Author Topic: General Accounting questions  (Read 5376 times)

Drake

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Re: General Accounting questions
« Reply #10 on: March 28, 2016, 03:58:16 AM »
For corporates, the total debt is the principal only. Don't forget to include short term portions of long term debt (current liabilities) in this number and potentially any significant operating lease liabilities and the net pension liability if the pension is material.
[...]
I think banks, perversely, are allowed to record discounts on their debt as a gain (which means I assume they drop the principal amount to face value) but I don't really look at the big banks so someone with better expertise could clarify that.

First: I am no accounting expert, but I would like to add some questions for my own understanding...

On the question whether principal shown or whether interest is included: Wouldn't that depends less on whether a company is a corporate or a bank, but on the form of the debt? To my understanding, loans taken by a company would be accounted for at amortized cost and hence be shown as principal, only. Debt issued via marketable securities (bonds) would be accounted for at fair value.

Fair value is the value of all future payments, discounted by expected interest rates plus credit spreads of the issuer. Thus, debt accounted at fair value would be discounted for by the market's estimate of the issuer's creditworthiness: if the issuer's creditworthiness degrades, liabilities are reduced and a gain is shown. I don't like this effect either, but if you want fair value to reflect market price, then there is no easy way out of this - after all, the market will indeed pay less for your bonds if your creditworthiness degrades.

If I remember correctly (and again, I am no expert on this, so I might remember wrongly), this discount is treated differently in U.S? IFRS and  European IFRS: IIRC in Europe, the best approximation of market price, including discounts for creditworthiness, will be used for fair valued liabilities while in the U.S. the market price has to be corrected by changes from own creditworthiness so that deteriorating creditworthiness will not reduce the liabilities (which I think to be more intelligent than the European treatment because a company always will have to repay its debt fully) Can anyone confirm this? I am really not certain about this difference, but I think that the upcoming IFRS 9 will have rules that forbid to show gains on the balance sheet caused by deteriorating creditworthiness...


Simple Investor

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Re: General Accounting questions
« Reply #11 on: March 29, 2016, 11:53:34 AM »
I have been doing some work on Wabtec.  They have done about 34 acquisitions since 2005.  This has added around 800mm in goodwill.  The interesting thing is parts of the goodwill are allocated to “deductible goodwill”. 

Not sure what number question we are on so I will use letters. 

A.   Has anyone seen or heard of deductible goodwill?  I have not seen this amortized or deducted on the WAB 10-k. So far investor relations says “some goodwill is amortized’.  Not sure if that is true.
B.   How about adjusting goodwill for currency fluctuations.  Is this normal?  The past two years they have lowered goodwill value by $80mm due to currency fluctuations. 

from 10-k
On February 4, 2015, the Company acquired Railroad Controls L.P. (“RCL”), a U.S. based provider of railway signal construction services for a purchase price of approximately $78.0 million, net of cash acquired, resulting in preliminary goodwill of $14.9 million, all of which will be deductible for tax purposes.

and

   Goodwill      
                                                         Freight          Transit      Total Goodwill
previous year (2014)                                 515,067         347,217        862,284
Adjustment to purchase                         (1,210)        (4,056)              (5,266)
Acquisitions Goodwill                                  28,964         12,140       41,104
Impairment          -
foreign currency impact                         (10,856)        (28,788)      (39,644)
year end (2015)                                          531,965         326,513        858,478

 

WneverLOSE

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Re: General Accounting questions
« Reply #12 on: February 17, 2019, 02:56:13 AM »
Question :
When a company issues stock options they expense the cost of the options to arrive at the net income figure.
but the cost is only a forecast, they calculate the cost using the black scholes model.
lets say the options are for 3 years, and were given at the first year.
during that year the net income figure took into account the value of the options at the time, but by year 3 the stock did so well the options are worth much more.
so during the first year the net income figure shown to investors was too high.
What happens on year 3 ?
The company get the value of the options it issued and in exchange buys the appropriate amount of stock on the market and flips it to the employees (buying it at a premium) so net the company cash outflow was bigger than the inflow from the options.
(employees got paid much more that what initially thought, thus leaving less for shareholders)
by my best understanding the income statement doesn't recognize that shareholders wealth was lost by that.
How does one calculate the true earnings if a company stock keeps rising by so diverting income from shareholders to employees ?
« Last Edit: February 17, 2019, 06:44:33 AM by WneverLOSE »

