Intermediate accounting
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Intermediate accounting
- 2. Intermediate Accounting Case Presentation Zheng Lu Troubled Yuchuan Huiping Debt Restructuring Qu Xin Salman Kamani
- 3. Part IV Part I Background Part II Debt Presentation Flow Part III Rationales Influence on Financial Introduction Restructuring Behind Statements Part V Part VI Part VII Influence on Economics of Q&A Conclusion Stakeholders Transactions
- 5. Part I Background Introduction Part II Debt Restructuring Part III $50 Millionago Rationales Behind Part IV of 8% bonds, issued years Influence on Financial Behind and Statements Part V in interest payments Influence on Stakeholders contributions to its bonds retirement fund Part VI 60%million Economics of Transactions of par: $30 Part VII Conclusion
- 6. Part I Background Introduction Part II Debt Restructuring Part III Rationales Behind Bonds Part IV Influence on Financial to Statements $30 Preference Part V Influence on Stakeholders million Shares Part VI Economics of Transactions Part VII Conclusion
- 7. Here’s the Problem… Part I Background Introduction Bonds liability 50m Preference share capital 30m Part II Debt Extraordinary gain on Restructuring debt restructuring 20m Part III Auditor: Company: Rationales Behind “ We really have “ Here we are, almost Part IV NO bankrupt, and you tell us Influence on Financial we must report $20 m as Statements a gain. choice!won’t Part V You had use of the Influence on Stakeholders money, and you Are you have to pay it back. ” kidding me? Part VI Economics of ” Transactions Bonds liability 50m Part VII Preference share capital 50m Conclusion
- 8. What should we do? ? ? ? ? ? ? ? ?
- 10. Part I Background Introduction Part II Debt Restructuring Part III Rationales Behind Debt Part IV Influence on Restructuring Financial Statements “ • Outstanding debt Part V Influence on Stakeholders • Alter debt agreements Part VI Economics of Transactions • Achieve advantages. Part VII ” Conclusion
- 11. Part I Debt Background Impairments Settlement Modification Introduction Part II Debt Restructuring Part III • Creditor’s perspective Rationales Behind • Creditors: Grant aall amounts • Unable to Grant a concession Creditors: collect concession Part IV Influence on Financial due Statements • Less than CV • More favorable terms Loss contingency Part V Influence on Stakeholders • Asset/Equity Swap • Extraordinary loss Establishment Extinguishment & Part VI Economics of Transactions Part VII Conclusion
- 12. Then… When shall we recognize gains?
- 13. Part I Background Debt Impairment Introduction Part II Debt Restructuring No Loss!!! Only Gain!!! Part III Rationales Behind Part IV Influence on Financial Statements Loss on PV of CV Impairment expected future CF using historical rates Part V Influence on Stakeholders Part VI Bad Debt XX Economics of Transactions Allowance for Doubtful A/C XX Part VII Conclusion
- 14. Part I Background Modification Introduction Part II Debt Restructuring Part III Rationales Behind Restructured gain Part IV Interest Payable XX Influence on Financial Bonds Payable XX Statements = CV of debt Restructured Debt – PV of expected CFs using XX Part V Gain on Restructuring of Influence on historical rates Debt XX Stakeholders Part VI Economics of Transactions Part VII Conclusion
- 15. Part I Background Introduction Settlement - Equity/Asset Swap Part II Debt Restructuring Part III Rationales Debt Equity/Asset Behind Part IV Influence on Financial FMV Statements CV of Debt of Asset/Equity Part V Influence on Stakeholders Not Restructured gain = a troubled debt Restructuring CV of debt – Asset/Equity FMV Part VI Economics of Transactions Part VII Conclusion
- 16. Part I Background Introduction Creditor Debtor Part II Debt Restructuring Part III Rationales EquitySwap Asset Swap Asset/Equity Swap Behind Part IV Influence on Financial Statements Allowance for Note Payable doubtful A/C XX Part V Influence on Share/Property Share Capital Investment Property Investment XX Stakeholders Bonds Receivable Share Premium Ordinary Gain on Asset XX Disposition Gain on Debt XX Part VI Extraordinary Economics of Extraordinary Gain on Debt Restructuring XX Transactions Restructuring XX Part VII Conclusion
- 18. Part I Background Company’s Way (No Gain) Introduction Part II Debt Restructuring •Ridiculous financial statements Part III Rationales Behind situation •Bankrupt <-> $20 M gain? Part IV Influence on Financial Statements Part V Influence on Stakeholders •Misinterpretation of the Part VI company’s financial condition Economics of Transactions •Accounting gain <-> Economic loss Part VII Conclusion
- 19. Part I Background Auditor’s Way (With Gain) Introduction Part II Debt Restructuring •Accounting standard requirement •Equity swap -> fair market value of the Part III Rationales Behind debt or equity Part IV Influence on Financial •Creditor’s consideration Statements •Exchange of one asset (Bond receivable) Part V Influence on to another (Capital investment) Stakeholders Part VI Economics of •Boost stock price Transactions •Higher reported net income Part VII Conclusion
