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Goodwill Considerations & Foreign Entities.

September 16th, 2009 Comments off

            Yesterday’s blog post was one that turned out to be a great example of the value of the network I’ve been able to build up, and tap into, when it comes to subjects or situations that are outside of my experience or knowledge range. Yesterday I wrote about the recent 10Q filing for Quiksilver and the fact that they had reported an increase in their stated goodwill value as a result of favorable foreign currency exchange rates. After pulling a Sherlock Holmes and making some calls to accountants and private equity contacts, I was still coming up short. Leave it to Twitter! One of my contacts in Twitter, a CPA up in the Santa Rosa area, researched the subject a bit more and came up with the necessary guidance.

            In addition to SFAS 142, which covers Goodwill & Other Intangible Assets, Joe pointed me in the direction of SFAS 52, which covers the element of Foreign Currency Translation. While I’m familiar with both of these standards, the combination of the two, and a resulting change in goodwill, which was not associated with an acquisition, divestiture, amortization, or general write-down (as we’ve recently seen), was certainly an approach I had not encountered. I should also clarify that while it is certainly common to see companies reporting the foreign currency impact on their operations, particularly within the income statement and management discussion, the application of this standard to the valuation of goodwill was one I had not previously seen.

            While I have always viewed goodwill as a relatively static number, it’s not until you get into paragraph 101 of SFAS 52 that it provides any specific guidance for this area. Keep in mind that SFAS 52 is 54-pages of guidance, but the section on goodwill is a mere 5 sentences. Regardless, in paragraph 101, FASB states “Likewise, after a business combination accounted for by the purchase method, the amount allocated at the date of acquisition to the assets acquitted and the liabilities assumed (including goodwill) should be translated in conformity with the requirements of this statement”. Given that, it would seem that guidance would call for calculating the adjusted value, based on exchange rates, of the goodwill for a foreign subsidiary, well after the actual business combination.

            I’m always pretty intrigued when I find a topic that is so open to interpretation, and one that can have a material effect on income statement or balance sheet accounts. In this case, the adjustment resulted in a 7% increase in reported goodwill. What will be interesting to see is if the same downward adjustments are reflected in future reporting if the exchange rate becomes unfavorable. Thanks again to my Twitter contact up in Santa Rosa!

Thanks for reading . . . .

Jeffrey Ishmael

Moss-Adams: IFRS webinar on SME’s(Part2)

September 4th, 2009 Comments off

            Yesterday I covered the opening segment on my coverage of the Moss-Adams webinar on IFRS for SME’s. As a quick review, the overall definition of an SME, or Small Medium Enterprise is one that publishes financial statements for external customers, has no “Public Accountability” or fiduciary responsibility, and is a private entity. As the classification currently stands, there is no threshold on the level of revenues for the company; only that it is private in organizational structure. While some of the basic elements of general IFRS were covered, I’ll itemize some of the points that were covered on the call yesterday.

§  GAAP is a Rules-based set of guidelines whereas IFRS is a Principles-based structure.

§  LIFO is allowed under GAAP whereas it IS NOT allowed under IFRS.

§  GAAP calls for inventory valuations that are the lower of cost/market versus a lower of cost or Net Realizable Value under IFRS.

§  Unlike GAAP which DOES NOT allow for the amortization of goodwill, IFRS DOES ALLOW for this, along with the inclusion of a 1-step impairment test.

§  Unlike GAAP which does not allow for the reversal of impairments, IFRS DOES ALLOW for a reversal, except for in the case of goodwill.

§  Under GAAP, R&D expenses are capitalized if obtained through an acquisition and expensed if they are internally developed.

            With respect to the first rollout of IFRS for SME’s in the U.S., there would be a complete review after the first 2-year window to address any errors, omissions, or provide further clarity for specific topics. After the first 2-year review, this process would then happen every 3-years.  Also during the webinar there were a number of questions that were posed to the participants. As I mentioned in my posting yesterday, there were 245 participants on the webinar. Below are the questions & responses.

