Changes to Accounting for Investments and the Emergence of Private Company Financial Reporting Standards - Issues, Challenges, and Opportunities

By James, Marianne L. | Journal of the International Academy for Case Studies, October 1, 2012 | Go to article overview

Changes to Accounting for Investments and the Emergence of Private Company Financial Reporting Standards - Issues, Challenges, and Opportunities


James, Marianne L., Journal of the International Academy for Case Studies


CASE DESCRIPTION

The primary subject matter of this case concerns proposed financial accounting and reporting changes that will affect virtually all U.S. public and private companies. The case addresses proposed significant changes to the measurement and recognition of investments and the emergence of private company financial reporting standards. Secondary, required financial reporting changes that must be implemented starting with the 2012 reporting periods are also briefly addressed. The main focus of this case is on the technical accounting changes and their likely financial statement effect, as well as short-term and long-term strategic decisions that may substantially be influenced by these significant changes.

This case has a difficulty level of three to four and can be taught in about 40 minutes. Approximately four hours of outside preparation is necessary for students to fully address the issues, concepts, and suggested assignments. The assignments include both case-specific questions and questions requiring research. This case can be utilized in an intermediate accounting course, but also can be utilized in a graduate level course focusing primarily on the strategic issues. The case may enhance students' technical knowledge and their critical thinking, analytical, research and communication skills.

CASE SYNOPSIS

Significant changes to financial accounting and reporting during the next five years will affect nearly all private and public entities. One of the proposed changes that likely will affect most entities involves accounting for investments. As part of their convergence project, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are revising the accounting rules governing the recognition and measurement of investments, while attempting to develop global consistency. In addition, the Blue Ribbon Panel on Standard Setting for Private Companies (BRP) recommended to the Financial Accounting Foundation (FAF) that accounting standards for non-public entities should be developed. While this may enhance the usefulness of financial reporting by private companies, it likely will cause comparability issues between private and public companies, particularly in light of the likely implementation of IFRS by public companies during the next five to seven years. In addition, since many private companies eventually become public and public companies frequently invest in or acquire private entities, it can also affect investment and acquisition strategies, as well as financing decisions. Thus, the two issues - accounting for investments and private company financial reporting - are interrelated.

This case addresses technical accounting issues as well as the strategic issues that may affect companies' investment and acquisition strategies. The introduction to the case provides brief background on the topics. The case was developed for an intermediate accounting course, but can also be used in a more advanced course focusing primarily on the strategic issue. The suggested assignments include case-specific as well as research questions. All questions are independent to allow for maximum flexibility; the case can be assigned as a group or as an individual project. Assigning this case may enhance students' critical thinking, research, and communication skills; as well as their technical accounting knowledge.

INTRODUCTION ANI) BACKGROUND

Most companies carry investments on their balance sheets. For example, based on information provided by Accounting Trends and Techniques, 92% of the 500 entities surveyed aimually by the American Institute of CPAs included non-current investments on theft 2009 balance sheets (AICPA, 2010). In addition, 35% of the surveyed companies reported current investments in marketable securities on their balance sheets (AICPA, 2010). The most common types of investments involve equity securities, corporate bonds, hybrids, and derivatives.

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Changes to Accounting for Investments and the Emergence of Private Company Financial Reporting Standards - Issues, Challenges, and Opportunities
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