Cigarbutt

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Re: General Accounting questions
« Reply #13 on: February 17, 2019, 01:16:49 PM »
Question :
When a company issues stock options they expense the cost of the options to arrive at the net income figure.
but the cost is only a forecast, they calculate the cost using the black scholes model.
lets say the options are for 3 years, and were given at the first year.
during that year the net income figure took into account the value of the options at the time, but by year 3 the stock did so well the options are worth much more.
so during the first year the net income figure shown to investors was too high.
What happens on year 3 ?
The company get the value of the options it issued and in exchange buys the appropriate amount of stock on the market and flips it to the employees (buying it at a premium) so net the company cash outflow was bigger than the inflow from the options.
(employees got paid much more that what initially thought, thus leaving less for shareholders)
by my best understanding the income statement doesn't recognize that shareholders wealth was lost by that.
How does one calculate the true earnings if a company stock keeps rising by so diverting income from shareholders to employees ?
That's a good question.
Accounting rules for stock options measure and reporting is a form of compromise.
The convention now requires to bring no adjustments to the allocated expenses after the grant date but the principle of incentive alignment between you, the shareholder, and the manager is maintained. Remember that when the stock is down, the same logic works in reverse unless the Board grants large numbers of options at low prices to "compensate" for the expiring stock options previously granted.
Stock options are truly an expense and the "true" expense (in the form of foregone opportunity to issue shares at market price), even if unrecognized, will be larger if the company does well. That seems fair.
Another mitigating aspect is that the relevant accounts (compensation expense and paid-in capital) will gradually incorporate the new market information over time.
BTW, nice avatar.

SharperDingaan

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Re: General Accounting questions
« Reply #14 on: February 17, 2019, 03:38:14 PM »
The company will report on its Statement Changes Financial Position the debt due on maturity date. There will also be a note disclosure that outlines the relevant details, terms, and conditions. The only time an entity can report a 'gain' on its issued debt, is if they've bought it back from the market at less than the maturity value; then either extinguished or defeased it.

A company can only MTM assets and liabilties available for sale, and must record the MTM adjustment in Other Comprehensive Income. It cannot record a MTM adjustment on debt that it has issued, just because it has become less credit worthy. A company does not get a positive MTM on debt they cannot repay as a result of restructuring or bankruptcy.

Under IFRS goodwill is means tested every year, and the deteriation in value recorded as a goodwill expense in the income statement. Under US GAAP, goodwill is simply amortized forward over up to a 40 year period.

Obviously it is possible to 'engineer' transactions.
Parents will often defease a portion of a subs debt to execute a restructuring. Goodwill will often move to a US GAAP reporter to minimize the annual goodwill charge. To avoid a note disclosure it must only be non-material, at the time it occurrs.

SD
   

For corporates, the total debt is the principal only. Don't forget to include short term portions of long term debt (current liabilities) in this number and potentially any significant operating lease liabilities and the net pension liability if the pension is material.
[...]
I think banks, perversely, are allowed to record discounts on their debt as a gain (which means I assume they drop the principal amount to face value) but I don't really look at the big banks so someone with better expertise could clarify that.

First: I am no accounting expert, but I would like to add some questions for my own understanding...

On the question whether principal shown or whether interest is included: Wouldn't that depends less on whether a company is a corporate or a bank, but on the form of the debt? To my understanding, loans taken by a company would be accounted for at amortized cost and hence be shown as principal, only. Debt issued via marketable securities (bonds) would be accounted for at fair value.

Fair value is the value of all future payments, discounted by expected interest rates plus credit spreads of the issuer. Thus, debt accounted at fair value would be discounted for by the market's estimate of the issuer's creditworthiness: if the issuer's creditworthiness degrades, liabilities are reduced and a gain is shown. I don't like this effect either, but if you want fair value to reflect market price, then there is no easy way out of this - after all, the market will indeed pay less for your bonds if your creditworthiness degrades.

If I remember correctly (and again, I am no expert on this, so I might remember wrongly), this discount is treated differently in U.S? IFRS and  European IFRS: IIRC in Europe, the best approximation of market price, including discounts for creditworthiness, will be used for fair valued liabilities while in the U.S. the market price has to be corrected by changes from own creditworthiness so that deteriorating creditworthiness will not reduce the liabilities (which I think to be more intelligent than the European treatment because a company always will have to repay its debt fully) Can anyone confirm this? I am really not certain about this difference, but I think that the upcoming IFRS 9 will have rules that forbid to show gains on the balance sheet caused by deteriorating creditworthiness...
« Last Edit: February 17, 2019, 03:58:04 PM by SharperDingaan »

AdjustedEarnings

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Re: General Accounting questions
« Reply #15 on: February 18, 2019, 10:20:12 AM »
Some goodwill is deductible for tax purposes based on how the transaction was structured. This will reduce your goodwill at the time of the initial recording of the transaction, with the corresponding change to the net deferred tax assets or liabilities. Financial statement goodwill is not deductible. But, when deductible for tax purposes, it improves cash flows in the years deducted. Foreign currency impact here might just be translation differences at reporting dates of goodwill of the foreign subs, though generally this is to be done at historical rates for that account.