Do you believe your organization would benefit from IFRS for SME’s?
Yes 14%      
No 14%      
Not Sure 34%      
N/A MA employee 36%      
           
Do you believe your company will adopt within the following timeframes?
Immediately 0%      
1-3 years 19%      
3-5 years 34%      
Never 8%      
N/A MA employee 37%      
           
How much do you know about IFRS for SME’s?
Nothing 18%      
Very Little 50%      
Significant 6%      
N/A MA employee   24%      

            As I’ve mentioned in previous posts, I still have my doubts as to how aggressively this will really be rolled out in the U.S. and if the U.S. will allow GAAP to be so easily discarded in favor of such a new set of standards, regardless if they are being applied globally. We shall see….

Thanks for reading . . . . 

Jeffrey Ishmael

Knocking on the door of Shared Services….increased scrutiny?

June 9th, 2009 Comments off

     There’s an interesting article this morning on CFO.com, which outlines recent court rulings and the issue of “Cost Sharing” pacts.  I am not going to go into the details of the case, which involves Xilinx and their treatment of ESO expenses, since this is a very unique area and I am not qualified to address it. However, it does raise a very interesting question regarding Shared Services arrangements, particularly those that are international in nature. Specifically, I worked with a France-based company, that implemented, what we believed in North America was a very agressive Shared Services structure.

     During the almost 4-years that I was with the company, we were constantly being “reminded” that our EBIT results were not on par with our France counterparts. It wasn’t until the beginning of my 3rd year that we chose to conduct an EBIT improvement project and bridge the differences between our performance in North America and France. I spent weeks onsite in Grenoble reviewing operations, cost structures, and the operating expenses for the respective organizations. In the end, there was never a silver bullet that could be identified. The primary differences were in the product mix being offered within the respective markets and the consolidated operating expenses, which I will explain further. For the product mix, we were heavily focused on closed bid, large projects, aimed at the financial services and government sectors. Our counterparts were higher margin offerings aimed at consumer and small business. However, where were argued and differed in our view was in the consolidated operating expenses.

     The France and U.S. markets, as a percentage of global sales, were extremely high. If I recall correctly, well over 50%. The strategy adopted by the corporate office was that corporate overhead would be allocated to the entity level according to their respective percentage of global revenues. This was not a situation of allocation according to actual usage or needs. In fact, where we argued, was that our North American entity was entirely self-sufficient in every aspect. The only areas that we could say that there was a true “sharing” of services was in the areas of service providers such as insurance and auditing. That was all. We had an entirely self-sufficient R&D, Engineering, QA, Finance, and Marketing organization. If we had the ability to spin-off as a separate company we could have easily done so and not miss a beat. We did receive some parts from the Grenoble facility, but any overheads would have also been addressed through our Transfer Pricing Policy. When we asked where we could better utilize corporate resources and perhaps cut some expenses on our side in North America, there were no options available. So essentially, we received a 7-figure corporate allocation and received nothing in return.

     In the end, I certainly didn’t mind the allocation, as long as the published results weren’t viewed as an accurate picture of what our financial productivity meant for the global results. I am not a tax expert so if our tax experts at the global level determined that this was the best strategy for the company then I was willing to participate within that structure. However, don’t taint our performance through gamesmanship.  Bring this single example back full-circle to the recent ruling against Xilinx and there is potentially serious consequences for firms that may be participating in a Shared Services structure for which there is no basis. It’s an interesting discussion to have, especially when it comes to accurately measuring contribution margins at the entity level and the development of tax strategies.

Thanks for reading . . . .

Jeffrey Ishmael

It’s December & the Budget isn’t finalized…?

December 10th, 2008 Comments off

Needless to say the last month has been extremely hectic trying to reengineer the financials of a new company, as well as trying to finalize the 2009 Budget. While it’s kept me from regular updates on the blog, it’s been a great exercise in a truly unique economic environment. As of now, I am looking to present the final 2009 Budget to the Board next week for approval. If this was any of the prior years I had gone through the budgeting process I would have been infuriated if the Budget had not been completed by the beginning of Q4, but then again, this is no ordinary year.

Considering that we are focused within the Retail / Apparel sector, we have obviously been closely watching the retail comp results of the last quarter and trying to anticipate the impact to our own business. Fortunately, one of our larger customers, Journeys, has been posting positive retail comps, which has been a bright spot in the Genesco portfolio. However, others have not been so fortunate. We also distribute product through the “Core” channel, which is primarily comprised of “Mom & Pop” shops, which have exhibited some surprising resiliency over the last half-year. Clearly, this holiday season will be the true test for them. Regardless, we have ended up using every bit of time in this calendar year so that we can finalize and commit to a 2009 Budget that is as accurate as possible and not having to explain obvious variances for the remainder of the year.

