Types of Plans. pension benefits. other (OPEB) health insurance benefits. life insurance benefits. tuition assistance. dependent care.
Many accounting standards provide opportunities for. managing income. off-balance sheet financing (OBSF) Why would managers want to do this basic economics. we are all self interested agents. agency costs. Q3.6. rational expectations—makes financial sense for manager to do them (either for themselves or their firm) bonus is a good example of ‘self interest’ debt covenant is an example of balance sheet management. political cost runs contrary to usual direction. Why do creditors impose debt covenants limit risks of change in company credit worthiness when lending long-term. opportunity to renegotiate debt terms (most likely interest rate) Standard setting is a political process—the constituents try to influence to their desires. preparers—easy to prepare, flexible. auditors—easy to audit, detailed and specific (to avoid using judgment) users—transparency (don’t always get their way because they don’t advocate in process) Q1.13. Why would GAAP permit managers do this this PEAP, POOP, WYWAP.
Commitments and Contingencies disclosure in the notes to financial statements provide important information about off-balance sheet financing and other complex financing arrangements. Enron is a prime example of a company with enormous activity reported in the Commitments and Contingencies disclosure
Financial Statement Variations. capital lease. lessee treats lease as an asset purchase (transfer of risks, rights, rewards) required treatment when lease covers most of asset’s life. In what industries will this be an important issue operating lease. lessee treats lease as a simple rental agreement. required treatment when lease term is short (in relation to asset’s life) rules are arbitrary, many operating leases nominally meet requirements. very little difference from substance of leases treated as capital. THE KEY POINT: Even operating leases stipulate noncancellable future lease payments.
Timing Economic events and accounting entries may take place in different periods, e.g., changes in market value of PP&E. Recognition Many economic events do not receive recognition, e.g., contingencies, off balance sheet finance. Measurement Certain items may be reported in different ways, e.g., FIFO vs. LIFO. LOS 29a : Discuss the general principals of the financial reporting system.
Operating Leases >provide maintenance in addition to financing & are also usually canceable. Examples >Computers, copiers, & automobiles are often financed through operating leases. Balance Sheet Impact >for operating leases, no assets or lease liabilities are recorded on the balance sheet.
Off-balance-sheet financing is an attempt to borrow monies in such a way to prevent recording the obligations. Different Forms: Non-Consolidated Subsidiary. Special Purpose Entity (SPE) Operating Leases. LO 8 Explain the reporting of off-balance-sheet financing arrangements.