategy.

Pulled Plug

While Blyth’s exit was said to be unrelated to those of his star hires, the talk inside HMC’s offices at the Federal Reserve Bank of Boston centered on why management had pulled the plug on the team so quickly amid a volatile equities market.

According to people familiar with the matter, some traders in Ryan’s group posted losses in 2015 significant enough to trigger internal temporary stop-loss orders. Ryan also lost money in a portfolio he managed. The extent of the losses is unclear, however, and came at a time when most hedge funds were struggling to beat market indexes.

But now, Harvard is once again confronting the same, uncomfortable question that has dogged it for years: why can’t the world’s richest university, for all its brains, make smarter investments?

The IRS Scandal, Day 1180
World Tribune, ‘Smoking-Gun Documents’ Show IRS Knew About Targeting of Conservatives Before 2012 Election ---
http://taxprof.typepad.com/taxprof_blog/2016/08/the-irs-scandal-day-1180.html

Top IRS officials knew the agency was targeting conservatives because of their ideology and political affiliation two years before disclosing it to Congress and the public, according to a Judicial Watch report released on July 28.

“Senior IRS officials knew that agents were targeting conservative groups for special scrutiny as early as 2011,” the report said.

Lois Lerner revealed the targeting in May 2013 when she responded to a planted question at an American Bar Association conference.

Continued in article

Jensen Comment
Lois Lerner continues to refuse to testify whether or not the conservative targeting was at the behest of somebody in the Whitehouse (not necessarily President Obama who was up for re-election).

The IRS admits to destroying the evidence in Virginia that might answer the question of who instigated the targeting of the conservative fund raising groups.

It would become a tremendous scandal if the Whitehouse manipulated the IRS or any other government agency to aid in the election of a USA President. But without testimony and other evidence the genuine scandal cannot be proven. The shadow of scandal will probably last long into history after President Obama leaves office. By not investigating the scandal himself he has not cleared his own record.

As a minor scandal, Lois Lerner was given a bonus by the IRS after her resignation in disgrace.


VAT Tax --- https://en.wikipedia.org/wiki/Value-added_tax

Corporate Income/Revenue Taxes Increases Are Either Avoided (such as sweetheart deals from the Illinois Governor)
or They Get Passed Along in Higher Prices
or They Drive Companies Out of State (as Wisconsin learned the hard way)

"Oregon’s Regressive Tax Referendum:  A gross-receipts levy would punish the 99% to help public unions," The Wall Street Journal, August 11, 2016 ---
http://www.wsj.com/articles/oregons-regressive-tax-referendum-1470958010?mod=djemMER

Progressives claim they can pay for their grand spending ambitions by soaking the rich, but the little guy invariably gets wet. The latest illustration is Oregon, where unions are campaigning for a gross-receipts tax on large corporations that even state budget analysts warn will drench the 99% too.

Last week Governor Kate Brown endorsed a November referendum that would impose a 2.5% tax on corporate sales exceeding $25 million. Oregon’s top income tax rate of 9.9% is the second highest in the country after California, and it hits at an income of only $125,000 for a single tax filer.

The Beaver State last raised income taxes in 2009, and state revenues have grown by nearly 30% in the last four years. But unions say the new business tax is needed to close a $1.4 billion deficit and pay for baked-in spending—the same justification for the last tax increase.

Health-care costs will rise by $1 billion in the next two-year budget thanks in part to the state’s ObamaCare Medicaid expansion. Generous new union contracts that increase worker pay and reduce their health-care premium contributions will add hundreds of millions to the fisc, while public pension costs are projected to swell by 150% to $4.5 billion by 2021.

The gross-receipts tax, which would throw off $3 billion annually and expand the budget by a third, would be a revenue gusher because of its pyramiding effect. As the Tax Foundation notes, “In effect, the tax gets built into prices and compounded as a product moves through the production process.” So low-margin businesses at the end of the supply chain—particularly retailers—get walloped.

Only five states assess a gross-receipts tax. Many including Michigan and New Jersey have dumped theirs due to its economic distortions. Oregon’s would be the highest and most onerous since it wouldn’t include deductions or differential rates to ameliorate the burden on low-margin industries. For instance, Texas allows businesses to deduct the cost of goods sold and employee compensation—and the Lone Star State has no income tax.

Businesses will respond by raising prices, reducing investment and laying off workers. The state Legislative Revenue Office estimated that the tax would cost 38,200 jobs in the private economy including 13,600 in retail trade while increasing government employment by 17,700. By 2022 state income would decline by 0.17% while prices would edge up 0.89% relative to the office’s baseline forecast.

The analysts also forecast that the measure would increase the state’s per capita tax burden by $600, and that “the marginal impact of the tax will be regressive.” Households making less than $21,000 in income would experience a 0.9% decline in after-tax income—about twice as much as those earning more than $206,000.

Continued in article

Jensen Comment
Actually I favor a VAT tax to replace the easily-avoided corporate income tax, but the VAT tax will only work well if it is imposed nationally.


GAO:  IRS Faulted for Lax Housing Tax Credit Oversight ---
http://www.accountingweb.com/tax/irs/irs-faulted-for-lax-housing-tax-credit-oversight?source=tx080116

Bogus Tax Return Refund Fraud:  GAO Finds Holes in IRS Taxpayer Protection Program (TPP) ---
http://www.accountingweb.com/tax/irs/gao-finds-holes-in-irs-taxpayer-protection-program?source=tx080116  


Some interesting real world company illustrations of negative goodwill are listed at
https://www.scheller.gatech.edu/centers-initiatives/financial-analysis-lab/files/2011/gatech_finlab_bargainpurchase_4apr2011.pdf


Pokemon Go --- https://en.wikipedia.org/wiki/Pok%C3%A9mon_Go

Augmented Reality --- https://en.wikipedia.org/wiki/Augmented_reality

MAAW's Blog by Jim Martin:  Why Pokémon Go’s technology is no fad ---
http://maaw.blogspot.com/2016/07/why-pokemon-gos-technology-is-no-fad.html


Learning maps, diagrams, and flowcharts. A sampling of illustrations from MAAW ---
http://maaw.info/LearningMapsandFlowCharts.htm


These are Not Your Average Business Cards ---
https://www.moo.com/us/products/business-cards.html?cvosrc=ppc content.bidtellect.bid-4054-How To Geek LLC-393367-jul16&cvo_campaign=28259&utm_source=bidtellect&utm_medium=native&utm_campaign=us_soho_bidtellect_camp28259_4054_How To Geek LLC_393367_jul16&utm_content=393367&utm_term=4054


Questions
How do WebLedgers differ from other types of accounting software"
How is this difference changing in the era of cloud storage?
How is there still a difference betwee WebLedgers and other accounting software in this era of cloud storage?

 

NetSuite --- https://en.wikipedia.org/wiki/NetSuite

Oracle plans to acquire NetSuite for $9.3 billion ---
http://www.usatoday.com/story/tech/news/2016/07/28/oracle-acquires-netsuite-93-billion/87652732/?AID=10709313&PID=6147589&SID=ir6rex3qep005fwm00dth

Oracle continues expanding the size of its cloud.

The software giant, which has its own growing cloud computing business, is making a $9.3 billion bid to acquire NetSuite, another cloud software provider, the companies said Thursday.

Oracle will pay $109 in cash per NetSuite share in the transaction, expected to close in 2016, a 19% percent premium to NetSuite's closing share price of $91.57 Wednesday. NetSuite's board has unanimously approved the deal, the company said.

Shares of NetSuite (N) were up 18% in midday trading Thursday to $108.15 after rising 9% Wednesday on speculation of a deal.

Oracle (ORCL) shares were up 0.13% to $40.99 midday.

Redwood Shores, Calif.-based Oracle has been growing its cloud business beyond its traditional corporate software offerings. In NetSuite, Oracle gets the company that became the first to a full suite of enterprise resource planning (ERP) applications, said Ray Wang, principal analyst and founder at Constellation Research.

Located in San Mateo, Calif., NetSuite was co-founded in 1998 by current NetSuite Chairman and Chief Technology Officer Evan Goldberg and Oracle founder Larry Ellison as NetLedger, a cloud accounting company. Ellison, who stepped down as Oracle CEO two years ago, is now Oracle's executive chairman. He and his family remain the largest shareholders of NetSuite, owning more than 45% of outstanding shares as of March 31, 2016, according to filings with the Securities and Exchange Commission.

With NetSuite’s IPO in 2007, the company was valued at $2.1 billion and had grown to $7.7 billion by the end of 2013. Today, NetSuite has more than 30,000 companies in more than 100 countries using its cloud-based business management software. Current NetSuite CEO Zach Nelson, who handled global marketing for Oracle from 1996 to 1998, has said he expects NetSuite to hit $1 billion in revenue for the first time.

Continued in article

Jensen Comment
Cloud computing as we know it today was nonexistent in 1998 when NetLedger and other WebLedger accounting systems were formed. NetLeger was probably the most successful of the WebLedger ventures. WebLedgers like NetLedger differed from other accounting software in that the ledgers and journals of a company were remotely stored databases such as huge Oracle databases. The good news is that the expensive costs of acquiring and maintaining accounting databases were provided by WebLedger systems thereby relieving clients, especially smaller clients, from having to install accounting systems and hire the IS experts to maintain local databases. The bad news, of course, was the loss of some controls that arise from having your own databases locally.

I wrote about WebLedger alternatives at the time at
http://www.trinity.edu/rjensen/webledger.htm

In those days students could get free access to NetLedger and set up an accounting system for a hypothetical company. You can read the resulting project for one of my student teams at
http://www.trinity.edu/rjensen/acct5342/projects/NetLedger.pdf

Today cloud storage offers some of the WebLedger advantages of offsite storage and maintenance. However, WebLedgers still offer the advantages and disadvantages of offsite accounting software.


Friends, Partners, or Dummies on the Inside Are More Important Than Hacking Skills

A new study suggests many data breaches are caused by insider threats -- whether through malice or accident ---
http://www.zdnet.com/article/data-theft-rises-sharply-insiders-to-blame/

Jensen Comment
The enormous problem is a disgruntled employee with a key to the kingdom.


How to Mislead With Statistics

"The Great Productivity Puzzle," by John Cassady, The New Yorker, August 10, 2016 ---
http://www.newyorker.com/news/john-cassidy/the-great-productivity-puzzle


What's the difference between "John Doe, CPA" versus "John Doe, CPA, ABV?"

AICPA Answer ---
http://www.aicpa.org/Membership/Join/Pages/credentials.aspx#tab-5?utm_source=mnl:cpald&utm_medium=email&utm_campaign=23Aug2016

Jensen Comment
Note the other certifications in the tabs at the top of the page.

Badges and certifications will probably replace college diplomas in terms for both landing jobs and obtaining promotions in the future.

But not all badges and certifications are created equally. The best ones will be those that have both tough prerequisites and tough grading and tough experience requirements. There's precedence for the value of certifications in medical schools. The MD degree is now only a prerequisite for such valuable certifications in ophthalmology, orthopedics, neurology cardio-vascular surgery, etc.

What will be interesting is to see how long it will take badges/certifications to replace Ph.D. degrees for landing faculty jobs in higher education. At present specializations are sort of ad hoc without competency-based testing. For example, accounting professors can advance to specialties like auditing and tax corporate tax accounting with self-study and no competency-based testing. This may change in the future (tremble, tremble).

Watch this video link forwarded by Denny Beresford ---
Watch the video at
https://www.youtube.com/watch?v=5gU3FjxY2uQ
The introductory screen on the above video reads as follows (my comments are in parentheses)

In Year 2020 most colleges and universities no longer exist (not true since residential colleges provide so much more than formal education)

 

Academia no longer the gatekeeper of education (probably so but not by Year 2020)

 

Tuition is an obsolete concept (a misleading prediction since badges will not be free in the USA that already has  $100 trillion in unfunded entitlements)

 

Degrees are irrelevant (yeah, one-size-fits-all diplomas are pretty much dead already)

 

What happened to education?

 

What happened to Epic?

Bob Jensen's threads on the  future of badges and certifications ---
http://www.trinity.edu/rjensen/assess.htm#ConceptKnowledge


From the CFO Journal's Morning Ledger on August 26, 2016

Europe's radical copyright reform trains cross hairs on Google
The European Commission is finalizing reforms that will allow European news publishers to levy fees on internet platforms such as Alphabet Inc.’s Google if search engines show snippets of their stories, the Financial Times reports. The proposals, to be published in September, aim to dilute the power of big online operators that can lead to imbalanced commercial negotiations between search engines and content creators, officials say.

Jensen Comment
What's a snippet?

If this restricts anything from being quoted it Europe will be shutting down academic debate. The whoe purpose of allowing "short" quotations is to allow scholars to write critiques and inspire debate.

As a rule copyright holders cannot prevent you from quoting their published works as long as the quotations are short in length. One of the main reasons is that authors cannot use copyright law to put their works above criticism. Sometimes it's really not effective to criticize a work without quoting some parts of that work. Europe's "radical copyright reform" will hopefully not make authors' works above criticism.


Will the largest for-profit training school (with 130 campuses) be thrown under the bus?

ITT --- https://en.wikipedia.org/wiki/ITT_Technical_Institute

From the CFO Journal's Morning Ledger on August 26, 2016

This could be it for ITT
The Obama administration took steps Thursday that could effectively force the closure of one of the nation’s largest for-profit college chains, banning ITT Technical Institute from enrolling new students who receive federal aid. ITT, which has about 43,000 students nationwide, is facing accusations from its accreditor of chronic mismanagement of its finances and using questionable recruiting tactics. The company is also under investigation by state and federal authorities. Parent ITT Educational Services Inc.’s stock plunged.

Bob Jensen's threads on fee-based training alternatives ---
http://www.trinity.edu/rjensen/Crossborder.htm


From the CFO Journal's Morning Ledger on August 23, 2016

U.S. and German audit regulators sign cooperation pact
The Public Company Accounting Oversight Board and the German Auditor Oversight Body agreed to cooperate in oversight of audit firms subject to both regulatory jurisdictions, the Journal of Accountancy reports. The deal provides a framework for joint inspections and allows the regulators to exchange confidential information in accordance with German laws and the Dodd-Frank Act.

 


From the CFO Journal's Morning Ledger on August 23, 2016

Court rules against EY in overtime case
A federal appeals court has ruled in favor of two Ernst & Young employees who wanted to participate in a class-action lawsuit against the firm about overtime pay rather than submit to mandatory arbitration, Accounting Today reports. The U.S. Court of Appeals for the Ninth Circuit handed down an opinion Monday in favor of two EY employees, vacating a district court’s order that would have compelled they submit to individual arbitration of their claims. The class-action lawsuit they wished to participate in alleged that EY misclassified employees in order to deny them overtime wages, in violation of the Fair Labor Standards Act and California labor laws.

 


From the CFO Journal's Morning Ledger on August 23, 2016

BofA gets nod against DOJ appeal
An appellate court on Monday declined to reconsider its decision to throw out a mortgage-fraud case against Bank of America Corp., a blow to the Justice Department as it tried to rescue one of its highest-profile cases tied to the financial crisis. Judges for the Second U.S. Circuit Court of Appeals in New York said in a filing that they had considered the Justice Department’s request and would deny it. The judges didn’t elaborate on their decision.