- 20. Part IV Influence on Financial Statements
- 21. Part I Background Company’s Way Introduction Part II Debt Restructuring Bonds liability 50m Preference share capital 50m Part III Rationales Behind Part IV Influence on Auditor’s Way Financial Statements Part V Influence on Stakeholders Bonds liability 50m Preference share capital 30m Part VI Extraordinary gain on Economics of debt restructuring 20m Transactions Part VII Conclusion
- 22. Company’s Way Part I Background Introduction No No gain Part II interest Debt Restructuring expense Part III Rationales Behind Income Statement Part IV Influence on Financial Statements Part V Influence on $20M Stakeholders No Part VI Extraordinary Gain interest expense Economics of Transactions Auditor’s Way Part VII Conclusion
- 23. Company’s Auditor’s Way Part I Background Way Introduction $50M $50M Part II Debt Restructuring Reduced Reduced Part III Rationales Bond Liability Bond Liability Behind $50M $30M $20M Part IV Influence on Financial Statements Increased Increased Increased Preference Part V Preference Share Retained Influence on Share Capital Capital Profits Stakeholders Part VI Economics of Transactions Balance Sheet Part VII Conclusion
- 24. Part I Cash Flow Statement Background Introduction Part II Company’s Auditor’s Way Debt Restructuring Way Part III Rationales Behind $4M $4M Part IV Influence on Financial Statements Part V Reduced cash Reduced cash Influence on Stakeholders outflow of outflow of annual interest annual interest Part VI Economics of expense expense Transactions Part VII Conclusion
- 25. Company’s Auditor’s Way Part I Background Way Introduction Part II $30M Debt $50M Restructuring Increased Part III Preference Share Rationales Behind Capital Increased Part IV $20M Influence on Preference Financial Statements Share Capital Increased Part V Influence on Retained Profits Stakeholders Part VI Statement of Economics of Transactions Shareholders’ Equity Part VII Conclusion
- 27. Part I External Background Shareholders Investors Introduction Auditors Part II Debt Restructuring Part III Creditors Rationales Behind Stakeholders Part IV Influence on Financial Statements Government Part V Influence on Stakeholders Part VI Economics of Transactions Communities Employees Customers Part VII Conclusion
- 28. Part I Background Introduction Part II Debt Restructuring Impact: Principal Bondholders Needs: Potential Bondholders Part III Rationales Needs: Behind • Accurate financial statements Part IV Influence on Auditor’s Way Financial • Principal & Company’s way interest repayment Auditor’s Way • Statements • Company’s way •e.g. More dividends Favorableraisingdebt-to- (high liquidity) • Potential Way Increased Company’s way Auditor’s Way Auditor’s equity ratio Part V • Governmentshare • • More accurate to •More attractive – tax obligation • Misinterpret Influence on preference Favorable debt-to- stock price • Increased More attractive Stakeholders • reportedauditor – • More accurate •Higher shareholder’s followstatements External ($50m) capital equity ratioincome preference share financial Accurate financial accounting •• No on bookfinancial financial Accurate creditors statement for Part VI equity retained capital ($30m) information • More accurate Economics of standards decisionsinformation business profits allocated - lending Transactions financial Employee – salary payment information Part VII Conclusion
- 30. Part I Background Company’s Way Introduction Part II Debt Bonds liability 50m Restructuring Preference share capital 50m Part III Rationales Behind $20m Gain Overstatement Part IV of Influence on Financial Not Realized Preference Share Statements Capital Part V Influence on Stakeholders Favorable Fail Part VI Economics of debt-to-equity to capture Transactions ratio adverse effect Part VII Conclusion
- 31. Part I Background Auditor’s Way Introduction Part II Debt Bonds liability 50m Restructuring Preference share capital 30m Part III Extraordinary gain on Rationales debt restructuring 20m Behind Part IV Influence on $20m Gain Favorable Financial Statements debt-to-equity Realized Part V Influence on ratio Stakeholders Part VI Economics of Reflects Transactions Essence of transaction Part VII Conclusion
- 32. Part I Aftermath Credibility Difficult Background Introduction Financing Part II Debt Restructuring Part III Rationales Behind •Investors demand •Damaged reputation Part IV Influence on Financial Statements higher premium. lower credibility. and Part V Influence on Stakeholders •Higher cost of •Investors: reluctant to debt/equity financing invest Part VI Economics of Transactions Part VII Conclusion
- 33. Company’s Way Auditor’s Way No Recognition of Gain Recognition of Gain No adverse effect on Financial No adverse effect on Financial Statements Statements Overstatement of Preference Preference Share Capital at Fair Share Capital Value • Both fail to faithfully represent the economics of the transaction. • Auditor’s is fair and gives better information to stakeholders.