Nice article for discussion of stock options

A recent USA TODAY article provides a nice way to lead into the discussion of expensing of stock options. We cover the issue of stock option compensation in chapter 18 of our text. One item of interest is:

Massive charges. The change is still causing some major earnings turbulence. Merrill Lynch this week said it would expense $1.2 billion for stock options in the first quarter, vs. the $350 million previously expected. Richard Wagner, president of Strategic Compensation Research Associates, says the magnitude of that is staggering. He says accounting watchdogs eliminated a technicality Merrill had been using to delay having to expense options. Rather than taking a hit to earnings over several years, Merrill took it all in the first quarter.

Caribou Coffee's Asset Retirement Obligation

When Caribou Coffee announced its recent earnings one thing that stood out was its reference to FIN 47:

Effective October 3, 2005, the Company adopted FASB Financial Interpretation No. 47 ("FIN 47") Accounting for Conditional Asset Retirement Obligations. FIN 47 requires the Company to record an asset and a corresponding liability for the present value of the estimated asset retirement obligation associated with the fixed assets and leasehold improvements at some of our coffeehouse locations. The asset is depreciated over the life of the corresponding lease while the liability accretes to the amount of the estimated retirement obligation. The Company recognized an expense for the cumulative effect of this accounting change in the fourth quarter of 2005 of $0.4 million or ($0.02) per share.

The story also presents Caribou's balance sheet, which includes the following:

Notes payable and capital lease obligations,
less current maturities - 19,923,930
Asset retirement obligation liability 760,997 -
Deferred rent liability 10,485,177 8,420,509
Deferred revenue 2,964,000 3,055,000
Minority interests in affiliates 138,159 217,206
Total long term liabilities 14,348,333 31,616,645

Software revenue

Motive, Inc. disclosed in an 8-K, that it would have to restate its past financial results because of difficulty applying the software revenue recognition rules.

The discussion of the software issue demonstrates how difficult it is to apply software revenue recognition rules.

Specifically, the 8-K reported:

In its 8-K, Motive said it recently concluded that insufficient evidence existed to support the Company's prior determination that vendor specific objective evidence (VSOE) of fair value for maintenance existed for the majority of its software arrangements. Generally speaking, the presence of VSOE of fair value permits the revenue of a bundled software arrangement to be allocated among that arrangement's various elements, such as license, maintenance, consulting, and hosting services.

The absence of VSOE of fair value is expected only to impact the timing of revenue recognized and does not call into question the validity of the underlying transactions or revenue. Generally speaking, the absence of VSOE of fair value is expected to result in the recognition of revenue over longer periods of time.

Money for Nothing

Home Depot reported revenue from unused gift cards. This would seem to be an interesting topic to bring before intermediate accounting students given Home Depot's rationale:

Home Depot calculated the $43 million in "breakage"—unredeemed value of cards sold—by analyzing historical redemption patterns and tallying the remaining balance of outstanding gift cards that are unlikely to be redeemed. But the cards have no expiration date or service fees, and cardholders can redeem their gift cards at any time.

Home Depot will regularly track income from unredeemed gift cards
"Our breakage reporting will never affect a customer that has an unused gift card," Smith said. "If there is a remaining balance on the card, the customer will always be able to use that card and be assured that the money is there and available for them to use in our stores."

This is interesting: Should HD recognize revenue when the cards have no expiration date?

The article goes on to detail:
About 12% of gift card value is never spent, according to research firm TowerGroup, Needham, MA. That will be about $5.7 billion in the U.S. this year, up from more than $4 billion in 2002, per TowerGroup.
Sales of retailers' gift cards will reach $47.5 billion this year; $50.8 billion in 2006; and top $57 billion in 2008, TowerGroup projects.

$5.7 BILLION in unused gift cards!!