From the CFO Journal's Morning Ledger on August 23, 201

Wells Fargo settles with CFPB
Wells Fargo Bank agreed to pay $4 million to resolve allegations by the Consumer Financial Protection Bureau that it used illegal payment-processing practices resulting in higher costs for some borrowers. The settlement includes a $410,000 refund to affected consumers and a $3.6 million civil penalty to the CFPB, which has recently stepped up its scrutiny of student-loan servicing companies. The unit of Wells Fargo & Co. said it disagreed with the CFPB’s assertions.b

 


From the CFO Journal's Morning Ledger on August 19, 2016

FASB tweaks nonprofit reporting
The Financial Accounting Standards Board’s updated rules aim to make it simpler for nonprofits to classify and report their assets. The new rules also make it easier for donors, creditors and other interested parties to see how a nonprofit’s funds are being used. Nonprofits will now report two classes of assets, instead of three, which should reduce some of the burden of deciding which charitable assets can be used, and when. The new reporting will separate cash that is available now from cash that may have time contingencies or other strings attached.

 


Record Dividend Payouts Hurting Bond Investing Since the Fed Drove Interest Rates to Virtually Zero

From the CFO Journal's Morning Ledger on August 19, 2016

Big companies are handing more of their profits to shareholders than at any time since the financial crisis, as record-low bond yields put a premium on dividends, Mike Bird, Vipal Monga and Aaron Kuriloff write. Payouts at S&P 500 companies for the 12 months were nearly 38% of net income. Moreover, 44 of those firms paid more than they earned over the previous year, the most in a decade and a practice some analysts deem unsustainable. The dividend yield on the S&P 500, or annual payouts as a share of the current price, has been steadily above the 10-year U.S. Treasury yield for most of 2016, after only occasionally doing so for decades.

The shift has forced many investors to conclude there is no alternative to investing in stocks, a mantra that has accompanied the rise this year of the Dow Jones industrial Average and S&P 500 to records.The increase also underscores the intense pressure on corporate earnings. Earnings at S&P 500 companies are set to decline from a year earlier in five straight quarters, a retreat not seen since in the financial crisis. Companies paying more than their income over the past 12 months included drug firm Pfizer Inc., aluminum smelter Alcoa Inc., toy maker Mattel Inc. and food companies Kellogg Co. and Kraft Heinz Co.


From the CFO Journal's Morning Ledger on August 19, 2016

Harley settles on emissions probe
Harley-Davidson Inc.
 reached a $15 million settlement to resolve U.S. claims that it violated air-pollution laws amid growing government scrutiny of vehicle emissions on the road. The company made or sold 340,000 “super tuner” devices that improved engine performance but increased engine exhaust to levels beyond the emissions levels the company had certified with regulators, according to a complaint and consent decree, both filed Thursday by the Justice Department on behalf of the Environmental Protection Agency.

 


From the CFO Journal's Morning Ledger on August 17, 2016

Hain’s problematic revenue accounting
Something could be rotten in Hain Celestial Group Inc.’s revenue, Miriam Gottfried writes for Heard on the Street. Hain, which specializes in natural and organic foods, said Monday it will delay its earnings report because of a potential problem with how it has accounted for revenue. Hain is evaluating whether revenue associated with concessions it granted certain U.S. distributors was recorded in the correct period. The company has historically recognized it at the time products are shipped to distributors, but is examining whether that revenue should have been recognized when products were sold through distributors to stores

Bob Jensen's threads on revenue accounting frauds and errors ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm


From the CFO Journal's Morning Ledger on August 17, 2016

Health care a sticky wicket
Many companies are cutting jobs in response to rising health-care costs spurred by the Affordable Care Act, according to a new survey by the Federal Reserve Bank of New York. Roughly one-fifth of service sector and manufacturing company executives said they are reducing the number of workers in response to provisions in the health-care law, Vipal Monga reports. The results add to a bevy of bad news related to the Obama administration’s signature health-care law.

Bob Jensen's universal health care messaging --- http://www.trinity.edu/rjensen/Health.htm 


From the CFO Journal's Morning Ledger on August 16, 2016

Aetna bails on many Obamacare exchanges
Aetna Inc. will withdraw from 11 of the 15 states where it currently offers plans through the Affordable Care Act exchanges, becoming the latest of the major national health insurers to pull back sharply from the law’s signature marketplaces after steep financial losses. Aetna’s move will sharpen concerns about competitive options in the exchanges—and it puts at least one county at risk of having no insurers offering exchange plans in 2017.

Bob Jensen's universal health care messaging --- http://www.trinity.edu/rjensen/Health.htm 


Home Equity Loan --- https://en.wikipedia.org/wiki/Home_equity_loan

From the CFO Journal's Morning Ledger on August 12, 2016

Home equity loans come back to haunt borrowers, banks
The bill is coming due for many homeowners on a type of loan that was widely popular in the run-up to the housing bust, causing a rise in delinquencies at banks. More homeowners are missing payments on their home-equity lines of credit, or Helocs, a type of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or almost any other expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years. Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax  Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017.

Reverse Mortgage Calculator ---
http://reversemortgageguides.org/?leadint_source=BingPPC


From the CFO Journal's Morning Ledger on August 12, 2016

GM continues to seek shield from ignition-switch suits
General Motors Co. sought a rehearing of an appeals court ruling that exposes it to hundreds of potential lawsuits and some $10 billion in liabilities from faulty ignition switches. Lawyers for the nation’s largest auto maker said the court made two “fundamental errors” last month when it ruled against the company’s efforts to use its 2009 bankruptcy to shield itself from the litigation over the ignition switches. GM said the court’s decision, if not reversed, would permanently damage the bankruptcy process that saved it from collapse in 2009.


Reminds me of the 1990s when companies reported bartering of Website advertising as revenue

From the CFO Journal's Morning Ledger on August 11, 2016

Comscore delays quarterly report on accounting probe, names new leadership
ComScore Inc. on Wednesday said it needs more time to file its June quarterly report, as the media measurement and analytics company completes an internal investigation into its accounting. Separately, comScore named a new management team, including replacing its chief executive Serge Matta, who has been accused of benefiting from the company’s boosted results from the recording of “nonmonetary” revenue. This reflects revenue from barter agreements, where actual cash doesn’t change hands. As the WSJ’s Anne Steele writes, comScore replaced finance chief Melvin Wesley with chief revenue officer David Chemerow. Mr. Chemerow was CFO for Rentrak Corp., which ComScore bought in January.

Bob Jensen's threads on bartering and other creative accounting ploys to jack up revenues ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 


From the CFO Journal's Morning Ledger on August 10, 2016

Tipsters are poised for big payouts
U.S. government settlements with State Street Corp. and Bank of New York Mellon Corp. could produce a windfall for three former employees who blew the whistle on the banks’ alleged mistreatment of foreign-currency-trading clients. The awards could exceed a combined $100 million, the largest such awards on record, according to an analysis by The Wall Street Journal. Harry Markopolos, the forensic accountant who repeatedly blew the lid off Bernard Madoff’s Ponzi scheme, assembled the group and advised them.  He could reap a slice of any payouts awarded to the whistleblowers, according to people familiar with the matter.

Bob Jensen's threads on whistle blowing ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing


From the CFO Journal's Morning Ledger on August 4, 2016

Age is more than just a number for the U.S. economy.

New research by Harvard economists shows that an aging population not only reduces the labor force, it also robs U.S. companies of critical knowledge and experience as skilled workers retire. And that, in turn, undermines productivity across the whole economy.

As the WSJ’s Greg Ip reports, demographics could be a crucial factor in why the current economic expansion is the weakest on record. The new paper by Nicole Maestas of Harvard University and Kathleen Mullen and David Powell of the Rand Corp. think tank, was able to analyze the impact of aging on economic growth, because the 50 states are aging at different rates.

On average, every 10% increase in the share of a state’s population over the age of 60 reduced per capita growth in gross domestic product by 5.5%, it found.

There were two reasons for this. First, as more workers retire, the labor force grows more slowly, accounting for one-third of the 5.5% hit to growth. The bigger effect, however, resulted from the lower productivity of the remaining workers. This couldn’t be explained by emigration, mortality or an influx of younger, inexperienced workers. Rather, the researchers found that everyone became less productive in an aging state. “An older worker’s experience increases not only his own productivity but also the productivity of those who work with him,” the authors noted. By applying their state-level findings to the whole country, the authors estimate that aging will reduce growth by 1.2 percentage points between 2010 and 2020, with two-thirds of the effect attributable to reduced productivity.

 


From the CFO Journal's Morning Ledger on August 3, 2016

IASB pressed to fix 'wishy-washy' accounting rules
The Australian Accounting Standards Board is urging the international accounting standards watchdog to tighten up the language used for global regulations, which the local body says is injecting ambiguity into the rules. Following research in conjunction with its South Korean counterpart, the AASB is urging the International Accounting Standards Board to fix indecisive language that leaves too much room for interpretation. According to AASB research director Angus Thomson, increasing use of terms like "probable", "likelihood" and "remote" creates confusion on when firms should recognize assets and liabilities. Researchers picked 13 out of about 30 different terms used in international accounting standards to infer the likelihood of an event occurring or not.

 


From the CFO Journal's Morning Ledger on August 3, 2016

Washington State files $100 million lawsuit against Comcast
Washington State Attorney General Bob Ferguson has filed a $100 million lawsuit against Comcast Corp. saying the cable giant deceived customers into paying tens of millions of dollars in fees for a “near-worthless” service protection plan. Mr. Ferguson also accused Philadelphia-based Comcast of committing more than 1.8 million violations of the state’s Consumer Protection Act, by charging improper service call fees and using improper credit screening practices. “This case is a classic example of a big corporation systematically deceiving Washington state consumers and putting profits above those consumers,” said Mr. Ferguson.

Bob Jensen's Fraud Updates ---
 http://www.trinity.edu/rjensen/FraudUpdates.htm


A Billion Here a Billion There:  Facebook May Owe an Additional $3-$5 Billion in Taxes

From the CFO Journal's Morning Ledger on July 29, 2016

Speaking of Facebook
Facebook Inc. said it could be on the hook for $3 billion to $5 billion in additional taxes as a result of an Internal Revenue Service investigation into how the social network transferred assets overseas. The company said in a quarterly filing that the IRS had issued a “statutory notice of deficiency” saying Facebook owes more taxes for 2010. The IRS earlier this month sued Facebook for documents related to the transfer, saying it suspected that Facebook’s accountants had undervalued some of those assets by “billions of dollars.”


A Billion Here a Billion There:  Amazon Doubles Profit

From the CFO Journal's Morning Ledger on July 29, 2016

Amazon doubles profit
Amazon.com Inc.
 on Thursday reported in its third consecutive record profit, nearly doubling its prior high-water mark, and its fifth straight quarter in the black. Amazon’s revenue jumped by almost a third, and it also more than doubled its operating margin, which historically has been razor thin, and issued a cheery outlook for the coming quarter. The results show Amazon moving toward investors’ long-held hope of consistent profitability after a lengthy period of heavy investments and quarterly losses. The Seattle company hasn’t had five consecutive profitable quarters since 2012.

 


From the CFO Journal's Morning Ledger on July 27, 2016

FASB proposes tax-reporting tweaks
The Financial Accounting Standards Board has proposed a new accounting standards update that would require companies to change the way they report income taxes, Accounting Today reports. Companies would have to disclose more about the differences between foreign and domestic taxes, plus more surrounding decisions about indefinitely reinvested foreign profits and the effects of new tax laws, plus a better breakdown of where cash is parked among foreign subsidiaries.


We can blame democracy for the high risk of public-sector pension plans.
The Economist Magazine
July 26, 2016
http://www.economist.com/news/business-and-finance/21702623-rules-encourage-public-sector-pension-plans-take-more-risk-putting-it-all

Jensen Comment
It turns out that pension investing risk relies heavily on investment and accounting rules where public-sector pension fund managers are allowed to get their funds into riskier investments, including junk bonds.

The enormous TIAA/CREF and some other pension funds give investors risk choices. TIAA bond funds are doing worse due to the Fed's low-interest policy such that teachers in TIAA/CREF are choosing more risky funds. Deals are no longer as good for fixed-annuity plans on the date of retirement relative to when I retired in 2006 (blind luck rather than brilliant strategy).

Sadly, riskier public-sector pension plans increase the expectation of future taxpayer bailouts. Public-sector pension plans would probably not be as risky if government declared there was zero chance of future bailouts. But then what legislators seeking office are going to promise zero chance of a public-sector pension bailout? Hence we can blame democracy for the high risk of public-sector pension plans.

One definition of democracy is gambling with taxpayer dollars.
Bankers as well as K-12 teachers helped to invent the taxpayer bailout idea along with municipal workers. Public-sector workers opposed to gambling probably don't even know they are gambling with taxpayer dollars.

 

 




"The New York Times uses the same accounting techniques the paper critiques,' by Francine McKenna, May 5, 2016 ---
http://www.marketwatch.com/story/the-new-york-times-uses-the-same-accounting-techniques-the-paper-critiques-2016-05-04

The New York Times has highlighted the use of made-up financial metrics that have resulted in “phony-baloney financial reports.” However, even the New York Times Company can’t resist using a few non-GAAP numbers each quarter to present its earnings in a flattering way.

In its press release accompanying first-quarter earnings The New York Times Company says that the measures “provide useful information to investors.”

Continued in article

Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

Understanding Disclosure Controls over Non-GAAP Measures
by: Deloitte CFO Journal Editor
Jul 22, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Reporting, Financial Accounting, GAAP, Internal Controls, Non-GAAP

SUMMARY: As part of its current focus on non-GAAP measures, the SEC has questioned whether companies and audit committees have implemented appropriate controls regarding the disclosure of such measures. The article discusses the types of controls that could be established and provides high-level examples of control issues and related responses for consideration in connection with non-GAAP measures.

CLASSROOM APPLICATION: This article addresses the increased concerns regarding popular non-GAAP/pro forma financial reporting articles by discussing the use of internal controls.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Advanced) What are internal controls? What are the benefits of establishing and enforcing good internal controls?

4. (Advanced) How can internal controls be used for non-GAAP reporting? What benefits does it offer?

5. (Advanced) What is ICFR? What are DCPs? How do they differ? How do they relate to controls over non-GAAP measures?

6. (Advanced) What does the SEC say about Section 302 of the Sarbanes-Oxley Act? How does this affect companies that use non-GAAP measures? What procedures should companies consider?

Reviewed By: Linda Christiansen, Indiana University Southeast

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Online Exclusive

 

"Understanding Disclosure Controls over Non-GAAP Measures," by Deloitte CFO Journal Editor, The Wall Street Journal, July 22, 2016  ---
http://deloitte.wsj.com/cfo/2016/07/22/understanding-disclosure-controls-over-non-gaap-measures/?mod=djem_jiewr_AC_domainid

As part of its current focus on non-GAAP measures, the SEC has questioned whether companies and audit committees have implemented appropriate controls regarding the disclosure of such measures.* Deloitte’s Heads Up newsletter discusses the types of controls that could be established and provides high-level examples of control issues and related responses for consideration in connection with non-GAAP measures. In addition, the Heads Up outlines a sample approach for consideration. Following is an excerpt from the full newsletter.

Disclosure Controls and Procedures versus Internal Control over Financial Reporting

Before diving into a detailed discussion about types and examples of controls, the stage should be set by clarifying whether controls over non-GAAP measures are related to disclosure controls and procedures (DCPs), to internal control over financial reporting (ICFR) or to both.

ICFR, which is defined in both SEC and PCAOB rules (see Appendix B in the full Heads Up newsletter), focuses on controls related to the “reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.” DCPs, on the other hand, are more broadly defined and pertain to all information required to be disclosed by the company (see Appendix B).

