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!!

The new Pension Exposure Draft is released

The FASB released the Pension exposure draft today.

Some important items:

The Exposure draft would require:
a. Recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation would be the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation would be the accumulated postretirement benefit obligation.

The second important point is that the standard would become effective for most companies in 2007:

Issue 4: This proposed Statement would require a public entity that currently
measures plan assets and benefit obligations as of a date other than the date of its statement of financial position to implement the change in measurement date as of the beginning of the fiscal year beginning after December 15, 2006. If that entity enters into a transaction that results in a settlement or experiences an event that causes a curtailment in
the last quarter of the fiscal year ending after December 15, 2006, the gain or
loss would be recognized in earnings in that quarter. Net periodic benefit cost in the year in which the measurement date is changed would be based on measurements as of the beginning of that year.

SOX and derivatives

There is an interesting article on TCS Daily today that looks at SOX, it is interesting when compared to Jack Ciesielski blog entry for today at the Accounting Observer Blog. The TCS piece is a good example of how business people downplay the benefits of SOX and accentuate the costs. But many times SOX work has uncovered weak internal controls on basic accounting functions. Mattson Technologies 8-K is a good example, not derivatives, not Fin 46, rather it was:

In connection with the preparation and review of the Company's financial statements for the year ended December 31, 2005, management became aware that the Company's previously reported results for the first, second and third quarters of 2005 contained errors related to its recognition of revenue, assessment of inventory valuation, recording of depreciation and amortization expense for certain assets, and estimation of statutory liability for severance payments earned by certain foreign employees.

Why we still need to care about Defined Benefit Plans.

When teaching pensions I sometimes think that maybe I should just give the pension expense/ Cash entry that is needed by firms that provide defined contribution plans, since it seems that no company would start (or maybe even continue) a defined benefit plan.

However, we have to remember that most companies still maintain separate defined benefit plans for highly compensated employees. These pension plans are non-qualified plans, in that they do not qualify for tax benefits but they are still provided by companies and they are quite lucrative.

A nice article about these types of plans.