I have been doing some work on Wabtec.  They have done about 34 acquisitions since 2005.  This has added around 800mm in goodwill.  The interesting thing is parts of the goodwill are allocated to “deductible goodwill”. 

Not sure what number question we are on so I will use letters. 

A.   Has anyone seen or heard of deductible goodwill?  I have not seen this amortized or deducted on the WAB 10-k. So far investor relations says “some goodwill is amortized’.  Not sure if that is true.
B.   How about adjusting goodwill for currency fluctuations.  Is this normal?  The past two years they have lowered goodwill value by $80mm due to currency fluctuations. 

from 10-k
On February 4, 2015, the Company acquired Railroad Controls L.P. (“RCL”), a U.S. based provider of railway signal construction services for a purchase price of approximately $78.0 million, net of cash acquired, resulting in preliminary goodwill of $14.9 million, all of which will be deductible for tax purposes.

and

   Goodwill      
                                                         Freight          Transit      Total Goodwill
previous year (2014)                                 515,067         347,217        862,284
Adjustment to purchase                         (1,210)        (4,056)              (5,266)
Acquisitions Goodwill                                  28,964         12,140       41,104
Impairment          -
foreign currency impact                         (10,856)        (28,788)      (39,644)
year end (2015)                                          531,965         326,513        858,478

 
« Last Edit: February 18, 2019, 10:49:45 AM by AdjustedEarnings »

SharperDingaan

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Re: General Accounting questions
« Reply #16 on: February 18, 2019, 01:20:40 PM »
Goodwill is a business expense no different to depreciation, and reflects use of the asset.
Tax deductibility depends on the tax code of the country the company is based in, in most places it will be a tax deductible expense.

Where goodwill was incurred in foreign currency, it is revalued the same as any other foreign currency asset at period end; typically at the end-of-period exchange rate. It's not that unusual a transaction; it's just not seen that often on most NA company books.

SD


Some goodwill is deductible for tax purposes based on how the transaction was structured. This will reduce your goodwill at the time of the initial recording of the transaction, with the corresponding change to the net deferred tax assets or liabilities. Financial statement goodwill is not deductible. But, when deductible for tax purposes, it improves cash flows in the years deducted. Foreign currency impact here might just be translation differences at reporting dates of goodwill of the foreign subs, though generally this is to be done at historical rates for that account.

I have been doing some work on Wabtec.  They have done about 34 acquisitions since 2005.  This has added around 800mm in goodwill.  The interesting thing is parts of the goodwill are allocated to “deductible goodwill”. 

Not sure what number question we are on so I will use letters. 

A.   Has anyone seen or heard of deductible goodwill?  I have not seen this amortized or deducted on the WAB 10-k. So far investor relations says “some goodwill is amortized’.  Not sure if that is true.
B.   How about adjusting goodwill for currency fluctuations.  Is this normal?  The past two years they have lowered goodwill value by $80mm due to currency fluctuations. 

from 10-k
On February 4, 2015, the Company acquired Railroad Controls L.P. (“RCL”), a U.S. based provider of railway signal construction services for a purchase price of approximately $78.0 million, net of cash acquired, resulting in preliminary goodwill of $14.9 million, all of which will be deductible for tax purposes.

and

   Goodwill      
                                                         Freight          Transit      Total Goodwill
previous year (2014)                                 515,067         347,217        862,284
Adjustment to purchase                         (1,210)        (4,056)              (5,266)
Acquisitions Goodwill                                  28,964         12,140       41,104
Impairment          -
foreign currency impact                         (10,856)        (28,788)      (39,644)
year end (2015)                                          531,965         326,513        858,478

 

meiroy

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Re: General Accounting questions
« Reply #17 on: February 18, 2019, 05:04:20 PM »
Regarding goodwill:

http://www.berkshirehathaway.com/letters/1983.html


The part under "Corporate Performance" and then the Appendix.

If someone wakes you up in the middle of the night you should be able to recite the whole thing from memory.