Because the starting point for a non-GAAP measure is a GAAP measure, ICFR would be relevant to consider up to the point at which the GAAP measure that forms the basis of the non-GAAP measure has been determined. However, regarding controls over the adjustments to the GAAP measure and the related calculation of the non-GAAP measure—including the oversight and monitoring of the non-GAAP measure—it is appropriate to consider such controls within the realm of DCPs.

For a discussion of controls over non-GAAP measures in which the Committee of Sponsoring Organizations (COSO) Internal Control—Integrated Framework is considered, see Appendix A.

Non-GAAP Measures, Earnings Releases and DCPs

The SEC’s final rule on certifications states that Section 302 of the Sarbanes-Oxley Act of 2002 requires management to certify on a quarterly basis that DCPs are effective “to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act [footnote omitted] is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.” Earnings releases containing non-GAAP measures are often furnished on Form 8-K, which does not require certifications of the effectiveness of DCPs. However, the final rule also indicates that “[d]isclosure controls and procedures . . . are required to be designed, maintained and evaluated to ensure full and timely disclosure in current reports.”

Therefore, registrants that use non-GAAP measures in earnings releases furnished on Form 8-K—or those that use them in Forms 10-Q and 10-K (outside the financial statements), which would be explicitly covered by Section 302 certifications—should consider the appropriateness of their DCPs in the context of their non-GAAP information. Registrants should, at a minimum, consider designing DCPs to ensure that procedures are in place regarding:

1. Compliance—Non-GAAP measures are presented in compliance with SEC rules, regulations and guidance.

2. Consistency of preparation—Non-GAAP measures are presented consistently each period, and potential non-GAAP adjustments are evaluated on an appropriate, consistent basis each period.

3. Data quality—Non-GAAP measures are calculated on the basis of reliable inputs that are subject to appropriate controls.

4. Accuracy of calculation—Non-GAAP measures are calculated with arithmetic accuracy, and the non-GAAP measures in the disclosure agree with the measures calculated.

5. Transparency of disclosure—Descriptions of the non-GAAP measures, adjustments and any other required disclosures are clear and not confusing.

6. Review—Non-GAAP disclosures are reviewed by appropriate levels of management to confirm the appropriateness and completeness of the non-GAAP measures and related disclosures.

7. Monitoring—The registrant’s monitoring function (e.g., internal audit, disclosure committee or audit committee) appropriately reviews the DCPs related to non-GAAP disclosures. The audit committee is involved in the oversight of the preparation and use of non-GAAP measures.

A critical aspect of such DCPs is the involvement of the appropriate levels of management and those charged with governance. Depending on the registrant, this may include reviewing the selection and determination of non-GAAP measures with a disclosure committee, the audit committee or both.

Establishing a written policy that clearly describes the nature of allowable adjustments to GAAP measures, defines the non-GAAP measure(s) to be used under the policy, and explains how potential changes in the inputs, calculation or adjustments will be evaluated and approved may help management identify its DCPs.

For example, a policy might describe qualitatively the types of adjustments that are nonrecurring and abnormal and thus within the defined policy. It may also outline specific quantitative thresholds for which income or expense items might be evaluated in the determination of whether they should be included in non-GAAP adjustments. This could help ensure that appropriate non-GAAP measures are used as well as eliminate the need for numerous immaterial adjustments in the reconciliation that may confuse investors.

Disclosure Committee Considerations

Some companies may find it helpful to use a disclosure committee to assist the CEO, CFO and audit committee in preparing and overseeing disclosures, including those related to non-GAAP measures. Disclosure committees are typically management committees, although some companies prefer that the disclosure committee function as a subcommittee of the board and audit committee.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

Congratulations on the Summer Job! Here's What You Owe the Government
by: Laura Saunders
Jul 23, 2016
Click here to view the full article on WSJ.com

TOPICS: Individual Taxation

SUMMARY: This article offers information regarding the tax issues students should know about their summer jobs. Beyond the basics, the article includes: being employed by a parent, employment status, taking care of the W-4, shifting an education tax break, and funding an IRA.

CLASSROOM APPLICATION: This article is a nice addition to an individual tax class for its content, but also because it is full of helpful information for all of our students, regardless of class or major.

QUESTIONS: 
1. (Introductory) What are the basic requirements for filing a tax return? What is the threshold of earned income required to file? Who must pay Social Security and Medicare taxes?

2. (Advanced) What are the rules regarding parents employing their children? Do the tax rules offer advantages or cause disadvantages for this situation? Is this something parents should consider doing?

3. (Advanced) What is an employee? What is an independent contractor? How do they differ for tax purposes?

4. (Advanced) What is a W-4? What should a student choose on a the W-4?

5. (Advanced) What are education tax breaks are available? What options should parents and students consider to maximize tax benefits?

6. (Advanced) What is an IRA? What are the types of IRAs? How can students fund an IRA to maximize the tax benefits?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Congratulations on the Summer Job! Here's What You Owe the Government," byLaura Saunders, The Wall Street Journal, July 23, 2016 --- 
http://www.wsj.com/articles/congratulations-on-the-summer-job-heres-what-you-owe-the-government-1469179802?mod=djem_jiewr_AC_domainid

Some children’s returns are as complicated as their parents’

Summertime living is supposed to be easy, but for those who take seasonal jobs the taxes can be tricky.

Now is a good time for a checkup if you are a student with a summer job or have a young worker in the family.

“Some children’s returns are almost as complex as their parents’, even though they don’t have much income,” says Ken Rubin, a certified public accountant with RubinBrown in St. Louis.

One common complication is the need for multiple state returns if a child’s home is in one state, a college or on-campus job is in another and a summer job is in a third.

Slip-ups can mean aggravation later or lost opportunities, so here are tax tips for summer earners.

Know the basics. For many young workers who are dependents—meaning that someone else provides more than half their support—the threshold for federal income tax in 2016 will be $6,300 of earned income. That’s the amount of the standard deduction.

Employees typically owe 7.65% in Social Security and Medicare tax on all earned income, while self-employed workers generally owe 15.3% for these levies on earned income above about $430, according to Troy Lewis, a CPA who practices in Draper, Utah.

If the employee is your child. Parents who hire children under 18 to work in a sole proprietorship, a spousal partnership or a single-member limited-liability company can deduct the child’s pay, and no payroll taxes are due.

Payroll taxes are due if the child is 18 or older, but children under 21 who are employed by a parent are exempt from federal unemployment taxes and possibly state unemployment taxes as well.

Parents who plan to deduct a child’s pay should pay fair wages for real work, says Mr. Lewis, and be sure to keep careful records. Many tech-savvy teens have expertise in building or maintaining business websites or marketing via social media.

Check employment status. Young workers may not know whether they are employees or independent contractors, but there’s a big difference. Contractors don’t have income or payroll taxes withheld, so these workers could have a surprise tax bill if a 1099 form arrives next spring.

Independent contractors should also track deductible expenses for mileage, special uniforms or equipment used in their work, says Mr. Lewis, because such expenses can be hard to reconstruct.

Take care with the W-4. If an employee won’t have taxable income for 2016, the W-4 form should say “exempt” on line 7, to avoid having to file a return next spring. Payroll taxes due will still be withheld.

Consider shifting an education tax break. Last year, Congress made permanent the American Opportunity Tax Credit, which is often the best college tax break. Those claiming it can use up to $4,000 of college expenses for tuition, books and equipment to reduce their income taxes by as much as $2,500.

The catch: This benefit isn’t available to most couples who have more than $160,000 of adjusted gross income or singles with more than $80,000.

If the parents have too much income to claim the American Opportunity Credit for college costs, the young worker may be able claim it instead, says Mr. Rubin, even if the employee is still a dependent of his or her parents. Often families are unaware of this option, according to Mr. Rubin.

In this case, neither the parents nor the child claim the personal exemption for the child. This benefit may be of little value to the parents because of a phaseout for affluent taxpayers.

The student then claims the American Opportunity Credit on his or her own return, which offsets up to $2,500 of taxes. The student doesn’t have to pay the college costs to use this benefit.

Mr. Rubin adds that the credit can apply to the student’s “unearned” income (as from investments or a trust) as well as his or her earned income, even if the unearned income is taxed at the parents’ rate due to a provision known as the “kiddie tax.”

Fund an IRA. Summer workers can contribute their earned income up to $5,500 this year to either a traditional or a Roth individual retirement account. Assets in either account compound tax free.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

SEC Proposes to Eliminate Outdated and Duplicative Disclosure Requirements
by: Deloitte Risk Journal Editor
Jul 22, 2016
Click here to view the full article on WSJ.com

TOPICS: Disclosures, Financial Accounting, GAAP, IFRS, SEC

SUMMARY: The SEC issued a proposed rule that would amend some of its disclosure requirements that may be redundant, duplicative or outdated, or may overlap with other SEC, U.S. GAAP or IFRS disclosure requirements. The proposal also seeks comment on whether certain SEC disclosure requirements that overlap with U.S. GAAP requirements should be retained, modified, eliminated or referred to the FASB for potential incorporation into U.S. GAAP. The proposed amendments are the next step in the SEC's ongoing disclosure effectiveness initiative, which is a broad-based review of the commission's disclosure, presentation and delivery requirements for public companies.

CLASSROOM APPLICATION: This summary of the SEC's proposal is appropriate for use in a financial accounting class when covering disclosure requirements.

QUESTIONS: 
1. (Advanced) What is the SEC? What are it areas of authority? What types of disclosures does it require?

2. (Introductory) What is GAAP? What is its purpose? What body determines GAAP? To what companies does it apply?

3. (Introductory) What is IFRS? What is its purpose? To what companies does it apply?

4. (Advanced) What new rule is the SEC proposing? What is the reason for this new rule? What issues is the SEC attempting to address?

5. (Advanced) What are the details of the new proposal? What companies would be affect by these changes?

6. (Advanced) Why do some reporting requirements overlap? Is this overlap beneficial for users of this information or is the overlap burdensome for companies?

Reviewed By: Linda Christiansen, Indiana University Southeas

 

"SEC Proposes to Eliminate Outdated and Duplicative Disclosure Requirements," by Deloitte Risk Journal Editor, The Wall Street Journal, July 22, 2016 --- 
http://deloitte.wsj.com/riskandcompliance/2016/07/22/sec-proposes-to-eliminate-outdated-and-duplicative-disclosure-requirements/?mod=djem_jiewr_AC_domainid

The SEC issued a proposed rule¹ that would amend some of its disclosure requirements that may be redundant, duplicative or outdated, or may overlap with other SEC, U.S. GAAP or IFRS disclosure requirements. The proposal, issued on July 13, also seeks comment on whether certain SEC disclosure requirements that overlap with U.S. GAAP requirements should be retained, modified, eliminated or referred to the FASB for potential incorporation into U.S. GAAP.

Following is an excerpt from the latest Deloitte Heads Up newsletter covering the SEC proposal, which includes a table summarizing some of the proposed changes.

The proposed amendments are the next step in the SEC’s ongoing disclosure effectiveness initiative, which is a broad-based review of the commission’s disclosure, presentation and delivery requirements for public companies. As part of the initiative, the SEC also issued a concept release² in April of this year that sought feedback on modernizing certain business and financial disclosure requirements of Regulation S-K as well as a request for comment³ last September on the effectiveness of certain financial disclosure requirements in Regulation S-X.⁴

The proposed amendments to the disclosure requirements would affect U.S. issuers, foreign private issuers (FPIs), investment advisers, investment companies, broker-dealers and nationally recognized statistical rating organizations. The effect on each type of issuer varies depending on the amendment proposed. The SEC intends to improve the disclosure requirements and simplify registrants’ compliance efforts without significantly altering the total mix of information that is ultimately provided to investors.

The proposal’s request for comment on overlapping requirements notes that “proposals related to some topics would result in the relocation of disclosures from outside to inside the financial statements, subjecting this information to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements.”

For example, the requirements in Regulation S-K, Item 103,⁵ to disclose certain legal proceedings can in certain cases be more expansive than those in U.S. GAAP, under which loss contingencies must be disclosed. The commission is seeking input on whether incorporation of Item 103, among other requirements, into U.S. GAAP may impose greater burdens on issuers and auditors related to the development and auditing of additional estimates and disclosures. The SEC also notes that the location of some disclosures in a filing could change as a result of the proposal to address overlapping requirements, which might affect users by changing the prominence of the disclosures.

The proposal may result in the removal or addition of a bright-line disclosure threshold (i.e., a threshold below which no disclosure is required), which may change the disclosure burden on issuers and the amount of information disclosed to investors. For example, unlike U.S. GAAP, Regulation S-K&⁶ requires disclosure of the amount of revenue from any class of similar products and services that account for 10% or more of revenue.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

tDeloitte Resigns as 1MDB Auditor
by: Michael Rapoport
Jul 27, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting, Auditing, Big Four, Fraud

SUMMARY: The departure of a third auditor for a Malaysian government investment fund is putting focus on another global company that apparently failed to raise questions about what investigators are calling a large-scale fraud. The fund, 1Malaysia Development Bhd. or 1MDB, said that its auditor, Deloitte Touche Tohmatsu Ltd., resigned in February. Earlier disputes over the fund's accounts led to the firing of 1MDB's previous auditors, KPMG and Ernst & Young. The fund also said its 2013 and 2014 financial statements, which were audited by Deloitte, should no longer be relied on. Deloitte joins a long list of financial firms that have worked with 1MDB without identifying the alleged fraud there.

CLASSROOM APPLICATION: This article is appropriate for an auditing class or as part of a discussion on these topics in a financial accounting class.

QUESTIONS: 
1. (Introductory) What is auditing? What is it purpose? What companies are audited?

2. (Introductory) What are the Big Four firms? What services do they offer? Geographically, where do they offer these services?

3. (Introductory) What is 1MDB? What are the facts of the legal issues facing 1MDB?

4. (Advanced) What Big Four firms have worked with 1MDB? What services did they provide? Why did they fail to detect the fraud? Should they have done additional work to detect it? Should they have reported the issues they found?

5. (Advanced) What are auditor responsibilities for fraud detection? Should the auditors in this case have detected the fraud? Could they be found liable for not finding it? Why or why not?

6. (Advanced) Why were these U.S. firms auditing a Malaysian government investment firm? If they had not taken on the audit engagement, who would have done the auditing? Should U.S. firms do this kind of work?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Deloitte Resigns as 1MDB Auditor," by Michael Rapoport, The Wall Street Journal, July 27, 2016 --- 
http://www.wsj.com/articles/deloitte-resigns-as-1mdb-auditor-1469579900?mod=djem_jiewr_AC_domainid

Malaysian government investment fund says Deloitte Touche Tohmatsu resigned in February

The departure of a third auditor for a Malaysian government investment fund is putting focus on another global company that apparently failed to raise questions about what investigators are calling a large-scale fraud.

The fund, 1Malaysia Development Bhd. or 1MDB, said Tuesday that its auditor, Deloitte Touche Tohmatsu Ltd., resigned in February. Earlier disputes over the fund’s accounts led to the firing of 1MDB’s previous auditors, KPMG and Ernst & Young, according to a Malaysian auditor general’s report last year.

The fund also said its 2013 and 2014 financial statements, which were audited by Deloitte, should no longer be relied on.

Deloitte joins a long list of financial firms that have worked with 1MDB without identifying the alleged fraud there. These include Goldman Sachs Group, Swiss private banks Falcon Private Bank Ltd. and BSI SA, and other banks such as DBS Bank Ltd, Standard Chartered PLC and UBS Group AG. All have said they were unaware of the alleged fraud at 1MDB, though investigators have said they could have done more to spot it.