One of the more challenging fronts has been the International side where we distribute product through more than 45 countries and negotiate our transactions in both the U.S. Dollar and Euro. For our Euro accounts, although we have had discussions with some of our customers about decreased purchasing power and weakened markets, those customers have also shown surprising resiliency. However, for those subject to exchange rates based on their native currency, there’s a different story. We’ve seen decreases of any where from 25% in the U.K., to 40% in Australia, and outright currency freezes in a number of other countries. Will the currency situation reverse as the oil situation did from its highs this year? Hard to say, but at this point we’re planning for an “As-Is” scenario.

So as we move into the final weeks of 2008 and prepare the final Budget for submission to the Board, I’ve been able to effectively incorporate the conditions currently reflected in our sector, which would not have been included were the Budget completed at the beginning of Q4. We’ve made changes to all aspects of the Budget and will be moving into 2009 with a degree of confidence knowing we’ve been able to reflect all aspects of the current environment. We’ve also had the luxury of being a smaller company and having the agility of moving quick to adapt to market conditions, which is much more difficult in a larger entity. So yes, it is December and only now is my Budget being finalized. When was your Budget completed? Are you going to spend the year explaining countless variances or have you been able to incorporate current market conditions?

Thanks for reading . . . .

Jeffrey Ishmael

IFRS planning & IT collaborations

September 3rd, 2008 Comments off

In my post this morning about making the jump into an IFRS conversion, I wrote about the platform upgrade we had completed prior to our move into the adoption of IFRS. We had implemented Hyperion HFM, which would allow us to report under the new standards. I wrote that a word of caution was necessary knowing whether your current or planned system would be able to support IFRS since not all platforms are capable at this time. Just posted to CFO.com is a great article regarding the necessary collaboration that needs to happen with the Finance and IS departments. Definitely worth the few minutes to read.
CFO.com article:Can your CIO spell IFRS?

IFRS conversions . . . Planning your jump.

September 3rd, 2008 Comments off

Now that the SEC has just moved the U.S. one step closer towards IFRS conversion, have you really started considering the staffing needs that it will take to develop your new reporting platforms? Likely the biggest issue at this point is the available guidance on making the actual conversion. Approximate statistics reflect approximately 25,000 pages of GAAP/FASB related documentation while there is only 1/10th of that currently available for IFRS. Not to mention the small amount of knowledge resources that are available to assist corporations in this effort. This is an area that will see huge growth in the coming years. Keep in mind, with this being a summarization of info, that this is not intended to be a detailed oultine of all that should be considered.

In consideration to the conversion, there are 38 key areas (IAS and IFRS) that have been documented in the form of released statements covering their respective areas. While our conversion was a very time-consuming effort, we had a very good reporting foundation to work from and had already transitioned to a new reporting software that would accommodate our IFRS initiatives. Previous to our conversion, we had implemented Hyperion HFM for all our reporting and consolidation needs. It should be noted that not all software platforms are currently capable of supporting IFRS reporting needs. We also had to start bridging the gaps of what we were not reporting in North America, which would be required under IFRS. It was necessary to go through each of the standards and bridge the differences.

As you get down into the statements that have been released, they are as basic as IAS 1, which outlines the presentatation of financial statements. However, once you start moving into some of the other areas, the new reporting could be a bit more problematic. Under IAS 2, which relates to the reporting of inventories, there is no LIFO reporting allowed, whereas it is in the U.S.. Fortunately, this was not an issue, but for some it clearly will be. Not too mention the impact to the financial results when the change is made. For our company, IAS 18, which dealt with Revenue Recognition, was another key area. Unlike GAAP, where there is extensive guidance in this area, there is little with IFRS at the current time. For a company that dealt with large projects as well as deferred revenues related to Service contracts, this was an area we could not be loose in our applications. We defaulted to GAAP guidance in this area with the assumption that eventually IFRS would become more stringent, which still has not happened….

