Business acumen is keenness and quickness in understanding and dealing with a business situation in a manner that is likely to lead to a good outcome. For CPAs in public accounting this means performing higher quality audits. But who has the time to compile a list of timely accounting news relevant to CPAs? We do! Here are a few articles, blog posts, and publications designed to help increase business acumen in the profession.
Sears to Report First Profit Since 2012 (August 3, 2015) – The Wall Street Journal (@WSJ)
A recent spin-off by Sears is paving the way for its first profitable quarter in over three years. This expected income is coming from the sale of several hundred real estate properties into an investment trust. Despite the good news, sales, including those made in the same store year over year, continue to decline. Sears continues to search for ways to bolster its liquidity to combat these declining revenues, mainly by cost cutting and divestiture.
How It’s Relevant: Spinning off business units or divesting assets can be a common occurrence when an institution looks to shed under-performing operations or non-core parts of its business. However, these transactions come with several types of accounting considerations. For instance, how might a spin off affect your treatment of subsidiary for consolidated book purposes? Does it fall under deconsolidation guidance in ASC 810? There might be other types of disclosures – like discontinued operations! – that may need to be addressed as well. Much like acquisitions, divestitures can have far reaching consequences and the accounting implications should be well vetted before the transaction actually occurs!
Fed Survey Finds Pickup in Demand for Loans (August 3, 2015) – The Wall Street Journal (@WSJ)
A recent survey of domestic banks shows there has been a surge of demand for both commercial and consumer loans during Q2 2015. As a result, it was noted that some banks have loosened lending standards to meet this demand as bank and nonbank lenders look to secure these commitments, leading to aggressive competition. The article also refers to a general trend of gradually lowering credit standards over the last ten year period, though most banks believe this is more applicable to commercial and industrial lending rather than consumer loans, like mortgages and home equity lines.
How It’s Relevant: The trend of high competition between lenders leading to looser standards has been often discussed in the years since the recession – and for good reason! This dynamic continues to bear on the banking industry and it should be regarded carefully. Why? Easier credit often leads to higher losses as lenders take on borrowers with riskier profiles! The impact to allowances made for these losses should be a major point of discussion between auditors and clients. While a macro trend of looser lending standards doesn’t necessarily mean a bank will incur higher future losses, understanding management’s approach to dealing with the changing competitive environment, and mitigating those risks, is certainly important and should provide more clarity on the impact to loan loss allowances.
U.S. Firms Struggle to Trace ‘Conflict Minerals’ (August 3, 2015) – The Wall Street Journal (@WSJ)
The Dodd-Frank Act requires a company to disclose whether certain minerals (such as tin, tungsten, tantalum and gold) used in its products are connected to violent militia groups in the war-torn country of the Democratic Republic of the Congo. This disclosure must be made in “conflict minerals” reports filed with the SEC. The phase-in period for reporting deadlines and requirements has expired, with large companies expected to file audited conflict minerals reports by the end of June 2016. However, approximately 90% of companies required to disclose this information last year responded that it was undetermined whether their products were conflict-free, as mandated.
How It’s Relevant: Tracing potential conflict minerals through several layers of a company’s supply chain is a daunting task. With the newly effective requirement for these reports to also be externally audited, the challenge will also extend to those firms who are opining on these reports! Upfront discussions with management to set the expectations for the nature and extent of documentation needed to support a company’s findings – and the audit trail thereof! – will be critical. The amount of supply chain knowledge may also give rise to the identification of additional operational or even reporting risks that should be considered as part of any concurrent financial statement audits.
Trade Deficit Widens, Showing Effect of Strong U.S. Dollar (August 5, 2015) – BloombergBusiness (@business)
Recent import and export data from the month of June show that a strong dollar is widening the trade deficit. As the dollar increases in value relative to other foreign currencies, domestic products are becoming more expensive, making U.S. products less attractive to overseas trade partners. Meanwhile, the strength of the dollar has made importing of foreign goods more attractive as domestic purchasing power increases.
How It’s Relevant: Foreign exchange rates can have a significant effect, not only on the business operations of a company (or country) but also on its financial accounting. Changes in these rates can lead to translation gains and losses and may spur businesses to look harder at hedging foreign currency exposures. Awareness of these issues will better prepare you for the changes you should see in your client’s financial statements, and if you haven’t already, you might consider brushing up on your understanding of hedging relationships!
Accounting Issues Mask a Seller’s True Value (August 5, 2015) – CFO.com (@cfo)
With increasing M&A volume and deal sizes, this article looks into common issues that may cloud the value of a target company. Working capital issues, namely collecting on receivables, may present themselves in the future despite significant revenue growth. Non-GAAP financial measures used by target companies may actually confuse the underlying economic value of a company, even if these measures are ones commonly presented. Changes to accounting disclosures and selective financial reporting can also cloud the waters for acquiring companies. Implementation of new IT systems and internal control implications can also lead to significant drains on future value or drag down quality of financial reporting!
How It’s Relevant: Mergers and acquisitions continue to be a hot topic in the business landscape. Some of this activity is leading to more creative financial reporting when closing these deals, such as use of non-GAAP ratios or measures and selective presentation. The one item that stands out is the susceptibility of financial misstatements during IT implementation projects! Given the increasing regulatory scrutiny over the use of data in audit or review engagements, it is becoming more and more critical that auditors – both financial and IT – adequately understand the risks associated with any new systems or processes being put in place. This understanding includes the identification of key controls that should mitigate these risks and give confidence in the accuracy and completeness of data sourced from these newly developed systems.
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