The Swiss attorney general’s office said earlier this year it suspected $4 billion had been misappropriated from 1MDB. Last week, the U.S. Justice Department filed a civil lawsuit aiming to seize assets that it said were bought with $3.5 billion misappropriated from the fund. The Wall Street Journal has reported that hundreds of millions of dollars originating with 1MDB flowed into the personal bank account of Malaysian Prime Minister Najib Razak .

Deloitte said in a statement Tuesday that the information in the Justice Department lawsuit against 1MDB “would have impacted the financial statements and affected the audit reports” if it had been known at the time, and so its audit reports for 2013 and 2014 should no longer be relied upon.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

Videogames: Knowing What Really Sells
by: Dan Gallagher
Jul 26, 2016
Click here to view the full article on WSJ.com

TOPICS: Deferred Revenues, Financial Accounting, GAAP, Non-GAAP, Revenue Recognition

SUMMARY: Most videogames these days have online functions that demand continual upgrades and, hence, bear costs for publishers. So accounting rules require some of the revenue generated from the sale of such games to be deferred over several months, and even more than a year in some cases. Videogame publishers have gotten around this by reporting a form of adjusted revenue every quarter that includes the effect of deferrals. The practice doesn't alter reported cash flows of the businesses. But those days are ending as regulators cast a more critical eye on metrics that don't conform to generally accepted accounting principles, or GAAP.

CLASSROOM APPLICATION: This fact situation is a good example to use when covering deferred revenues and non-GAAP reporting.

QUESTIONS: 
1. (Introductory) What revenue recognition issues do videogame companies face? How do these differ from revenue recognition of most products and services?

2. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

3. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

4. (Advanced) What has Electronic Arts announced it will do regarding its financial reporting? Why did the company make this decision? What impact will this decision have on the company's financial reporting?

5. (Advanced) The article says that the differences tend to smooth over time. What does that mean? What differences? What was does the smoothing do for financial reporting purposes? How are users of the financial statements affected?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Videogames: Knowing What Really Sells," by Dan Gallagher, The Wall Street Journal, July 26, 2016 ---
http://www.wsj.com/articles/videogames-knowing-what-really-sells-1469460997?mod=djem_jiewr_AC_domainid

Revenue recognition rules make tracking videogame sales activity a challenge

Many things about the videogame business have changed in the past decade. One very important thing hasn’t: Gamers still need to actually buy the games.

But tracking this important activity has become rather difficult, and not just because fewer games are being sold at retail stores. Most games these days have online functions that demand continual upgrades and, hence, bear costs for publishers. So accounting rules require some of the revenue generated from the sale of such games to be deferred over several months, and even more than a year in some cases.

Videogame publishers have gotten around this by reporting a form of adjusted revenue every quarter that includes the effect of deferrals. The practice doesn’t alter reported cash flows of the businesses. But those days are ending as regulators cast a more critical eye on metrics that don’t conform to generally accepted accounting principles, or GAAP.

Electronic Arts said last week that it will stop including such non-GAAP figures in its quarterly reports. Other videogame publishers are likely to follow suit. EA, Activision Blizzard and Take-Two Interactive will all report quarterly results next week.

To be sure, there are plenty of good reasons to be suspicious of non-GAAP numbers. But one problem in the videogame business is that revenue recognition rules tend to obfuscate how much game content is actually sold in a given period. This is an important metric, given that it is the economic activity on which the entire industry is based.

Take the case of EA, which has been reporting adjusted revenue in the same way for the past nine years. Online-enabled games have grown to account for the majority of its business, which still follows the seasonal fluctuations common in the industry. So the spread between GAAP and non-GAAP revenue can be wide in quarters when the release of a big game like “Madden NFL” causes more revenue to be deferred.

But these differences tend to smooth out over time. For EA, the difference between annual GAAP and non-GAAP revenues has averaged only 4% over the last nine years.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Crisis-Era Lawsuits Winding Down? Not for PricewaterhouseCoopers
by: Michael Rapoport
Aug 01, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Bankruptcy, Forensic Accounting, Fraud, Liability

SUMMARY: PricewaterhouseCoopers LLP faces a lawsuit over civil claims that it failed to catch signs of fraud that helped lead to one of the biggest U.S. bank collapses during the Great Recession. The closely watched case could lead to billions of dollars in damages depending on how a jury answers a fundamental question in accounting: How much responsibility do auditors have for catching fraud? A bankruptcy trustee for Taylor Bean & Whitaker Mortgage Corp., once one of the nation's biggest privately held mortgage companies, is suing PwC, seeking $5.5 billion in damages. The trustee alleged in the 2013 suit that PwC was negligent in not detecting a massive fraud scheme that brought down Taylor Bean and helped trigger the 2009 collapse of a Montgomery, Ala. bank with $25 billion in assets. The Taylor Bean trustee contends that PwC should have found the fraud even though it wasn't Taylor Bean's auditor. PwC was the outside auditor for Colonial's holding company. Taylor Bean's auditor, Deloitte & Touche LLP, reached a confidential settlement with the trustee in 2013 over related allegations. PwC argues that it was deceived, and shouldn't have been expected to catch the Taylor Bean fraud when neither bank regulators nor Colonial or Taylor Bean did.

CLASSROOM APPLICATION: This is an excellent article to use when discussing whether auditors have a responsibility to detect fraud. It would also be good for coverage of fraud or in a forensic accounting class.

QUESTIONS: 
1. (Introductory) What are the facts of this lawsuit? Who is the plaintiff and who is the defendant?

2. (Advanced) What is PricewaterhouseCoopers? Who was its client? What work was it doing for the client in this case? What is the firm's response to being sued?

3. (Advanced) What are the rules regarding an auditor's responsibility to detect fraud? In what situations could the auditor be liable?

4. (Advanced) Why aren't auditors responsible to detect fraud in many cases? Should they be? Why or why not?

5. (Advanced) Why did the plaintiff choose to sue PwC in this case? Should this be one of those situations in which auditors are responsible to detect fraud?

6. (Advanced) Why isn't the plaintiff recovering all of the damages from the parties who perpetrated the frauds? Was PwC one of the perpetrators?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Crisis-Era Lawsuits Winding Down? Not for PricewaterhouseCoopers," by Michael Rapoport The Wall Street Journal, August 1, 2016 ---
http://www.wsj.com/articles/crisis-era-lawsuits-winding-down-not-for-pricewaterhousecoopers-1469817636?mod=djem_jiewr_AC_domainid

Banks, housing agencies, bond raters and many others have faced legal action over the 2008 financial crisis. Now, an accounting giant is taking its turn.

PricewaterhouseCoopers LLP faces a trial starting Monday over civil claims that it failed to catch signs of fraud that helped lead to one of the biggest U.S. bank collapses during the Great Recession. The trial in Florida state court in Miami is one of the few allegations of wrongdoing during the financial crisis that has reached a courtroom.

The closely watched case could lead to billions of dollars in damages depending on how a jury answers a fundamental question in accounting: How much responsibility do auditors have for catching fraud?

The bankruptcy trustee for Taylor Bean & Whitaker Mortgage Corp., once one of the nation’s biggest privately held mortgage companies, is suing PwC, seeking $5.5 billion in damages. The trustee alleged in the 2013 suit that PwC was negligent in not detecting a massive fraud scheme that brought down Taylor Bean and helped trigger the 2009 collapse of Colonial Bank, a Montgomery, Ala., bank with $25 billion in assets.

The trial is expected to last about six weeks. Such a trial isn't only rare—most crisis-related legal probes have ended in settlements at most—but it is also one of the few attempts to hold auditors liable for events stemming from the meltdown.

“This is basically holding an auditor responsible for its failure to do its job,” said Steven W. Thomas, an attorney representing Neil Luria, the Taylor Bean trustee.

But Elizabeth Tanis, an attorney for PwC, said the accounting firm did its job properly, and is “confident that a jury will understand the applicable rules and standards in this case and decide accordingly.”

The Taylor Bean trustee contends that PwC should have found the fraud even though it wasn’t Taylor Bean’s auditor. PwC was the outside auditor for Colonial’s holding company, Colonial BancGroup Inc. Taylor Bean’s auditor, Deloitte & Touche LLP, reached a confidential settlement with the trustee in 2013 over related allegations. Deloitte declined to comment.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Facebook May Owe Billions More in Taxes
by: Deepa Seetharaman
Jul 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Asset Transfer, Asset Valuation, Corporate Taxation, IRS

SUMMARY: Facebook Inc. said it could be on the hook for $3 billion to $5 billion in additional taxes as a result of an Internal Revenue Service investigation into how the social network transferred assets overseas. The company said in a quarterly filing that the IRS had issued a "statutory notice of deficiency" a day earlier saying Facebook owes more taxes for 2010. The July 27 notice came the same day that Facebook said second-quarter profit nearly tripled to $2.06 billion.

CLASSROOM APPLICATION: This article would be a good example to use in a corporate tax class or when covering the topic of asset valuation.

QUESTIONS: 
1. (Introductory) What did Facebook announce regarding the IRS allegations? What is Facebook's possible tax liability?

2. (Advanced) Why is the IRS suing Facebook? What is the timeline of actions and events related to the lawsuit?

3. (Advanced) What is Facebook's relationship with Ireland? Why did it transfer assets? What is the company hoping to do?

4. (Advanced) What is the IRS alleging in this case? What is Facebook's response to the allegations?

5. (Advanced) How does the tax assessment amount compare to the company's revenues? If the company had to pay the taxes, what would be the impact on its financial statements?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Facebook May Owe Billions More in Taxes," by Deepa Seetharaman, The Wall Street Journal, July 29 , 2016 ---
http://www.wsj.com/articles/facebook-gets-tax-notice-over-transfer-of-assets-overseas-1469750400?mod=djem_jiewr_AC_domainid

Facebook Inc. said it could be on the hook for $3 billion to $5 billion in additional taxes as a result of an Internal Revenue Service investigation into how the social network transferred assets overseas.

The company said in a quarterly filing Thursday that the IRS had issued a “statutory notice of deficiency” a day earlier saying Facebook owes more taxes for 2010. The July 27 notice came the same day that Facebook said second-quarter profit nearly tripled to $2.06 billion.

The notice flows from an investigation that started in 2013 into the company’s treatment of assets it transferred to Ireland in 2010.

The IRS earlier this month sued Facebook for documents related to the transfer, saying it suspected that Facebook’s accountants had undervalued some of those assets by “billions of dollars.” But neither the agency nor Facebook had said before Thursday what the company’s potential tax liability could be.

The IRS notice applies only to the 2010 tax year, but if the IRS takes a similar position for other years it is investigating and wins in court, it could result in an additional federal tax liability of between $3 billion and $5 billion, plus any interest or penalties.

Facebook said it disagrees with the IRS’s position and plans to file a petition in U.S. Tax Court challenging the notice. If the IRS prevails, it would have a “material adverse impact to Facebook’s finances,” the company said in the filing. Tax Court cases can take years to conclude and can be appealed into other federal courts.

If Facebook were required to pay an additional $5 billion in taxes, that amount would exceed its entire tax cost for 2014 and 2015 combined.

Other major companies like Microsoft Corp. , Amazon.com Inc. and Coca-Cola Co. have tangled with the IRS over the issue of attributing profits to foreign subsidiaries. Last year, Coke received notice of a potential $3.3 billion federal income-tax liability and is challenging that in tax court. Amazon, like Coke, is also challenging the IRS in tax court. Microsoft said in a securities filing Thursday that its audit is continuing and could have a “significant” impact on the company’s finances.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Some Healthcare Companies Adjust Earnings Too Much, Mizuho Says
by: Tatyana Shumsky
Jul 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Reporting, GAAP, Non-GAAP

SUMMARY: There's too much adjusting going on when it comes to healthcare earnings, according to analysts at Mizuho Securities USA Inc. Several companies in the sector report adjusted earnings that are too far afield from the results they report based on U.S. Generally Accepted Accounting Principles, analysts Ann Hynes and Sheryl Skolnick wrote in a report. The companies then go on to provide investors guidance using those adjusted figures alone. The Securities and Exchange Commission requires U.S. listed companies to compile their financial reports using GAAP figures. While companies may supplement their reports with non-GAAP metrics, the SEC clarified that GAAP figures should be given prominence and that any adjustments should be kept to a minimum.

CLASSROOM APPLICATION: This article is appropriate for use in financial accounting classes.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in this type of reporting? What are the benefits of non-GAAP reporting?

3. (Advanced) Why do some companies adjust their financial statements? What are the main areas of adjustments? Which of these adjustments are most common? Why?

4. (Introductory) What is Mizuho Securities? What did its analysts announce?

5. (Advanced) According to this article, what companies are adjusting their financial reporting? What adjustments are they making? Why?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Accounting Choices Blur Profit Picture
by Tatyana Shumsky and Theo Francis
Jun 28, 2016
Online Exclusive

U.S. Corporations Increasingly Adjust to Mind the GAAP
by Theo Francis and Kate Linebaugh
Dec 14, 2015
Online Exclusive

What Exactly are Non-GAAP Numbers? Well, That Depends
by Tatyana Shumsky
Jul 05, 2016
Online Exclusive

"Some Healthcare Companies Adjust Earnings Too Much, Mizuho Says," by Tatyana Shumsky,  The Wall Street Journal, July 29, 2016 ---
http://blogs.wsj.com/cfo/2016/07/28/some-healthcare-companies-adjust-earnings-too-much-mizuho-says/?mod=djem_jiewr_AC_domainid

There’s too much adjusting going on when it comes to healthcare earnings, according to analysts at Mizuho Securities USA Inc.

Several companies in the sector report adjusted earnings that are too far afield from the results they report based on U.S. Generally Accepted Accounting Principles, analysts Ann Hynes and Sheryl Skolnick wrote in a report. The companies then go on to provide investors guidance using those adjusted figures alone, the report said.

The Securities and Exchange Commission requires U.S. listed companies to compile their financial reports using GAAP figures. While companies may supplement their reports with non-GAAP metrics, the SEC in May clarified that GAAP figures should be given prominence and that any adjustments should be kept to a minimum.

In light of renewed scrutiny of these practices, the Mizuho analysts said they expect companies in the healthcare sector to make changes in their financial reporting.

“It’s probably taking them a little longer to prepare their earnings releases and their commentary around earnings,” said Ms. Skolnick, director of research at Mizuho. “We do anticipate that there are several companies…that will need to change their guidance basis,” she added.

Several companies have already changed tack. Pharmacy chain Walgreens Boots Alliance Inc. furnished investors with a revamped earnings release on July 6, placing GAAP results up front and reducing the use of non-GAAP figures. By contrast, the company’s April 5 earnings release focused on adjusted earnings.

The changes were made in response to the SEC guidance and to further enhance disclosure to investors, a company spokesman said in an email. However, Walgreens Boots has not made any changes to how it adjusts its earnings, he said.

Similarly, Quest Diagnostics Inc. said it moved its GAAP earnings per share higher in the layout of its second quarter earnings release on July 21 compared with April’s release in response to the SEC guidelines.

“We carefully considered the latest [SEC] guidance as part of our normal process of developing our quarterly earnings release,” a Quest Diagnostics spokesman said in an email.

However, Mizuho analysts outlined other issues with the non-GAAP reporting practices of several healthcare companies, including Kindred Healthcare Inc., Amedisys Inc., and Quest Diagnostics.