There will be further discussions on each one of the areas covered under IFRS and a summary of differing points between the two formats. Some of the more notable areas we’ll be looking at will be:
IAS 8 Changes in Accounting Methods
IAS 18 Revenue Recognition
IAS 14 Segment Reporting
IAS 36 Impairment
IFRS 3 Business Combinations
IFRS 5 Discontinued Operations

This is a large subject to tackle but it will be an interesting path.
Thanks for reading . . . .
Jeffrey Ishmael

IFRS – potential rollout after 12/15/09

August 27th, 2008 Comments off

As expected, the SEC announced a preliminary overview of the roadmap that would be put into place for the transition of financial reporting to IFRS. Overall, the Commission expects that there will be a full transition by 2014, but that there will be further details released with respect to the milestones needed achieve the goal.

Specifics of the information released this morning outlined the ability of certain companies to be able to begin reporting under IFRS after December 15, 2009. Companies that are considered to be in the Top-20 for their industry will be allowed to begin reporting after this date. There are approximately 110 companies in 34 industries that would be able to begin reporting after this date. This is probably a bit quicker than some might have anticipated, since this is only 16-months out.

Although the milestones have yet to be released, the Commission has tentatively scheduled a review of these milestones in 2011 to gauge the progress and determine if they will open up the ability to report under IFRS to a larger population of companies. There are also proposals for companies to provide reconciliations between prior GAAP reporting and the revised reporting under IFRS. The proposal calls for a 3-year reconciliation. This should be more than just a proposal at this point but an absolute requirement for investors to see the “walk” between the two reporting structures.

Even for a later date of 2011, this is not a very large window for governing bodies and schools to organize appropriate curriculum to cover the topic. The Commission requested that the AICPA and States add questions to existing exams for IFRS. Rather than add questions to the exam it would seem that there should be the introduction of a new module (?) that would cover IFRS. I still have a hard time believing that we are potentially looking at a 100% conversion to IFRS with no carry forward of GAAP. Not with the energies that have been expended over the last decade on new regulations, and prosecution of those regulations.

Time will tell. Thanks for reading . . . .

SEC set to announce IFRS dates. . .

August 25th, 2008 Comments off

The SEC has announced that on Wednesday it will release the tentative target dates for U.S. companies to convert to IFRS. There has already been quite a bit of speculation regarding the potential dates that might be rolled out, which ranged from initial targets of 2011 to coincide with Canada, India, and Japan, to 2015 for adoption by small companies. This change will involve more than just a simple restructuring of reporting standards. It will also have a huge ripple effect through accounting/finance curriculum and professional training standards.
In the coming weeks I’ll also be posting commentaries outlining the differences between IFRS and GAAP on a variety of subjects, including Revenue Recognition, Fair Value, and others. Until then, I’m eagerly awaiting the news on target dates.

The text of the article is listed below:

The long-awaited deadline will come in the form of a roadmap that the SEC commissioners will consider whether to propose — and which would open up the conversion date to public scrutiny and debate.

The SEC also plans to consider proposing amendments to various rules and forms that would allow “a limited number of U.S. issuers” to prepare their financial statements using IFRS rather than GAAP earlier than the roadmap proposes, the commission announced on Friday.

For the past year — ever since the SEC began allowing foreign companies to submit their SEC-prepared filings without reconciling them with GAAP — companies, academics, and accounting firms have been waiting to hear when U.S. publicly traded companies would be given a similar allowance. In the meantime, the Big Four accounting firms have been telling their clients that an SEC mandate for IFRS use is inevitable.

In Europe, companies were given three years to change over their financial reporting systems from their home-country GAAP to IFRS — an enormous switch that was completed in 2005. The experience has given large multinationals domiciled in the U.S. fodder for persuading the SEC that the largest of U.S. registrants could make a similar conversion by 2011. In that year, Canadian, Indian, and Japanese companies are expected to begin using the global standards.

Accounting firms also have predicted that the year 2013 could be cited by the SEC as an IFRS-switchover date for large U.S. companies, with 2015 being the deadline for small companies to begin using IFRS. Earlier this summer, Conrad Hewitt, the SEC’s chief accountant, said the U.S. shouldn’t be left behind while the rest of the world makes the switch to IFRS within the next three years.

While IFRS has become the most popular accounting language worldwide, it’s looked at speculatively by accounting experts based in the United States. Some say it’s more principles based and than the more time-tested GAAP, which provides accountants with more guidance for each of its rules.

For the better part of this decade, the Financial Accounting Standards Board and the International Accounting Standards Board have working on harmonizing U.S. GAAP and IFRS. Accounting experts say the standards are not yet close enough to ignore the quality differences between the two and the need for U.S. accountants to be schooled in IFRS.

