6.16 Achieving Off-Balance-Sheet Financing. (Adapted from materials by. R Dieter, D. Landsittel, J. Stewart, and A. Wyatt)
Diviney Company wants to raise $50 million Cash but for various reasons does not want to do so in a way that results in a newly recorded liability. The firm is sufficiently solvent and profitable, so its bank is willing to lend up to $50 million at the prime interest rate. Diviney’s financial executives have devised six different plans, described in the following sections. TRANSFER OF RECEIVABLES WITH RECOURSETRANSFER OF RECEIVABLES WITH RECOURSE Diviney will transfer to Condon Company its long-term accounts receivable, which call for payments over the next two years. Condon will pay an amount equal to the present value of the receivables, minus an allowance for uncollectible, as well as a discount, because it is paying now but will collect cash later. Diviney must repurchase from Condon at face value any receivables that become un collectible in excess of the allowance. In addition, Diviney may repurchase any of the receivables not yet due at face value minus a discount specified by formula and based on the prime rate at the time of the initial transfer. (This option permits Diviney to bene-fit if an unexpected drop in interest rates occurs after the transfer.) The accounting issue is whether the transfer is a sale (in which Diviney increases Cash, reduces Accounts Receivable, and recognizes expense or loss on transfer) or merely a loan collateralized by the receivables (in which Diviney increases Cash and increases Notes Payable at the time of transfer).PRODUCT FINANCING ARRANGEMENTPRODUCT FINANCING ARRANGEMENTDiviney will transfer inventory to Condon, which will store the inventory in a public warehouse. Condon may use the inventory as collateral for its own borrowings, the proceeds from which will be used to pay Diviney. Diviney will pay storage costs and will repurchase the entire invent-tory within the next four years at contractually fixed prices plus interest accrued for the time elapsed between the transfer and later repurchase. The accounting issue is whether the invent-tory is sold to Condon, with later repurchases treated as new acquisitions for Diviney’s invent-tory, or whether the transaction is merely a loan, with the inventory remaining on Diviney’sbalance sheet. THROUGHPUT CONTRACTTHROUGHPUT CONTRACT Diviney wants a branch line of a railroad built from the main rail line to carry raw material directly to its plant. It could, of course, borrow the funds and build the branch line itself. Instead, it will sign an agreement with the railroad to ship specified amounts of material each month for10 years. Even if Diviney does not ship the specified amounts of material, it will pay the agreed ship-ping costs. The railroad will take the contract to its bank and, using it as collateral, borrow the funds to build the branch line. The accounting issue is whether Diviney should increase an asset for future rail services and increase a liability for payments to the railroad. The alternative is to make no accounting entry except when Diviney makes payments to the railroad. CONSTRUCTION PARTNERSHIPCONSTRUCTION PARTNERSHIPDiviney and Mission Company will jointly build a plant to manufacture chemicals that both needing their production processes. Each will contribute $5 million to the project, called Chemical. Chemical will borrow another $40 million from a bank, with Diviney being the only guarantor of the debt. Diviney and Mission are each to contribute equally to future operating expenses and debt service payments of Chemical, but in return for its guaranteeing the debt, Diviney will have an option to purchase Mission’s interest for $20 million four years hence. The accounting issue is whether Diviney should recognize a liability for the funds borrowed by Chemical. Because of the debt guarantee, debt service payments ultimately will be Diviney’s responsibility. Alternatively, the debt guarantee would be treated as a commitment merely to be disclosed in the notes to Diviney’s financial statements. RESEARCH AND DEVELOPMENT PARTNERSHIPRESEARCH AND DEVELOPMENT PARTNERSHIPDiviney will contribute a laboratory and preliminary findings about a potentially protologue-splicing discovery to a partnership, called Venture. Venture will raise funds by selling the remaining interest in the partnership to outside investors for $2 million and borrowing $48million from a bank, with Diviney guaranteeing the debt. Although Venture will operate under Diviney’s management, it will be free to sell the results of its further r discoveries and development efforts to anyone, including Diviney. Diviney is not obligated to purchase any of Venture’s output. The accounting issue is whether Diviney would recognize the liability. HOTEL FINANCINGHOTEL FINANCING Diviney owns and operates a profitable hotel. It could use the hotel as collateral for a conventional mortgage loan. Instead, it considers selling the hotel to a partnership for $50 million cash. The partnership will sell ownership interests to outside investors for $5 million and borrow$45 million from a bank on a conventional mortgage loan, using the hotel as collateral. Diviney guarantees the debt. The accounting issue is whether Diviney would record the liability for the guaranteed debt of the partnership.