Amedisys, which the report describes as undergoing a turnaround, adjusts its earnings per share from GAAP by adding back legal fees, which appear to be an ongoing expense due to a regulatory investigation. Amedisys also adds back restructuring charges, “without which the turnaround wouldn’t be possible,” the bank said.

Amedisys finance chief Ronald LaBorde said the company aspires to ensure its adjusted and GAAP results are as close together as possible.

Adjusted results are “not meant to substitute, in any way, for GAAP results,” Mr. LaBorde said. Rather, the adjusted numbers should give investors a deeper understanding of Amedisys’ business, he added. Amedisys is scheduled to report its second quarter earnings on August 2.

Meanwhile, Quest Diagnostics’ adjusted earnings exclude restructuring and integration charges which relate to “integration and restructuring efforts of acquisitions that closed years ago,” Mizuho says.

Quest Diagnostics hasn’t changed the way it adjusts its earnings for the company’s most recent earnings report, a spokesman said in an email.

“Since 2013 our cumulative reported (GAAP) earnings per share are essentially the same as our cumulative adjusted earnings per share,” he added.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Data Helps Government Target Fraud, Abuse
by: Deloitte CIO Journal Editor
Jul 28, 2016
Click here to view the full article on WSJ.com

TOPICS: data analytics, Fraud, Governmental Accounting, Internal Controls

SUMMARY: Awareness of fraud, waste, and abuse in government benefits programs has risen markedly during the past decade. The U.S. Government Accountability Office found $137 billion in improper payments in 2015. That's up from $38 billion in 2005, or 197 percent in inflation-adjusted dollars - and those figures do not even account for waste. Demand for government benefits such as Medicaid, Medicare, and disability compensation is increasing, as are health care costs, which comprise 17 percent of U.S. GDP and continue to grow. Advanced analytics techniques give the government greater opportunity to dig into the data and understand where fraud, waste, and abuse problems lie and what processes can help address those issues. A broad array of analytics techniques can be used in tandem to detect improper and wasteful activity, establish effective compliance programs, and recover funds as appropriate. The article discusses some of these techniques.

CLASSROOM APPLICATION: This article discusses controls and data analytic techniques government and businesses can use to reduce fraud waste, while increasing compliance and recovery of funds. It could be used in governmental or financial accounting classes, and when covering fraud prevention and detection.

QUESTIONS: 
1. (Introductory) What types of frauds occur against the government? What is the extent of the fraud? What are similar frauds that occur in the business world?

2. (Advanced) What is data analytics? What are some of the tools and benefits provided by these analytics?

3. (Advanced) How can data analytics be used to prevent and detect fraud? Discuss how some specific techniques have an impact in the battle against fraud.

4. (Advanced) What are some limitations of using data analytics to prevent and detect fraud? What other actions should accountants and others take to fill in the gaps data analytics leaves?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
2016 Federal Government Industry Outlook
by Deloitte CIO Journal Editor
Jan 27, 2016
Online Exclusive

Compliance Analytics: A Proactive Approach
by Deloitte CIO Journal Editor
Sep 10, 2015
Online Exclusive

"Data Helps Government Target Fraud, Abuse," by Deloitte CIO Journal Editor, The Wall Street Journal, July 28, 2016 ---
http://deloitte.wsj.com/cio/2016/07/28/data-helps-government-target-fraud-abuse/?mod=djem_jiewr_AC_domainid

Government agencies are increasingly using advanced analytics techniques to confront instances of fraud, waste, and abuse in their benefits programs.

The first hint that something was amiss in the city of Klamath Falls, Oregon, came in 2012, when a food stamp recipient told a state Department of Human Services caseworker that a local market was making fraudulent sales to beneficiaries in return for cash payouts.¹ State officials began examining these small-scale food stamp infractions. The investigation eventually led law enforcement to a criminal ring linked to Mexican drug cartels that was laundering an estimated $20,000 each month in food stamp benefits. Two years later, police arrested 65 people in connection with the case.²

This is not an isolated instance—far from it, in fact. Awareness of fraud, waste, and abuse in government benefits programs has risen markedly during the past decade. The U.S. Government Accountability Office found $137 billion in improper payments in 2015.³ That’s up from $38 billion in 2005,⁴ or 197 percent in inflation-adjusted dollars⁵—and those figures do not even account for waste.

“There is not necessarily more fraud, waste, and abuse than in the past. Rather, our ability to use analytics to discover it has increased,” said Brien Lorenze, a principal at Deloitte Advisory, during a Deloitte Dbriefs webcast in June. According to the webcast presenters, fraud is illegal and intentional, abuse is improper but not necessarily illegal, and waste is driven by inefficient or ineffective management, vague policy, and poor decision-making.

As a result of this enhanced awareness, “There is a growing call today among government leaders, the media, the public, politicians, and other stakeholders to identify, report, and mitigate acts of fraud, waste, and abuse in the public sector,” says William Eggers, a public sector research director at Deloitte Services LP and author of the recent Deloitte University Press book “Delivering on Digital: The Innovators and Technologies That Are Transforming Government.”

Demand for government benefits such as Medicaid, Medicare, and disability compensation is increasing, as are health care costs, which comprise 17 percent of U.S. GDP and continue to grow.⁶ “Containing fraud, waste, and abuse is therefore essential if we wish to improve access to and timeliness of care as well as other benefits,” Lorenze says.

Fraud, waste, and abuse can take many forms. For instance, according to Rachel Frey, a principal at Deloitte Consulting LLP, service providers may record inaccurate information about recipients or accidentally double-bill for services. Service recipients might intentionally falsify or incorrectly report eligibility information. Agency employees could even collude with service recipients. All of these cases may lead to government agencies improperly disbursing funds, then expending time and energy to recover them, a “pay-and-chase” model that government increasingly looks to avoid, Frey says. Additionally, agencies are looking to uncover waste in their internal operations, such as the misallocation of employees, she says.

Enter Analytics

Government agencies, of course, have been trying to provide cheaper, faster, better service for many years. Advanced analytics techniques are now giving them the ability to examine and draw conclusions from large volumes of information. “Analytics gives the government greater opportunity to dig into the data and understand where fraud, waste, and abuse problems lie and what processes can help address those issues,” Lorenze said during the webcast.

A broad array of analytics techniques can be used in tandem to detect improper and wasteful activity, establish effective compliance programs, and recover funds as appropriate, says Dan Olson, a senior manager at Deloitte Transactions and Business Analytics LLP. Examples of these techniques include:

Rules-based monitoring for known risks. This entails building business rules based on policies and regulations to identify recognized patterns in data typically associated with fraud, waste, and abuse.

Anomaly detection to locate potential new risks. This requires using statistical profiling and outlier detection to identify patterns inconsistent with normal activity.

Statistical modeling, including machine learning, to predict future events. This involves uncovering patterns in historical data to determine where and how compliance violations may emerge.

Text analytics to examine documents such as electronic health records for insights buried in unstructured data. For example, text analytics enables the comparison of doctors’ patient case notes and billed procedure or diagnosis codes to determine if abuse is occurring.

Network analytics to identify links across entities. This leads to discovering unlikely relationships between groups to recognize potential fraud networks and uncover collusion or kickback activities.

Visual analytics and dashboards to create visual representations. This can allow stakeholders to more easily identify suspicious patterns hidden in data.

Fraud is dynamic, Olson says, so each of these analytics approaches plays an important role in a broader compliance program. “By using data-driven analytics, we can increase awareness of bad actors,” he says.

Government Analytics in Action

During the webcast, speakers shared agency case studies illustrating the value of analytics in government fraud, waste, and abuse programs.

In one case, the New Mexico Department of Workforce Solutions was striving to prevent improper payments in its unemployment insurance program. The state combined advanced analytics and behavioral analysis and recognized the value in “nudging,” or prompting, certain program recipients—through carefully worded communications on initial applications and ongoing weekly certifications—to report more reliable, timely eligibility information. As a result, the state can now identify and, more importantly, prevent potential overpayments rather than chase the money after it has already been paid, Frey says.

Continued in article

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

U.S. Proposes Rule Clamping Down on Estate-Tax Dodge
by: Richard Rubin
Aug 02, 2016
Click here to view the full article on WSJ.com

TOPICS: Asset Valuation, Business Valuation, Discounting, Estate Tax, Gift Tax

SUMMARY: The Treasury Department and Internal Revenue Service proposed making it harder for wealthy business owners to transfer assets to heirs without paying estate and gift taxes with plans to place new limits on a common technique used to transfer interests in illiquid businesses.

CLASSROOM APPLICATION: This article is a useful update for an estate and gift tax class, as well as for any class that covers business valuations.

QUESTIONS: 
1. (Advanced) What are the current tax rules regarding discounting the value of fractional interests in closely held businesses or land? Why has this been effective? What benefits does it offer? Who benefits?

2. (Introductory) What has the Treasury Department and Internal Revenue Service proposed regarding to limit use of a common technique used to transfer interests in illiquid businesses?

3. (Advanced) Why did the government make this proposal? How will the change affect taxpayers?

4. (Advanced) What are the liquidity issues with a partial interest in a closely held business? Are there control issues? Are there any legitimate reasons for a discount in fair market value? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

"U.S. Proposes Rule Clamping Down on Estate-Tax Dodge," by Richard Rubin, The Wall Street Journal, August 2, 2016 ---
http://www.wsj.com/articles/government-aims-to-limit-technique-for-lowering-estate-gift-taxes-1470155292?mod=djem_jiewr_AC_domainid

WASHINGTON—The U.S. government on Tuesday proposed making it harder for wealthy business owners to transfer assets to heirs without paying estate and gift taxes.

The plan from the Treasury Department and Internal Revenue Service would place new limits on a common technique used to transfer interests in family businesses.

The regulations address the practice of discounting the value of ownership stakes in closely held businesses or land. The discounts are permitted because some stakes are worth less since they are harder to sell or represent a minority interest. The reduced values allow wealthy families to pack assets inside the $10.9 million lifetime exclusion from estate and gift taxes for married couples.

A typical strategy would place, say, $14 million worth of assets—stock, a business, real estate or even cash—into a company with restrictions on some of the owners’ ability to sell their pieces, said David Scott Sloan, a partner at Holland & Knight LLP in Boston who advises high-net-worth families. Those restrictions could allow the owners to get an appraisal saying that the actual value of those assets was about $10 million.

“By taking advantage of these tactics, certain taxpayers or their estates owning closely held businesses or other entities can end up paying less than they should in estate or gift taxes,” Mark Mazur, the assistant secretary for tax policy, said in a statement. “Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques.”

The government’s proposal would make it harder for taxpayers to claim valuation discounts that taxpayers typically have used to reflect the diminished value of minority interests, said Richard Dees, a partner at McDermott Will and Emery in Chicago. “This is going to be a major problem for all family-owned businesses,” Mr. Dees said. “This all boils down to the question of whether a family business should be valued as if it’s owned by one person.”

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

A New Medicare Charge Is Coming: Here's How to Lessen the Blow
by: Laura Saunders
Aug 06, 2016
Click here to view the full article on WSJ.com

TOPICS: AGI, Individual Taxation, Modified AGI, Tax Planning

SUMMARY: For high-income Americans covered by Medicare, now is the time to make tax moves to minimize an increase in premium surcharges. For those in that expanding pool of Medicare premium surcharge payers, the premium can often be reduced with careful planning. The key number for planning is "modified adjusted gross income," which in this case usually means a person's adjusted gross income (AGI) plus any tax-exempt interest income.

CLASSROOM APPLICATION: This article is appropriate for an individual taxation class.

QUESTIONS: 
1. (Introductory) What is the Medicare surcharge? Who pays this charge?

2. (Advanced) Who pays the Medicare surcharge? How is the surcharge calculated?

3. (Advanced) What is AGI? What is modified adjusting gross income? How is it calculated? What can taxpayers do to reduce it? If it is reduced, what impact could it have on a taxpayer's tax liability?

4. (Advanced) Of the planning ideas listed in the article, which is available to most taxpayers? Which would be easiest to accomplish?

5. (Advanced) Which planning options require planning in advance of the current tax year? Which options do not require advance planning and could be accomplished within the year savings are desired?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"A New Medicare Charge Is Coming: Here's How to Lessen the Blow," byLaura Saunders, The Wall Street Journal, August 6, 2016 ---
http://www.wsj.com/articles/how-rich-americans-can-lessen-the-hit-from-a-jump-in-medicare-premiums-1470394801?mod=djem_jiewr_AC_domainid

For high-income Americans covered by Medicare, now is the time to make tax moves to minimize an increase in premium surcharges.

These surcharges apply because Congress has decided the top 5% or so of Medicare recipients should contribute more for their coverage than lower earners. Last year, about 3 million Americans owed extra premiums for Part B coverage for medical services, such as doctors, and about 2 million owed them for Part D coverage for drugs.

This year’s combined Part B and D surcharges range from $737 to $4,090 per person above the base annual premium of $1,462 per person. They begin above income of $85,000 for singles and $170,000 for couples.

Soon, those numbers could rise further, as Congress decided last year that some recipients will pick up an even greater share of the costs starting in 2018. For example, the total annual Part B premium for a single person with income between $133,500 and $160,000 is expected to rise 30% in 2018—from $2,856 to $3,720, according to research by the Kaiser Family Foundation, a nonpartisan health-policy nonprofit based in Menlo Park, Calif.

The overall number of Medicare recipients who owe these fees will also rise because the income thresholds aren’t indexed for inflation. Last year, 5.7% of Part B recipients owed the surcharges compared with 3.5% in 2011, and the number is expected to grow to 8.3% by 2019, according to Kaiser.

For those in that expanding pool of surcharge payers, the premium can often be reduced with careful planning.

“A very modest effort can result in real savings,” says David Roberts, a professor of accounting at DePaul University in Chicago.

In part, that is because the surcharges have a unique structure: an extra dollar of income can incur a much higher premium. Thus, a single person with $107,000 of income this year owes a $584 surcharge for Part B, compared with $1,462 for someone earning $107,001.

And this year’s planning will affect 2018 Medicare premiums, because surcharges are based on the recipient’s income earned two years before.

The key number for planning is “modified adjusted gross income,” which in this case usually means a person’s adjusted gross income (AGI) plus any tax-exempt interest income. AGI is the number at the bottom of the front page of the 1040 form. It doesn’t include itemized deductions such as those for mortgage interest, property taxes or charitable donations, so raising such deductions won’t help lower surcharges.

Here are moves that could help, especially for people close to a surcharge threshold.

*Revamp charitable contributions. Charitably-minded taxpayers who usually give cash should consider donating appreciated assets such as stock shares instead. Donors of such assets often get to skip capital-gains tax and to deduct the full market value of the donation, and the gift doesn’t raise AGI.

Taxpayers age 70 1/2 and older should also consider making direct donations of individual retirement account assets to charity instead of cash. Each IRA owner is allowed to give a total of $100,000 a year from his IRA to certified charities and have the donations count as part of their required annual withdrawal.

There is no deduction for such donations, but they don’t count as income either—which lowers AGI.

*Look to a Roth IRA. Payouts from Roth IRAs often aren’t taxable, so they don’t raise AGI. Assets shifted from a traditional IRA into a Roth IRA are taxable in the year of the conversion, however, and that does raise income.

*Manage capital gains and losses. Taxable capital gains raise AGI, but capital losses can offset gains plus $3,000 of other income a year.

“Passive” investments, such as broad-based index funds, tend to pay out less annually in capital gains than actively managed funds.

