Categories
Taxation

Exxon Mobil’s profits and taxes: both records

Exxon Mobil announced recently the highest annual profits by a US corporation in history. Reaction was predictable – the US Congress was littered with outraged politicians calling for a windfall profits tax. But that would be wrong, and the Tax Foundation can explain why much better than I:

While they were recording record profits last year, they were also writing checks to Uncle Sam to the tune of $100.7 billion — two and a half times what they made in net profit. In fact, previous Tax Foundation research found that from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today’s dollars, that’s $2.2 trillion.

This is followed by a nice segue into one of my favourite topics – hammering home the point that corporations don’t pay taxes.

Economists across the ideological spectrum agree that individuals bear the burden of business taxes. As stakeholders, we all pay in one of three ways: The first to pay are the employees of oil companies here in the U.S. — people who would make lower wages or perhaps even lose their jobs. Next would be the millions of Americans who have investments in the oil industry — people who would earn lower returns on those investments. And finally, the principal group to pay would be American gasoline customers — the millions of people who would pay more at the pump.

The main reason why the company can boast such a huge net income is simply because it’s so large in general. Formed when Exxon and Mobil merged in 1999, the company is the largest in the world by market value and revenue. It’s (obviously) the largest of the six “supermajor” oil companies. Income as a percentage of revenue is a reasonable 10.5%.

Categories
Web

Mining Wikipedia for accounting topics

Wikipedia logoWikipedia is a good source of information about a variety of topics. I’m pleased to find that it’s generally pretty good about accounting too.

The article on the Balance Sheet contains “case studies” showing the effect of some transactions on a very basic balance sheet.

As well, I’d never seen non-current liabilities referred to as “fixed” liabilities before, although I’m familiar with “fixed assets.” Guess I’d just never considered the contra terminology!

It makes sense though, given that they result in fixed costs to the business, in general.

The article on the Income Statement shows some examples from Colgate-Palmolive and Viacom and gives instructions on calculating earnings-per-share.

Pensions have been in the news lately, with FASB announcing revised standards regarding the funded status of defined benefit plans.

Wikipedia’s pension entry provides a solid description of the two types of pensions, defined benefit and defined contribution.

I learned something new on the pension page as well:

In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers’ contributions and taxes.

It’s not surprising to find out we don’t learn how to account for these types of pensions in school. It’s basically pensions on a cash basis. Pay the cash, recognize the expense.

Poor matching of expenses to the revenue they helped generate – which is no doubt why governments are the only organizations that get to use this type!

Have you ever contributed to Wikipedia?

Categories
Accounting

Nortel completes latest restatement

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!

Categories
Auditing

Nortel’s revenue recognition wrinkles

Om Malik, writer at Business 2.0 and power blogger, has posted his thoughts on the Nortel announcement from a couple days ago that they would have to restate their earnings again. His reaction is one of incredulity that Nortel, “a big NYSE company,” could actually not be able to get their accounting straightened out after all this time. Let me take a stab at an explanation.

Nortel BramptonThe thing about accounting is that minor changes have trickle down effects in many related accounts and indeed many different periods. A discovery of an error in an estimate for prior years’ revenues (estimates would be required if multi-year contracted sales arrangements are used, which they most certainly would be for Nortel) would have an effect on every set of financial statements from that year forward. Because Nortel is so large, public, and has operations in many countries (and is listed on both the NYSE and the Toronto Stock Exchange), it takes the auditors a long time and a lot of work to sort through the changes and restatements and their many side effects. And it’s busy season too.

Having seen the accounting inside many businesses up close and personal, I think the average observer would be very surprised at the amount of errors and issues auditors have to clean up and/or sort through as part of their job of rendering an opinion on the fair presentation of the statements.

Categories
Auditing

Revenue recognition and Nortel

Nortel BramptonNortel Networks Corp. once again will have to restate its financial results to fix accounting mistakes, the company said on Friday as it posted a fourth-quarter loss of $2.2 billion.

Their chief executive maintains that the revenue was just recognized in incorrect periods, from 2002 through 2005.

Revenue recognition is definitely a touchy subject these days, I know we certainly spend more time nowadays on it than we used to. We have checklists to ensure we’ve considered every different aspect of sales arrangements and there is a note to the financial statements concerning how and when revenues are recognized.

Since Nortel is large (complicated) and public (risky), the audit could take quite long and I wouldn’t be surprised if there are a handful of public accountants who are there each year more often than they are at their own office.