Over at the AAO Weblog, there’s an interesting post concerning the Adelphia fraud and an “enabler”, Scientific-Atlanta, which is now a unit of Cisco.
Around August 2000, Adelphia asked Scientific-Atlanta to increase the price of digital cable television set-top boxes it was selling to Adelphia – then kick back the difference to Adelphia in as “marketing support” for moving the set-top boxes.
How did the scheme work to increase earnings? Adelphia capitalized the set-top boxes at the inflated purchase price (and amortized the cost over more than one period) and the marketing support kickback was recorded as a reduction of ordinary marketing expense!
Ingenius! Now if Adelphia had just channelled their creative energies to building a legitimate business… Anyway, this is news because the SEC accused Scientific-Atlanta of aiding and abetting the fraud.
Without admitting or denying guilt, Scientific-Atlanta is settling the charges for $20 million.
The Financial Accounting Standards Board and the American Institute of CPAs have announced a joint project whose aim is to seek “constituent feedback on proposed enhancements to the FASB’s standard-setting procedures that would determine whether the Board should consider differences in accounting standards for private companies.”
This is the classic conundrum commonly known to those in the biz as “big GAAP little GAAP.” (Link via Jack Ciesielski’s AAO Weblog.)
What this refers to is GAAP for “big”, public companies and “little”, private companies. It’s about striking a balance between the cost of complying with accounting standards for small companies with its relative benefit to financial statement users.
In Canada, the profession has responded to the issue with something called “differential reporting”, which is a set of options that non-publicly accountable entities can choose to make their financial reporting cheaper, without sacrificing quality.
The most common options that I see in my work have to do with accounting for subsidiaries and other significantly-influenced investments, and income taxes. Ordinarily controlled entities are required to be consolidated in the financial statements with the parent company, but under differential reporting you can use easier methods such as the equity or cost method. They don’t provide the same level of disclosure or quality of information, but in smaller companies this isn’t the end of the world.
For income taxes, the taxes payable method is an option that can be used instead of the future income taxes method, allowing a company to forgo measuring their future income taxes, which are taxes that are likely to be assessed in future periods and arise from timing differences between financial accounting and tax laws.
In order to use differential reporting options, all the shareholders must agree to use it. As you can imagine, it is easiest and used most often in companies with owner-managers or only a handful of shareholders. It is useful because these types of shareholders are privy to information in the companies that ordinary shareholders in public companies simply aren’t, by virtue of their increased involvement in the daily operations.
The short answer is no. Here is a story from the Associated Press that claims the FASB is going to “tackle the thorny question of accounting for leased equipment and property.” Excuse me? Have we just been ignoring leases until this point? Does any journalist do research any more?
Lease accounting isn’t new, although it is constantly being revised due to the complicated financing arrangements implemented by business. There are very few differences between accounting for leases between the US and Canadian GAAP. As with every other area of accounting, we just follow business – if the arrangement is complicated, then the accounting for that arrangement is likely to be complicated.
Stock options are another area of complication, and one where ordinary journalists (and even those who are primarily business journalists – a contradiction in terms if I’ve ever seen one) often mix up the facts for the hysteria.
When you read something in the mainstream media about public accounting, please take it with a grain of salt because it is inevitably rife with misinformation, either deliberate or otherwise.
Nortel released their 2005 financials Friday and completed more restatements of prior years’ results. The restatements related to revenue recognition and decreased revenues and net income because the revenue should’ve been booked in different periods.
Maybe this will mark a turning point for the Canadian communications equipment company and they can retain (or regain) their position as a market leader. The fact they released these disappointing results on a Friday afternoon is of course a little trick to reduce their media exposure. Not everyone is fooled!