*Time the receipt of income. It may be possible to time the sale of an asset or payment of income so that it is split over two years, keeping AGI below a threshold. If not, it could make sense to bunch income so that some years have lower surcharges than others.

*Look to work-related savings. Medicare participants who are still employed can lower their AGI by contributing to 401(k) plans or traditional IRAs, says Ed Mendlowitz, a CPA with WithumSmith+Brown. Those who are self-employed can often deduct Medicare premiums for themselves and their spouse as a health insurance cost.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Zynga User Base Shrinks Further, Loss Narrows on Accounting Change
by: Lisa Beilfuss
Aug 05, 2016
Click here to view the full article on WSJ.com

TOPICS: Cost Behavior, Accounting Change, Financial Accounting

SUMMARY: Videogame developer Zynga Inc.'s second-quarter loss narrowed despite a shrinking user base and revenue decline, thanks mostly to an accounting change. The company has been trying to shore up cash, announcing layoffs last year that brought its staff to about half its peak and this year saying it would sell its seven-story San Francisco headquarters. It has also worked to cut marketing costs. The second-quarter improvement was driven by lower expenses, primarily because of a benefit stemming from a change in the estimated fair value of recent acquisition's liability.

CLASSROOM APPLICATION: This article is appropriate for financial accounting classes.

QUESTIONS: 
1. (Introductory) What is Zynga's financial situation? What changes and trends has it been experiencing?

2. (Advanced) What is an accounting change? What must companies do when they have one?

3. (Advanced) What was Zynga's accounting change? How did the change affect the company's financial statements? How would this be reported by the company?

4. (Advanced) What are some causes of these changes in Zynga's financial results? Which of these are under Zynga's control? Which are not controllable by the company? How should management handle both types of causes?

5. (Advanced) State the cost behavior of each of the changes Zynga has done or is considering. What are the benefits of changes in variable costs? Of changes in fixed costs? What are the possible problems of the variable cost changes? Of the fixed cost changes?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Zynga User Base Shrinks Further, Loss Narrows on Accounting Change," by Lisa Beilfuss, The Wall Street Journal, August 5, 2016 ---
http://www.wsj.com/articles/zynga-user-base-shrinks-further-loss-narrows-on-accounting-change-1470341109?mod=djem_jiewr_AC_domainid

Videogame developer Zynga Inc. ’s second-quarter loss narrowed despite a shrinking user base and revenue decline, thanks mostly to an accounting change.

Zynga said its loss would widen in the current quarter, with revenue coming in below expectations. Shares dropped 8.1% in after hours trading.

The San Francisco company, known for its social games Farmville and Words with Friends, has been trying to steady its business. Zynga had a meteoric rise, thanks largely to a marketing relationship with Facebook in its early days, but since the company went public in late 2011 the stock has tumbled. Shares made their debut at $11 and most recently closed at less than $3.

The company has been trying to shore up cash, announcing layoffs last year that brought its staff to about half its peak and this year saying it would sell its seven-story San Francisco headquarters. It has also worked to cut marketing costs.

“We have more work to do in our turnaround,” said Chief Executive Frank Gibeau, though he expressed optimism over steps the company has taken to “do more with less.”

The second-quarter improvement was driven by lower expenses, primarily because of a benefit stemming from a change in the estimated fair value of recent acquisition’s liability. Zynga bought the social casino Rising Tide Games last year. Mr. Gibeau said lower marketing costs also helped. Such expenses declined 1.2%.

During the quarter, Zynga’s user base continued to shrink. The company reported 61 million average monthly users—down 26% from a year earlier and 11% from the first quarter. Most of those users play Zynga’s games on mobile devices. Average monthly mobile users dropped 23% year-over-year and 11% from the first quarter. Users who play daily fell 15% from last year’s quarter to 18 million.

As the company’s user base declined, so did revenue. Total sales slid 9.1% to 181.7 million, with online game revenue down 16%. Advertising jumped 22% from a year earlier, though from the first quarter it fell 8%.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

One More Reason for Investors to Worry About 'Earnings Before Bad Stuff'
by: Michael Rapoport
Aug 04, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, GAAP, Non-GAAP

SUMMARY: Companies that report significantly stronger earnings by using tailored figures like "adjusted net income" or "adjusted operating income" are more likely to encounter some kinds of accounting problems than those that stick to standard measures. The research suggests that heavy use of metrics outside of generally accepted accounting principles - sometimes referred to derisively as "earnings before bad stuff" - could be a warning sign. Just 3.8% of those exclusively using standard GAAP metrics had formal earnings restatements from 2011 to 2015. Among heavy users of non-GAAP measures-those whose non-GAAP earnings were at least twice as high as their GAAP net income-the rate was 6.5%. Similarly, 7.5% of the GAAP-only group had material weaknesses in internal controls - flaws in their procedures to prevent financial errors and fraud - versus 11% of the non-GAAP group.

CLASSROOM APPLICATION: This article is appropriate for financial accounting classes.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Advanced) How many companies use non-GAAP reporting? Why? Name some examples of differences between GAAP and non-GAAP reporting.

4. (Advanced) What issues or problems can non-GAAP reporting present to users of the financial statements? What do the statistics reveal regarding the contrast of companies using non-GAAP reporting versus those not using non-GAAP reporting?

5. (Advanced) Should non-GAAP reporting be regulated? If so, how?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
U.S. Corporations Increasingly Adjust to Mind the GAAP
by Theo Francis and Kate Linebaugh
Dec 14, 2015
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What Exactly are Non-GAAP Numbers? Well, That Depends
by Tatyana Shumsky
Jul 05, 2016
Online Exclusive

Accounting Choices Blur Profit Picture
by Tatyana Shumsky and Theo Francis
Jun 28, 2016
Online Exclusive

"One More Reason for Investors to Worry About 'Earnings Before Bad Stuff'," by Michael Rapoport,The Wall Street Journal, August 4, 2016 ---
http://www.wsj.com/articles/one-more-reason-for-investors-to-worry-about-earnings-before-bad-stuff-1470261290?mod=djem_jiewr_AC_domainid

Regulators and investors are increasingly wary when companies overemphasize their own customized earnings metrics. New research shows they may have a point.

Companies that report significantly stronger earnings by using tailored figures like “adjusted net income” or “adjusted operating income” are more likely to encounter some kinds of accounting problems than those that stick to standard measures, according to research by consulting firm Audit Analytics.

The rules allow companies to report such tailored figures, and the research, conducted for The Wall Street Journal, doesn’t necessarily mean such companies are less scrupulous in their bookkeeping. But it does suggest that heavy use of metrics outside of generally accepted accounting principles—sometimes referred to derisively as “earnings before bad stuff”—could be a warning sign.

“I would say an overprominent user of non-GAAP metrics would justify more attention and is a red flag,” said Olga Usvyatsky, Audit Analytics’s vice president of research. Heavy use of non-GAAP metrics may indicate a company’s accounting is “more aggressive,” she said.

The study focused on companies in the S&P 1500 index. It found that just 3.8% of those exclusively using standard GAAP metrics had formal earnings restatements from 2011 to 2015. Among heavy users of non-GAAP measures—those whose non-GAAP earnings were at least twice as high as their GAAP net income—the rate was 6.5%.

Similarly, 7.5% of the GAAP-only group had material weaknesses in internal controls—flaws in their procedures to prevent financial errors and fraud—versus 11% of the non-GAAP group.

Some of the numbers are small, and the use of non-GAAP metrics didn’t specifically cause or relate directly to the companies’ accounting flaws. Audit Analytics cautioned more research is needed.

Still, the results suggest companies using non-GAAP metrics heavily “may be somewhat less rigorous in other accounting areas” than companies using only GAAP, said Robert Pozen, a senior lecturer at the MIT Sloan School of Management.

Two examples are Valeant Pharmaceuticals International Inc. and LendingClub Corp. Both companies have been heavy users of pro forma metrics, and both have run into accounting and other problems that have hammered their shares.

Valeant restated earnings earlier this year over revenue-booking issues and said it had material weaknesses relating to its “tone at the top,” or the commitment by a company’s leadership to doing business ethically. Valeant has used non-GAAP metrics for years, often benefiting significantly. In 2015, the company had a GAAP loss of $291.7 million but an “adjusted” non-GAAP profit of $2.84 billion after stripping out amortization of intangible assets, acquisition costs and other expenses.

Valeant spokeswoman Laurie Little said the company believes its non-GAAP measures “are useful to investors in their assessment of our operating performance and the valuation of our company.”

Online lender LendingClub forced its chief executive to resign in May after it found disclosure problems on some loans, and it too cited a “tone at the top” material weakness. The company had a 2015 GAAP loss of $5 million but non-GAAP net income of $56.8 million. LendingClub declined to comment.

Neither company was in the pool Audit Analytics examined.

Companies are allowed to use nonstandard metrics as long as they also provide GAAP numbers and show the differences between the two. The tailored measures strip out unusual or noncash items to present what companies say is a clearer picture of performance.

Even critics acknowledge the tailored metrics can sometimes be helpful—showing a company’s results in constant currency is a legitimate adjustment, for instance, Mr. Pozen said.

But there is also a concern they are being abused, that companies are stripping out normal, ongoing costs to make themselves look healthier.

Continued in article


 

Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

U.S. May Finally Get a Peek at the Books of Alibaba, Baidu
by: Kathy Chu, Chao Deng, and Michael Rapoport
Aug 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Finance, Financial Markets, International Business, Investing, PCAOB

SUMMARY: A long-running dispute between the U.S. and China over the ability to vet auditors of Chinese companies listed on American exchanges could be edging toward a breakthrough. Two big U.S.-listed Chinese companies - Alibaba Group Holding Ltd. and Baidu Inc. - and their outside auditors are preparing for audit inspections by officials from the Public Company Accounting Oversight Board. The PCAOB is expected to gain access in coming months to audit firms' records of the work they did to review Alibaba's and Baidu's books. That could be a prelude to fuller PCAOB inspections of the audit firms, a move long blocked by the Chinese government. PricewaterhouseCoopers' Hong Kong affiliate is Alibaba's auditor; Ernst & Young's Beijing affiliate is Baidu's auditor. The ability to check auditors of foreign firms listed in the U.S. is important to ensure auditing standards are upheld and investors in U.S. markets are protected.

CLASSROOM APPLICATION: This article is useful for auditing courses, and courses dealing with financial markets.

QUESTIONS: 
1. (Introductory) What is the PCAOB? What is its purpose and function? When was it created? Why?

2. (Advanced) What is Alibaba? Where is it based? How is it connected to the United States?

3. (Advanced) What have been the auditing issues related to Alibaba? Who is concerned or should be concerned? What are their concerns?

4. (Advanced) What are the possible new developments that could occur with the auditing of Chinese firms? How could a change like this affect American markets? How could they affect auditing? Should these changes be made? Why or why not?

5. (Advanced) Should Alibaba and other companies similarly situation be subject to U.S. regulations or jurisdiction? Why or why not?

6. (Advanced) The article states the companies' auditors are affiliates of U.S. Big Four firms. What does that mean? How much control do the U.S. firms have in those audits? How could that be handled to ensure proper audits?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"U.S. May Finally Get a Peek at the Books of Alibaba, Baidu," Kathy Chu, Chao Deng, and Michael Rapoport,The Wall Street Journal, August 7, 2016 ---
http://www.wsj.com/articles/u-s-regulator-expected-to-get-access-to-alibaba-baidu-financials-1470377222?mod=djem_jiewr_AC_domainid

A long-running dispute between the U.S. and China over the ability to vet auditors of Chinese companies listed on American exchanges could be edging toward a breakthrough.

Two big U.S.-listed Chinese companies— Alibaba Group Holding Ltd. and Baidu Inc. —and their outside auditors are preparing for audit inspections by officials from the Public Company Accounting Oversight Board, the U.S. audit-industry regulator. The PCAOB is expected to gain access in coming months to audit firms’ records of the work they did to review Alibaba’s and Baidu’s books, according to people familiar with the situation. That could be a prelude to fuller PCAOB inspections of the audit firms, a move long blocked by the Chinese government.

PricewaterhouseCoopers’ Hong Kong affiliate is Alibaba’s auditor; Ernst & Young’s Beijing affiliate is Baidu’s auditor.

The ability to check auditors of foreign firms listed in the U.S. is important to ensure auditing standards are upheld and investors in U.S. markets are protected, experts say. U.S. regulators have been particularly eager to vet how Chinese companies have been audited, after a wave of alleged accounting fraud and investor complaints about lack of financial transparency at smaller U.S.-listed Chinese firms starting around 2011.

“It’s critical for investors in the U.S. market that the PCAOB is able to inspect Chinese audit firms,” said Joseph Carcello, a University of Tennessee accounting professor.

The PCAOB has long attempted to inspect the performance of China-based firms that audit many U.S.-traded Chinese companies, the way the accounting board regularly inspects other audit firms. But to date, the Chinese government has refused to allow the inspections, citing sovereignty concerns: The Chinese government has indicated the information contained in audits of Chinese companies could be considered “state secrets.”

The new developments may be a move toward resolving that yearslong dispute, which has been marked by seeming steps toward agreement followed by reversals. Most recently, the PCAOB last year said publicly it was close to an agreement to proceed with inspections, only to have negotiations break down.

One person at a Big Four accounting firm said that the firm has been preparing for years for the possibility that the PCAOB will inspect its working papers for U.S.-listed Chinese companies. The firm has been conducting mock reviews of PCAOB audits for the past few years, going over questions and grading the employees on how well they answered, the person said.

It is still possible the Alibaba- and Baidu-related inspections might not proceed. The audit documents provided to the PCAOB may be heavily redacted and the board may face other restrictions in conducting the inspections, said the people familiar with the situation, raising questions about whether the board will be allowed to conduct the thorough inspections it is seeking.

The move toward inspections is a “good first step” in thawing relations between U.S. and Chinese regulators, said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management. “But that doesn’t mean that the inspections will be meaningful.”

Mr. Gillis says he expects audit work papers to be moved to Hong Kong for inspection, a way to ease the Chinese government’s concerns about foreign regulators working on Chinese soil.

The PCAOB wouldn’t confirm the move toward inspections, saying only that it continues “to work toward obtaining access to the information we need in order to conduct the necessary inspections of registered firms in China and Hong Kong.” The auditing regulator said it doesn’t comment on specific audits.

PwC in Hong Kong didn’t immediately respond to a request for comment. E&Y’s affiliate in Beijing declined to comment. The China Securities Regulatory Commission had no immediate comment.

PCAOB inspections are meant to assess the performance and compliance with auditing rules of firms that audit U.S.-traded companies. They are done on a regular basis and aren’t a sign the auditors or the companies have done anything wrong. But an inspection would come at a sensitive time for Alibaba in particular, as the U.S. Securities and Exchange Commission is investigating the accounting practices of the e-commerce giant.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Chief Audit Executives Cite Major Skills Gaps, Lack of Impact: Global Study
by: Deloitte Risk Journal Editor
Aug 08, 2016
Click here to view the full article on WSJ.com

TOPICS: Audit, Internal Audit

SUMMARY: Only 13% of more than 1,200 chief audit executives (CAEs) surveyed in 29 countries across eight industries are "very satisfied" that their functions have the skills to meet expectations of stakeholders. The top five skills gaps are cyber, cloud computing and other specialized information technology skills, cited by 42% of respondents, followed by data analytics (41%); risk modeling (27%), innovation (26%) and fraud detection (24%). CAEs also indicate risk anticipation (39%) and data analytics (34%) as the two innovations most likely to impact internal audit over the next three to five years.