CFO.com Working Capital survey. Not all bad….

August 15th, 2008 Comments off

From the first summary read on the 2008 Working Capital scorecard that was published on CFO.com yesterday, you would think that the majority of the companies fell short of expectations. At a top level, working capital levels increased by 1% versus the prior year levels. Considering that these results were through the end of 2007, there was certainly an opportunity for things to deteriorate a bit more in the 4th quarter. However, what is not reflected in the summary is that these results are for only European-based companies. While they obviously have their U.S. results on a consolidated basis, which we would have been a part of the Schneider Electric figures, the figures recently released are absolutely European-centric. These results do not reflect a full global economic slowdown, as we are now starting to see.

Getting into details of the results a bit more, DSO levels have continued to fall over the last 2-years by 4.1% and 3.6%, respectively. However, this is on the heels of revenue increases of 7.4% and 10.3%, respectively, over the same period.
Interesting enough, Gross Margins were flat over the last 2-year at 32.7% and 32.6%, respectively. Considering the increase in sales, it is a concern that Inventory levels (DIO) was up 3.5% this year versus a 2.5% decrease last year. It certainly tables some interesting questions about whether growth expectations were even higher than results or if there were shifts within product offerings that left companies with an improper mix. Also interesting is the fact that gross margin levels have only fluctuated by 0.1% over the last five years with a range of 32.6% to 32.8%.
With respect to Payables, DPO increased by 1.9% in the most current year versus a 4.2% decrease in the prior year. At the current level of 45.6 days versus 44.8 in the prior year, it’s not a huge push still not as high as the 2005 level of 46.8 days.

One of the more notable figures in the scorecard released by CFO.com is the change in EBIT levels over the last 5-years. Revenue levels have increased by approximately 7.9% per year while EBIT levels have increased by approximately 18.8% annually. EBIT levels among the participants has been achieved through an effective leveraging & control of operating expenses rather than increased performance in product margins. It would be interesting to look at 2008 Working Capital proforma results with a flat to low-single digit sales increase. Also, in further review of the study, there was a huge range in results among the participating countries with respect to a total DWC metric. But we’ll dive into those comparisons in a later post…..
Thanks for reading . . . .

Late stage questions for IFRS . . . .

August 6th, 2008 Comments off

Only two days ago it was announced that the SEC had filled two vacant commissioner posts and those individuals would be making their debut at the IFRS Roundtable. While I noted that this was a subtle signal towards the IFRS initiatives, it didn’t take much to read into the accompanying statement that the SEC had a much larger list of issues to deal with before scheduling a definitive effort towards IFRS conversion. I’ve also commented in previous postings that as a participant in an early IFRS conversion, I would have never thought that these new standards would trump those that the U.S. has spent decades establishing and refining. It seems that in yesterday’s release that there may be some new considerations by the SEC towards IFRS and making the firm commitment to adopt.

As noted in the new commissioner press release, the SEC is currently working on reforms in naked short selling, municipal-securities rulemaking, SEC registrations, along with two dozen other financial reporting issues. These topics are currently on the plate for the SEC and we’re going to fully commit to an IFRS conversion? Not too mention, some of the general considerations as of late is that too accommodate such a conversion, there would be a three-year moratorium on new accounting standards or revisions. Hard to say what the next financial “crisis” will be, but three-years seems quite a window to say that there will be no new updates. During the Roundtable discussion, there were also six other key questions raised regarding an IFRS conversions.

•Do international standards produce the same quality of reporting as U.S. GAAP does?
•Would the application and enforcement of international standards in the United States be as rigorous as they are in the case of U.S. GAAP?
•Does IASB have an adequate and stable source of funding that’s not dependent on private donors?
•Does IASB have enough full-time, technically capable, and independent staff members?
•Does IASB pay the most attention to the views of customers of financial reports–that is, investors?
•Does IASB have a structure, process, and adequate governmental support to keep its standards work from “being overridden by political processes?”

This is really an interesting topic and one I’m keen to follow. It’s going to be interesting to see whether the U.S. essentially forgoes standards that have been developed over the decades and adopts a global set of standards, which might mean a softening of rules.
Read the entire article at: Global Standards: Jilted at the Altar?

Thanks for reading . . . .