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 relevant and timely accounting news relevant to CPAs? We do! This week’s GAAP Flash includes articles about contingencies under ASC 450, hedging foreign currency and commodity risks under ASC 815 and other accounting news provided to help increase business acumen in the profession.

US Lawsuit Brings Volkswagen Back Down to Earth with a Bump (January 5, 2016) – Financial Times (@FT)

The U.S. government announced that it would sue VW over its emissions cheating for at least $45 billion. Its share fell 10%. “The US is going to be the place where this drama, and the future of VW, plays out,” said one of VW’s largest shareholders. Some investors are worried because VW has a long history of misjudging the U.S.

How It’s Relevant: This is a VERY large number and if this were the amount that is ultimately paid, would make it the largest U.S. settlement for environmental law breaches of all U.S. breaches. However, an analyst for BNP Paribas puts the number around $10 billion. Obviously, loss is probable so VW should accrue something. How much? VW should accrue the best estimate according to the requirements in ASC Topic 450. What if there is no best estimate? ASC 450 would then require VW to accrue the lowest amount in the range of reasonably possible estimates, a judgment call for sure. What is certain is that VW will have a loss and the lawyers will win!

For Companies, Bigger Currency Hits and More of Them, Too (January 13, 2016) – CFO Journal (@CFOJournal)

A report by FiREapps, a currency risk consulting firm, shows that in the third quarter of 2015, 353 North American and 46 European companies suffered from negative currency impacts. This compares to a total of 280 companies in the third quarter of 2014. “I think it is reasonable to expect the trend to stay at elevated levels for the foreseeable future,” said Wolfgang Koester, CEO and co-founder of FiREapps. FiREapps said such foreign exchange impacts generally apply to revenue and so do not account for the use of hedging strategies on bottom line results.

How It’s Relevant: FiREapps noted that for corporations, the quantified negative impact of currency swings for the third quarter of 2015 totaled $24 billion. The most frequently mentioned currencies by companies were the euro, Brazilian real, Canadian dollar, Japanese yen, and the Australian dollar. No doubt, many companies are hedging foreign currency risk. Question is, “Are they properly following the very strict rules of ASC Topic 815?” We’ve seen some companies who are not!

Oil Plunge Sparks Bankruptcy Concerns (January 11, 2016) – The Wall Street Journal (@wsj)

Crude-oil prices continued to plunge, now trading near $30 a barrel. Three major investment banks expect oil to crash through the $30 threshold and into $20 territory as a result of China’s slowdown, the U.S. dollar’s appreciation, and the fact that drillers won’t quit pumping despite the oil glut. According to Wolfe Research, as many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017. More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection so far during this downturn, according to law firm Haynes & Boone.

How It’s Relevant: This article is very thorough in its analysis of why the price of oil has plummeted and is not likely to rebound any time soon. Morgan Stanley issued a report this week describing an environment “worse than 1986.” This is bad news for oil drillers, as well as any companies associated, either directly or indirectly, with the industry. Is your company or audit client exposed to the oil-and-gas industry? If so, how are they addressing this risk? Are they hedging commodity prices? As we’ve already discussed, hedging requirements under ASC Topic 815 are fairly stringent.

Social Saints, Fiscal Fiends (January 2, 2016) – The Economist (@EconBizFin)

Pfizer intends, as part of its $160 billion takeover of Allergan, to shift its tax domicile from America to Ireland, where Allergen is domiciled. Why? Corporate taxes are considerably lower in Ireland compared to the U.S. If this “tax inversion” were effective in 2014, Pfizer would have saved approximately $1 billion of the $3.1 billion it paid the U.S. Treasury. While legal, is this transaction “right,” especially given Pfizer’s commitment to corporate social responsibility?

How It’s Relevant: What the author and some politicians fail to realize when questioning a company’s morality with respect to tax inversion transactions, is that corporations are beholden to their shareholders and maximizing shareholder value, not the country where they are domiciled. What do some Americans do when they are sick and tired of living in a high tax, low growth state riddled with debt from entitlements? They move to a lower tax state with pro-growth policies. This is what these corporations are doing when they enter into a tax inversion transaction. If politicians want to fix it, they could start by lowering the corporate tax rate in the U.S., which is currently one of the highest in the world, and stop bashing companies for their lack of values.