CLASSROOM APPLICATION: This article provides excellent information for an audit class, as well as for coverage of the internal audit function in any class.

QUESTIONS: 
1. (Introductory) What is a CAE? What does a CAE do?

2. (Advanced) What are the top five skills discussed in the article? What do CAEs think about these skills? How are they ranked?

3. (Advanced) What is internal audit? What are the responsibilities and areas of authority of the internal audit function?

4. (Advanced) What do CAEs think about their internal audit functions?

5. (Advanced) What are analytics? How could analytics be used by the internal audit function? What purpose would they serve? What benefits would they offer? What costs are involved?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Chief Audit Executives Cite Major Skills Gaps, Lack of Impact: Global Study," by Deloitte Risk Journal Editor,The Wall Street Journal, August 8, 2016 ---
http://www.wsjsmartkit.com/wsj_redirect.asp?key=AC20160811-07&mod=djem_jiewr_AC_domainid

Only 13% of more than 1,200 chief audit executives (CAEs) surveyed in 29 countries across eight industries are “very satisfied” that their functions have the skills to meet expectations of stakeholders, according to a global study, Evolution or Irrelevance? Internal Audit at a Crossroads, by Deloitte Touche Tohmatsu Limited (DTTL).

The top five skills gaps are cyber, cloud computing and other specialized information technology skills, cited by 42% of respondents, followed by data analytics (41%); risk modeling (27%), innovation (26%) and fraud detection (24%). CAEs also indicate risk anticipation (39%) and data analytics (34%) as the two innovations most likely to impact internal audit over the next three to five years.

Meanwhile, 72% of surveyed CAEs believe their internal audit functions do not have a strong impact and influence on their organizations. Further, 16% of respondents believe that their internal audit function has little to no impact and influence over the board of directors, executive team and other key personnel.

“These findings are concerning and indicate a need for internal audit groups to substantially increase their relevance within their organizations,” says Terry Hatherell, Global Internal Audit leader for DTTL. “Internal audit plays a critical role in effective corporate governance within an organization. The apparent lack of impact and influence is surprising and represents a clear call to action for change,” he adds.

The study also found that 57% of CAEs are not satisfied that their internal audit groups have the skills and expertise to deliver on stakeholder expectations for efficient audits, insightful reports and effective decision support. The majority of respondents say they use analytics in fieldwork, but fewer do so in annual planning and audit scoping.

Over the next three to five years, 58% of respondents expect to be using analytics in at least half of their audits. Thirty-seven percent expect to move to high usage—employing analytics in at least 75% of their audits. The survey revealed gaps in stakeholders’ expectations for more forward-looking, predictive activities (e.g., risk anticipation) from internal audit―the kind of activities enabled by analytics.

“The need to enhance analytics tools and techniques stands out among the most urgent priorities for internal audit,” says Neil White, an Advisory partner and internal audit analytics leader for Deloitte & Touche LLP. “While using analytics to deliver audits more efficiently is an important goal, the survey results lead us to believe internal audit should capitalize on the wealth of available data to deliver more insightful views of business issues and risks to stakeholders.”

Sixty-four percent of respondents believe it will be important to have strong impact and influence in their organizations over the next three to five years.  While about one-third of internal audit groups have evaluated their organization’s strategic planning process in the past three years, over half expect to do so in the next three years. In the next three years, 70% expect to evaluate their organization’s risk management process, up from 54% over the past three years.

Other Report Highlights

—The current use of analytics is largely at basic levels: While 86% of respondents use analytics, only 24% use them at an intermediate level and 7% at an advanced level. Most (66%) use basic, ad hoc analytics (e.g., spreadsheets) or no analytics.

Dynamic reporting is poised to increase: Use of static text documents and presentations to communicate with stakeholders will decrease as usage of dynamic visualization tools, such as those used to generate heat maps, bubble charts, interactive graphs and other easy-to-grasp representations of data, is anticipated to increase from 7% to 35% among respondents.

—CAEs expect to expand advisory services: More than half of respondents (55%) expect the proportion of advisory services they provide internally to expand over the next three to five years.

—Alternative resourcing for talent will likely expand: The percentage of respondents with formal rotation programs is expected to double over the next three to five years, from 10% to 20%. The percentage with guest auditor programs also will likely increase from 20% to 29%, and respondents expect the use of cosourcing to rise as well.

­—Budgets are expected to remain stable, which may present challenges: In a time when internal audit may need to make significant investments to strengthen its impact and influence, half of CAEs expect their budgets to remain stable, and another third expect them to increase somewhat. Only 10% expect budget decreases.

Considerations for CAEs

The business environment demands that organizations develop certain capabilities over the next several year, such as the ability to anticipate risks and implement responses. Organizations might find the following considerations useful:

—Seek ways to increase impact and influence.

—Embed analytics into internal audit activities.

—Streamline and visualize communications and reports.

—Assess and address talent and skills gaps.

—Review strategic planning and risk management.

—Promote a culture of innovation within the organization.

—Marshall senior-level support.

 “Organizations —especially the audit committee and the executive team—need internal audit to inform them about the future rather than report on the past, and they are seeking insights as well as information and advice as well as assurance,” says Mr. White. “Increased investment in analytics presents major opportunities for CAEs to increase efficiency, value and, perhaps most important, the impact of internal audits on their organizations.”

Related Resources

Evolution or Irrelevance? Internal Audit at a Crossroads

Driving Innovation in Audit: Joseph Ucuzoglu, Chairman and CEO, Deloitte & Touche LLP

As Cyberthreats Mount, Internal Audit Can Help Play Defense

Compliance Risks: What You Don’t Contain Can Hurt You

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

Good News for M.B.A. Students: Tuition Is Now More Deductible
by: Laura Saunders
Aug 13, 2016
Click here to view the full article on WSJ.com

TOPICS: Deduction, Individual Taxation, Tax Court

SUMMARY: A specialized court's decision should embolden more students enrolled in M.B.A. programs across the country to deduct their tuition - especially if they are getting an executive M.B.A. A married couple deducted $18,879 for tuition, commuting and other expenses on their 2011 tax return that the IRS disallowed, in part because he was unemployed for several months of the year. But the judge disagreed with the IRS, saving the taxpayers $2,111 in taxes - and providing more ammunition to M.B.A. students who want to deduct education expenses in the future. The decision was released earlier this month by the Tax Court, a specialized tribunal. Although the case is of a type that can't be appealed or formally cited as precedent, experts say such cases often are influential both inside and outside the IRS. Many M.B.A. students qualify for a deduction, however, because they have worked before enrolling in a program and are seeking to "maintain or improve" their skills, as the law requires. In addition, the degree doesn't lead to a license.

CLASSROOM APPLICATION: This is an excellent article to use in individual tax classes, and also for the information it provides our students who may be in graduate school or considering graduate school in the future.

QUESTIONS: 
1. (Introductory) What is Tax Court? How does it differ from other courts?

2. (Advanced) What was the ruling in this case? What is the reasoning behind that decision? What tax rules support the decision?

3. (Advanced) Why did the IRS fight the deduction in this case? What was the reasoning the IRS was asserting? What are the merits of the IRS's position?

4. (Advanced) What is precedent? How is the decision treated for precedent purposes? Why? How will that impact tax planning for other taxpayers?

5. (Advanced) What makes earning an MBA different from earning other degrees? Does the graduate vs. undergraduate distinction make a difference? For what programs or courses is a taxpayer most likely to deduct the costs? For what courses or programs are education expenses are not allowed? In what situations would MBA expenses be less likely to be deductible?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
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"Good News for M.B.A. Students: Tuition Is Now More Deductible," by Laura Saunders,The Wall Street Journal, August 13, 2016 ---
http://www.wsj.com/articles/good-news-for-m-b-a-students-tuition-is-now-more-deductible-1471013805?mod=djem_jiewr_AC_domainid

A specialized tax court’s decision seen as a win for M.B.A. students.

A specialized court’s decision should embolden more students enrolled in M.B.A. programs across the country to deduct their tuition—especially if they are getting an executive M.B.A.

In the case, Kopaigora v. Commissioner, the Internal Revenue Service had hoped to collect thousands of dollars from Alex Kopaigora, a 42-year-old who came to the U.S. from Ukraine in 1994 on a Mormon mission and later became a citizen. In 2011, he was employed at a hotel in Los Angeles and commuted to Brigham Young University in Salt Lake City, for its executive M.B.A. program.

Mr. Kopaigora and his wife, Elizabeth, deducted $18,879 for tuition, commuting and other expenses on their 2011 tax return that the IRS disallowed, in part because he was unemployed for several months of the year.

But the judge disagreed with the IRS, saving the Kopaigoras $2,111 in taxes—and providing more ammunition to M.B.A. students who want to deduct education expenses in the future.

“This case is a big win for all M.B.A. students,” says Robert Willens, a tax expert who teaches at Columbia University’s business school and has advised hundreds of M.B.A. students on the ins and outs of deducting tuition.

The decision was released earlier this month by the Tax Court, a specialized tribunal. Although the case is of a type that can’t be appealed or formally cited as precedent, experts say such cases often are influential both inside and outside the IRS.

According to the Department of Education’s most recent data, about 110,000 students were pursuing graduate degrees in business in 2014. About 12,000 students were enrolled in executive M.B.A. programs in the U.S. in 2015, according to the Executive MBA Council, and three-quarters of them paid all or part of their own expenses.

To see why the case has broad implications, it is necessary to grapple with intricacies in the tax law. The rules allow deductions for education costs as “unreimbursed business expenses” on Schedule A (for employees) and on Schedule C (for the self-employed)—but not if the courses prepare the student for a new type of business or license, such as for law or nursing.

In practice, this requirement often precludes taxpayers from taking deductions for both undergraduate and graduate education expenses, although other tax benefits may help with these costs.

Continued in article

Jensen Comment
Most students in other graduate programs will find this MBA student favoritism by the IRS to be discriminatory.


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

ComScore Delays Quarterly Report on Accounting Probe, Names New Leadership
by: Anne Steele
Aug 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Audit Committee, Executive Compensation, Financial Reporting, Revenue Recognition

SUMMARY: ComScore Inc. said it needs more time to file its June 2016 quarterly report, as the media measurement and analytics company completes an internal investigation into its accounting. ComScore said in a regulatory filing with the government that its investigation is "substantially complete," and that its audit committee has identified "certain areas of potential concern, including with respect to certain accounting and disclosure practices and controls that the company...is further analyzing."

CLASSROOM APPLICATION: This article is appropriate for coverage of revenue recognition and internal investigations.

QUESTIONS: 
1. (Introductory) What accounting-related issues ComScore is investigating? What reporting has the investigation delayed?

2. (Advanced) The article discusses "nonmonetary" revenue. What is that? What were the issues regarding this kind of revenue? How should the company account for it?

3. (Advanced) What is an audit committee? What are its duties and areas of authority? How would it be involved in a case like this?

4. (Advanced) How has the investigation affected the company's stock price? Why can stock price affected by this kind of investigation?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"ComScore Delays Quarterly Report on Accounting Probe, Names New Leadership," by Anne Steele, The Wall Street Journal, August 11, 2016 ---
http://www.wsj.com/articles/comscore-delays-quarterly-report-on-accounting-probe-names-new-leadership-1470834765?mod=djem_jiewr_AC_domainid

Analytics company said audit committee identified ‘certain areas of potential concern’

ComScore Inc. on Wednesday said it needs more time to file its June quarterly report, as the media measurement and analytics company completes an internal investigation into its accounting.

Separately, comScore named a new management team, including replacing its chief executive, who has been accused of benefiting from the company’s boosted results from the recording of “nonmonetary” revenue. This reflects revenue from barter agreements, where actual cash doesn’t change hands.

ComScore said in a regulatory filing with the government that its investigation is “substantially complete,” and that its audit committee has identified “certain areas of potential concern, including with respect to certain accounting and disclosure practices and controls that the company…is further analyzing.”

Last August, The Wall Street Journal called attention to comScore’s practice of reporting nonmonetary revenue, which appeared to have helped boost the compensation of comScore’s top executives. The company said in the filing Wednesday that it hasn’t concluded whether any transactions were incorrectly recorded.

In a news release, comScore said it named a slate of new executives, continuing a shake-up at the company. Co-founder Gian Fulgoni will become chief executive, replacing Serge Matta, who will stay on as executive vice chairman and adviser to Mr. Fulgoni.

Mr. Matta was among the executives receiving the special market-based equity awards. ComScore has said Mr. Matta’s awards were consistent with the company’s equity-incentive plan for all employees.

On a call with investors Wednesday comScore said its revenue for the first half of 2016 was about $214 million to $218 million, including $10 million of “nonmonetary” revenue. The company said this was about $20 million below what it expected and​gave three reasons for the shortfall: distraction related to the investigation; challenges with the speed of scaling its mobile measurement panels; and sales to clients that were delayed because of the clients’ own deal-making activity.

ComScore said it had about $150 million of cash and marketable securities on its balance sheet as of June 30. The company declined to provide further details on its accounting investigation on the call, but it offered a nonfinancial update on its various measurement products.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

FASB Standard Set to Change Accounting for Credit Losses
by: Deloitte Risk Journal Editor
Aug 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Credit Impairment, Credit Losses, FASB, Financial Accounting, GAAP

SUMMARY: New guidance from the FASB is set to significantly change the accounting for credit impairment. Banks and certain asset portfolios (e.g., loans, leases, debt securities) likely will need to modify their current processes for establishing an allowance for loan and lease losses and other-than-temporary impairments to ensure that they comply with the standard's new requirements. To do so, organizations should consider making changes to their operations and systems associated with credit modeling, regulatory compliance and technology. ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments.

CLASSROOM APPLICATION: This article would be appropriate for discussions of accounting for credit losses, as well as for coverage of FASB and GAAP in general.

QUESTIONS: 
1. (Introductory) What is FASB? What is its area of authority?

2. (Advanced) What is credit impairment? Why is it reported? What does it tell users of the financial statements?

3. (Advanced) What is an ASU? What changes is this ASU making? What were the previous rules? Why were these changes made?

4. (Advanced) What is the impairment allowance? How is it determined?

Reviewed By: Linda Christiansen, Indiana University Southeast

"FASB Standard Set to Change Accounting for Credit Losses," by Deloitte Risk Journal Editor,The Wall Street Journal, August 12, 2016 ---
http://deloitte.wsj.com/riskandcompliance/2016/08/12/fasbs-final-standard-set-to-change-accounting-for-credit-losses/?mod=djem_jiewr_AC_domainid

New guidance from the FASB is set to significantly change the accounting for credit impairment, as discussed in a recently released Heads Up newsletter from Deloitte & Touche LLP. Banks and certain asset portfolios (e.g., loans, leases, debt securities) likely will need to modify their current processes for establishing an allowance for loan and lease losses and other-than-temporary impairments to ensure that they comply with the standard’s new requirements. To do so, organizations should consider making changes to their operations and systems associated with credit modeling, regulatory compliance and technology.

For public business entities that meet the U.S. GAAP definition of an SEC filer, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For public business entities that do not meet the U.S. GAAP definition of an SEC filer, the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

Following is an excerpt from the full Heads Up newsletter which provides details on the new guidance known as ASU 2016-13.¹

ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model)² that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments.

The CECL Model

Scope

The CECL model applies to most³ debt instruments (other than those measured at fair value), trade receivables, lease receivables, reinsurance receivables that result from insurance transactions, financial guarantee contracts⁴ and loan commitments. However, available for-sale (AFS) debt securities are excluded from the model’s scope and will continue to be assessed for impairment under the guidance in ASC 320⁵ (the FASB moved the impairment model for AFS debt securities from ASC 320 to ASC 326-30 and has made limited amendments to the impairment model for AFS debt securities, as discussed in the full Heads Up newsletter).