REQUIREDREQUIRED
Discuss the appropriate treatment of each proposed arrangement from the viewpoint of the auditor, who must apply U.S. GAAP in deciding whether the transaction will result in a liability to be recorded or whether note disclosure will suffice. Does U.S. GAAP reporting result in an accurate portrayal of the economics of the arrangement in each case? Explain
6.21 Restructuring Charges at Intel.
Intel Corporation’s consolidated income statement appears in Exhibit 6.16.Note 15, which follows, explains the source of the restructuring charges, the breakdown of the charges into employee-related costs and asset impairments, and the balance of the accrued restructuring liability account We may incur additional restructuring charges in the future for employee severance andbenefit arrangements, and facility-related or other exit activities. Subsequent to the end of2008, management approved plans to restructure some of our manufacturing and assemblyand test operations, and align our manufacturing and assembly and test capacity to currentmarket conditions. These actions, which are expected to take place beginning in 2009, includeclosing two assembly and test facilities in Malaysia, one facility in the Philippines, and one facil-ity in China; stopping production at a 200mm wafer fabrication facility in Oregon; and endingproduction at our 200mm wafer fabrication facility in California.2008 NAND PLAN2008 NAND PLANIn the fourth quarter of 2008, management approved a plan with Micron to discontinue thesupply of NAND flash memory from the 200mm facility within the IMFT manufacturing network.The agreement resulted in a $215 million restructuring charge, primarily related to the IMFT200mm supply agreement. The restructuring charge resulted in a reduction of our investmentin IMFT of $184 million, a cash payment to Micron of $24 million, and other cash payments of$7 million.2006 EFFICIENCY PROGRAM2006 EFFICIENCY PROGRAMThe following table summarizes charges for the 2006 efficiency program for the three yearsended December 27, 2008:(in millions) 2008 2007 2006Employee severance and benefit arrangements $ 151 $ 289 $ 238Asset impairments 344 227 317Total $495 $516 $555402 CHAPTER 6 Accounting QualityCopyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.The following table summarizes the restructuring and asset impairment activity for the2006 efficiency program during 2007 and 2008:(in millions)Employee Severanceand BenefitsAssetImpairments TotalAccrued restructuring balanceas of December 30, 2006 $ 48 $ — $ 48Additional accruals 299 227 526Adjustments (10) — (10)Cash payments (210) — (210)Non-cash settlements — (227) (227)Accrued restructuring balanceas of December 29, 2007$ 127 $ — $ 127Additional accruals 167 344 511Adjustments (16) — (16)Cash payments (221) — (221)Non-cash settlements — (344) (344)Accrued restructuring balanceas of December 27, 2008$57 $— $57We recorded the additional accruals, net of adjustments, as restructuring and asset impair-ment charges. The remaining accrual as of December 27, 2008 was related to severance benefitsthat we recorded within accrued compensation and benefits.From the third quarter of 2006 through the fourth quarter of 2008, we incurred a total of$1.6 billion in restructuring and asset impairment charges related to this program. Thesecharges included a total of $678 million related to employee severance and benefit arrange-ments for appr oximately 11,900 employees, and $888 million in asset impairment charges.
REQUIREDREQUIRED
a. Based on your reading of the note, how would you treat Intel’s restructuring charges inthe assessment of current profitability and the prediction of future earnings?
b. Why is the balance of the ‘‘accrued restructuring’’ limited to employee-related costs?
c. Describe the effect on net income of each entry in the ‘‘accrued restructuring balance’’ account reconciliation. (For example, what is the effect of ‘‘Additional accruals’’ on net income?)
d. How do U.S. GAAP and IFRS differ on the rules used to compute the restructuring charge?
7.3 Dividends. Following is the shareholders’ equity section of All-Wood Doors on a dayits common stock is trading at $130 per share. Common stock ($2 par value, 40,000 shares issued and outstanding) $80,000Additional paid-in capital on common stock 1,600,000Retained earnings 3,000,000
a. Use the financial statement template below to show the financial statement effects ofthe following dividend events. (Assume that the events are independent.)(1) Cash dividend declaration and payment of $1 per share(2) Property dividend declaration and payment of shares representing a short-terminvestment in Screen Products, Ltd., with a fair value of $10,000(3) 10% stock dividend(4) 100% stock dividend(5) 3-for-1 stock split(6) 1-for-2 reverse stock splitAssets = Liabilities +Shareholders’ EquityCC AOCI REJournal entry:
b. Which events changed the book value of common equity? Under what conditions willthese events lead to future increases and decreases in ROCE (see Chapter 4 for the ROCEdefinition)
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