Recognition of Expected Credit Losses

Unlike the incurred loss models in existing U.S. GAAP, the CECL model does not specify a threshold for the recognition of an impairment allowance. Rather, an entity will recognize its estimate of expected credit losses for financial assets as of the end of the reporting period. Credit impairment will be recognized as an allowance—or contra-asset—rather than as a direct write-down of the amortized cost basis of a financial asset. However, the carrying amount of a financial asset that is deemed uncollectible will be written off in a manner consistent with existing U.S. GAAP.

Measurement of Expected Credit Losses

The ASU describes the impairment allowance as a “valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.” An entity can use a number of measurement approaches to determine the impairment allowance. Some approaches project future principal and interest cash flows (i.e., a discounted cash flow method) while others project only future principal losses. Regardless of the measurement method used, an entity’s estimate of expected credit losses should reflect those losses occurring over the contractual life of the financial asset.

When determining the contractual life of a financial asset, an entity is required to consider expected prepayments either as a separate input in the determination or as an amount embedded in the credit loss experience that it uses to estimate expected credit losses. The entity is not allowed to consider expected extensions of the contractual life unless it reasonably expects to execute a troubled debt restructuring with the borrower by the reporting date.

An entity must consider all available relevant information when estimating expected credit losses, including details about past events, current conditions and reasonable and supportable forecasts and their implications for expected credit losses. That is, while the entity is able to use historical charge-off rates as a starting point for determining expected credit losses, it has to evaluate how conditions that existed during the historical charge-off period may differ from its current expectations and accordingly revise its estimate of expected credit losses. However, the entity is not required to forecast conditions over the contractual life of the asset. Rather, for the period beyond the period for which the entity can make reasonable and supportable forecasts, the entity reverts to historical credit loss experience.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

Military Contractor Orbital ATK to Restate Financials
by: Doug Cameron and Austen Hufford
Aug 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting Errors, Materiality, Revenue Recognition

SUMMARY: Orbital ATK Inc. said that accounting errors obscured losses of up to $450 million on a Pentagon arms contract, forcing the aerospace and defense company to restate its financials. The company said it didn't believe there was any fraud involved. Orbital ATK said the misstatements overestimated revenue by $100 million to $150 million in total and that a forward loss provision, related to the unprofitable contract, would reduce previously reported pretax operating income by about $400 million to $450 million.

CLASSROOM APPLICATION: This article would be appropriate for financial accounting classes.

QUESTIONS: 
1. (Introductory) What did Orbital ATK Inc. announce regarding its financial statements? Why did the problems occur?

2. (Advanced) What are the details of the accounting errors? How did the correction of the errors affect the company's financial statements?

3. (Advanced) What is immateriality? Were the errors material for the company's financial position?

4. (Advanced) How did the report of errors affected the company's stock price? Why?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Military Contractor Orbital ATK to Restate Financials," by Doug Cameron and Austen Hufford,The Wall Street Journal, August 11, 2016 ---
http://www.wsj.com/articles/aerospace-contractor-orbital-atk-to-restate-financials-1470829385?mod=djem_jiewr_AC_domainid

Company says accounting errors obscured losses of up to $450 million on a Pentagon arms contract.

Orbital ATK Inc. said Wednesday that accounting errors obscured losses of up to $450 million on a Pentagon arms contract, forcing the aerospace and defense company to restate its financials.

The company said it had failed to meet cost-cutting targets at an ammunition plant it manages for the Army in Missouri that left it nursing a loss rather than breaking even on the fixed-price contract won in 2012.

Orbital ATK shares fell by almost a fifth in early trade following the announcement as the company said it would delay its quarterly filings with regulators for around 45 days.

The company said it didn’t believe there was any fraud involved. “We don’t think there was any misbehavior,” said Orbital ATK Chief Executive David Thompson on a call with analysts after the company reported forecast-beating quarterly earnings.

The problems were uncovered as the company installed new enterprise systems and relate primarily to a $2.3 billion contract with the U.S. Army to manufacture and supply ammunition at the Lake City Army Ammunition Plant in Independence, Mo., for an initial period of seven years and up to 10 years total.

Mr. Thompson said the problems had been “obscured” by a combination of unusual factors and called the incident “very distressing.” A review of other large and midsize contracts hadn’t revealed any material problems.

Orbital ATK said the misstatements overestimated revenue by $100 million to $150 million in total and that a forward loss provision, related to the unprofitable contract, would reduce previously reported pretax operating income by about $400 million to $450 million.

The contract accounts for around 5% of group sales and was inherited from Alliant Techsystems Inc., which merged last year with Orbital Sciences Corp. to form Orbital ATK.

Deloitte & Touche LLP audited the company through March 31, 2015, with the role then taken by PricewaterhouseCoopers LLP. Both are assisting with the continuing probe.

Orbital ATK shares were recently down 18% at $73.43.

Continued in article

Bob Jensen's threads on Deloitte & Touche LLP scandals are at
http://www.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

Wal-Mart Deal Could Jeopardize Jet.com's Sales-Tax Advantage
by: Rolfe Winkler and Sarah Nassauer
Aug 11, 2016
Click here to view the full article on WSJ.com

TOPICS: sales tax, Wal-Mart

SUMMARY: Wal-Mart Stores Inc. signed a $3.3 billion deal to buy web retailer Jet.com Inc., bringing in some outside help to jump-start growth at the retail giant's e-commerce operations. Jet.com Inc. pitches itself as a lower-priced alternative to Amazon.com Inc., partly by not tacking on sales taxes in most states. But tax experts say Jet's proposed $3.3 billion sale to retail giant Wal-Mart Stores Inc. could jeopardize that price advantage by forcing it to collect taxes nationwide. A 1992 Supreme Court ruling allows online retailers to avoid collecting sales taxes in states where they don't have a physical presence like a warehouse, a local store or office.

CLASSROOM APPLICATION: This is a rare and good article to save for coverage of sales tax.

QUESTIONS: 
1. (Introductory) What is sales tax? How is it collected and remitted?

2. (Advanced) What is Jet.com? Why did Wal-Mart purchase Jet.com? What strategy was involved?

3. (Advanced) What are the sales tax issues associated with Wal-Mart's purchase of Jet.com? What problems could the acquisition pose for either company?

4. (Advanced) Should Wal-Mart management be concerned about the sales tax issues? Should they have considered this before the acquisition? Could it have been a factor leading them to decide against the acquisition? Why or why not?

5. (Advanced) How do companies determine where they are required to collect sales tax? Why aren't companies required to collect sales tax in every state? How could that change?

6. (Advanced) Should companies be required to collect sales tax in all states? Please state reasons supporting companies collecting sales tax: (1) in all states, (2) in no states, and (3) in states under the current rules.

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Wal-Mart to Acquire Jet.com for $3.3 Billion in Cash, Stock
by Sarah Nassauer
Aug 09, 2016
Online Exclusive

 

"Wal-Mart Deal Could Jeopardize Jet.com's Sales-Tax Advantage." by Rolfe Winkler and Sarah Nassauer ,The Wall Street Journal, August 11, 2016 ---
http://www.wsj.com/articles/wal-mart-deal-could-jeopardize-jet-coms-sales-tax-advantage-1470855873?mod=djem_jiewr_AC_domainid

Isn’t yet clear how Wal-Mart will handle tax collections on Jet.com

Jet.com Inc. pitches itself as a lower-priced alternative to Amazon.com Inc., partly by not tacking on sales taxes in most states.

But tax experts say Jet’s proposed $3.3 billion sale to retail giant Wal-Mart Stores Inc. could jeopardize that price advantage by forcing it to collect taxes nationwide.

A 1992 Supreme Court ruling allows online retailers to avoid collecting sales taxes in states where they don’t have a physical presence like a warehouse, a local store or office.

With far more distribution centers nationwide, Seattle-based Amazon collects sales taxes in 28 states covering most of the U.S. population.

New York-based Jet collects taxes in just seven states, avoiding big ones like California and Texas.

On Wednesday, Amazon and Jet each listed a Le Creuset French oven for $319.95. But an Amazon shopper in Chicago, for example, would have to pay sales taxes of $32.79, unlike the Jet shopper.

Wal-Mart has a physical presence in every state, according to a spokesman, so it does collect sales taxes for items it sells on Walmart.com in all states that impose them.

Once the acquisition is closed, it isn’t clear how Wal-Mart will handle tax collections on Jet.com. Tax experts say it will depend on how ownership and operational integrations are structured.

If Jet uses Wal-Mart stores for returns or in-store pickup, or its parent company’s warehouses to store inventory, then it should have to collect sales taxes in those states, says Diane Yetter, who runs a namesake sales-tax consulting firm.

With far more distribution centers nationwide, Seattle-based Amazon collects sales taxes in 28 states covering most of the U.S. population.

New York-based Jet collects taxes in just seven states, avoiding big ones like California and Texas.

On Wednesday, Amazon and Jet each listed a Le Creuset French oven for $319.95. But an Amazon shopper in Chicago, for example, would have to pay sales taxes of $32.79, unlike the Jet shopper.

Wal-Mart has a physical presence in every state, according to a spokesman, so it does collect sales taxes for items it sells on Walmart.com in all states that impose them.

Once the acquisition is closed, it isn’t clear how Wal-Mart will handle tax collections on Jet.com. Tax experts say it will depend on how ownership and operational integrations are structured.

If Jet uses Wal-Mart stores for returns or in-store pickup, or its parent company’s warehouses to store inventory, then it should have to collect sales taxes in those states, says Diane Yetter, who runs a namesake sales-tax consulting firm.

Continued in article



 

Teaching Case
Cost Accounting and Inventory Valuation
by Bob Jensen: 
Differences Between Mark-to-Market Accounting for Derivative Contracts Versus Commodity Inventories
---
http://www.trinity.edu/rjensen/Mark-to-MarketCorn.htm

Double Counting Commodity Mark-to-Market Inventories?
Suppose that a dry summer doubles the prices of corn in both local and international markets. Further suppose that this increase in corn is passed along to hog inventories in Fred Farmer's hog confinement inventory. Suppose that the doubling of corn corn inventory values in Fred Farmer's corn bins correlates to a 25% increase in his hog inventories because increases in feed prices are passed along to hog buyers.

Question
Is there double counting of mark-to-market inventory adjustments of both Fred Farmer's hog feed inventory (corn he raised and stores) and his hog inventory?




 

Humor for August 2016

A Big Super Cut of Saturday Night Live Cast Members Breaking Character and Cracking Up ---
http://www.openculture.com/2016/08/a-big-super-cut-of-saturday-night-live-cast-members-breaking-character-and-cracking-up.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Robin Williams Delivers a Hastings College of Law Commencement Speech in 1983 ---
http://www.openculture.com/2016/08/robin-williams-uses-his-stand-up-comedy-genius-to-deliver-a-law-school-commencement-speech-1983.html
Poking fun at lawyers


You can get a free flight to Iceland if you agree to stay ---
http://www.businessinsider.com/wow-air-is-offering-free-flights-to-iceland-2016-8
Jensen Question
Wonder if that same idea would succeed in the USA?


Harvard Business Review Blog Cartoons ---
https://hbr.org/2016/08/strategic-humor-cartoons-from-the-september-2016-issue?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date


Forwarded by Paula

BAGPIPES

I love this story. Lay down what's bothering you, breath in the fresh air and LISTEN to this story.

Time is like a river. You cannot touch the water twice, because the flow that has passed will never pass again.

Enjoy every moment of life.

As a bagpiper,I play many gigs.

Recently I was asked by a funeral director to play at a graveside service for a homeless man. He had no family or friends,

so the service was to be at a pauper's cemetery in the

Nova Scotia back country.

As I was not familiar with the backwoods, I got lost and, being a typical man, I didn't stop for directions.

I finally arrived an hour late and saw the funeral guy had evidently gone and the hearse was nowhere in sight.

There were only the diggers and crew left and they were eating

lunch. I felt badly and apologized to the men for being late.

I went to the side of the grave and looked down and the vault lid was already in place. I didn't know

what else to do, so I started to play.

The workers put down their lunches and began to gather around. I played out my

heart and soul for this man with no family and friends.

I played like I've never played before for this homeless man.

And as I played "Amazing Grace", the workers began to weep. They wept, I wept, we all wept together.

When I finished, I packed up my bagpipes and started for my car.

Though my head was hung low, my heart was full.

As I opened the door to my car, I heard one of the workers say, "I never seen anything like that before,

and I've been putting in septic tanks for twenty years."

Apparently, I'm still lost....it's a man thing.

 

 

 

 

 

 

 




Humor August  2016 --- http://www.trinity.edu/rjensen/book16q3.htm#Humor083116.htm

Humor July  2016 --- http://www.trinity.edu/rjensen/book16q3.htm#Humor0716.htm  

Humor June  2016 --- http://www.trinity.edu/rjensen/book16q2.htm#Humor063016.htm

Humor May  2016 --- http://www.trinity.edu/rjensen/book16q2.htm#Humor053116.htm

Humor April  2016 --- http://www.trinity.edu/rjensen/book16q2.htm#Humor043016.htm

Humor March  2016 --- http://www.trinity.edu/rjensen/book16q1.htm#Humor033116.htm

Humor February  2016 --- http://www.trinity.edu/rjensen/book16q1.htm#Humor022916.htm

Humor January  2016 --- http://www.trinity.edu/rjensen/book16q1.htm#Humor013116.htm

Humor December 1-31,  2015 --- http://www.trinity.edu/rjensen/book15q4.htm#Humor123115.htm.htm

Humor November 1-30,  2015 --- http://www.trinity.edu/rjensen/book15q4.htm#Humor113015.htm

Humor October 1-31,  2015 --- http://www.trinity.edu/rjensen/book15q4.htm#Humor103115

Humor September 1-30,  2015 --- http://www.trinity.edu/rjensen/book15q3.htm#Humor093015

Humor August 1-31,  2015 --- http://www.trinity.edu/rjensen/book15q3.htm#Humor081115

Humor July 1-31,  2015 --- http://www.trinity.edu/rjensen/book15q3.htm#Humor073115

Humor June 1-30,  2015 --- http://www.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor May 1-31,  2015 --- http://www.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor April 1-30, 2015 --- http://www.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor March 1-31, 2015 --- http://www.trinity.edu/rjensen/book15q1.htm#Humor033115

Humor February 1-28, 2015 --- http://www.trinity.edu/rjensen/book15q1.htm#Humor022815

Humor January 1-31, 2015 --- http://www.trinity.edu/rjensen/book15q1.htm#Humor013115

 




And that's the way it was on August 31, 2016 with a little help from my friends.

 

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's Threads --- http://www.trinity.edu/rjensen/threads.htm

Bob Jensen's Blogs --- http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures --- http://www.trinity.edu/rjensen/resume.htm#Presentations   

Free Online Textbooks, Videos, and Tutorials --- http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines --- http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses --- http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's Resume --- http://www.trinity.edu/rjensen/Resume.htm
 

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

Accounting Historians Journal --- http://www.libraries.olemiss.edu/uml/aicpa-library  and http://clio.lib.olemiss.edu/cdm/landingpage/collection/aah
Accounting Historians Journal
Archives--- http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Accounting History Photographs --- http://www.olemiss.edu/depts/general_library/dac/files/photos.html