Journals

Journal of Mentored Management Accounting Research

Editorial Policy and Style Information

Volume 1 2010
___________________________________________________________________________
Journal of
Mentored Management
Accounting Research
(JMMAR)
________________________________________________________________________
Published by the West Chester Chapter of the Institute of Management Accountants
West Chester, Pennsylvania USA
It is with great pleasure that we announce the first issue the Journal of Mentored Management Accounting Research (JMMAR).
The West Chester Chapter of the Institute of Management Accountants (IMA) was chartered and formed in January 2008 to serve accountants and business professional working or residing in Chester County and neighboring areas. Due to the leadership provided by Ali Naggar, President, the Chapter won the First Place Award of Warner Division of the IMA that consist of 94 chapters nationwide. Professor Naggar accepted the award at the IMA Denver National Conference in June, 2009, and an additional award from the Commonwealth of Pennsylvania House of Representatives, where the Chapter was issued a Legislative Citation dated November 5, 2009, congratulating the West Chester Chapter of the IMA for the dedication and commitment to the highest standards of professional development.
A lot of people have gone further than they thought they could, because someone else thought they could ~ Author Unknown
One of the greatest achievements and greatest rewards is when we, as accounting professionals and academics, succeed in providing guidance to those seeking our mentorship. The Journal of Mentored Management Accounting Research unleashes this potential. It provides an opportunity for managers and their subordinates and faculties and their students to organize and share their expertise on contemporary issues in accounting, using a coauthor approach to publication and the broad dissemination of their thoughts and approaches to problem-solving. Our objective is to encourage those at all levels of expertise to contribute to the existing body of applied research and professional literature streams, with the benefit and guidance that formal mentorship provides.
In academia, many universities have adopted a teacher-scholar model. This journal provides the opportunity for academics to truly bring research to their students. Faculty may choose to use JMMAR to improve student information literacy, by mentoring them as they investigating contemporary topics. Similarly, managers may formally contribute to the professional development of subordinates, demonstrating their skills to the profession and the academic community.
Professors Naggar, Cataldo and I look forward to your submissions to JMMAR, as you encourage students and professional staff to contribute to the existing body of applied academic and professional literature streams. These peer reviewed articles will provide the foundation for future research and extensions, and encourage others to continue to contribute by sharing their thoughts and professional and academic expertise.
JMMAR is listed in Cabells and we are looking for high-quality submissions. We also look forward to receiving inquiries and applications for reviewers, from a variety of disciplines, capable of providing review notes to assist and mentor contributors.
Peter Oehlers – Associate Editor
A.J. Cataldo II – Editor
Ali Naggar – President, West Chester Chapter of the Institute of Management Accountants
December 31, 2009
Journal of An annual Journal of the West Chester
Mentored Management Chapter of the Institute of Management
Accounting Research Accountants
___________________________________________________________________________
Volume 1 Spring 2010 Number 1
Table of Contents
Financial Statement Analysis and IFRS Conversion Case: Using
Form 20-F Reconciliation for Ratio Analysis ................................................. 1
Mentor: John Brozovsky
Mentee: Rebecca Fay
Editorial Policy and Style Information……………………………………..24
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West Chester Chapter of the Journal of Mentored Management Accounting Research
Institute of Management Accountants (IMA) ISSN: 1947-4482/Volume 1 (2010), pp. 1-23
© 2009 West Chester Chapter of the IMA
Financial Statement Analysis and IFRS Conversion Case:
Using Form 20-F Reconciliation for Ratio Analysis
Mentor: John Brozovsky
Associate Professor
Virginia Tech
Blacksburg, VA, USA
Mentee: Rebecca G. Fay1
PhD Candidate, Virginia Tech
Blacksburg, VA, USA
CMA KEYWORDS: International Financial Reporting Standards, IFRS, accounting standards, ratio analysis, financial statement analysis, external financial reporting
1 The author gratefully acknowledges the guidance and support of Dr. John A. Brozovsky, Dr. Sam A Hicks, and Dr. Patricia Lobingier. I also express my appreciation to the Deloitte Foundation and to Carl Cronin and Greg Aliff, both Deloitte partners and Virginia Tech alums, for the encouragement and financial support that made this project possible. Any errors or omissions are solely the responsibility of the author.
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Financial Statement Analysis and IFRS Conversion Case:
Using Form 20-F Reconciliation for Ratio Analysis
ABSTRACT
This case is designed as a teaching case but can easily be used in a professional setting to help newer staff learn about the differences between IFRS and US GAAP and the effect that it can have on financial statement analysis (Section 1E on the CMA exam). A fictitious US corporation, New River, is considering the acquisition of a real European company, Océ N.V. The SEC EDGAR database is used to supply the 20F filing of Océ N.V. for the analysis. The student/new professional is asked to conduct an analysis of the financial statements of Océ prepared under International Financial Reporting Standards (IFRS). They then convert the statements to US GAAP via the 20F reconciliation and reconduct the financial statement analysis using amounts reported for US GAAP. Under IFRS reporting, the analysis appears consistent with New River‟s financial numbers. However, under US GAAP, Océ N.V.‟s financial information is significantly different due to the variations between US GAAP and IFRS on Océ N.V.‟s financial statements.
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INTRODUCTION
Abigail Leon began working with New River, Inc. as an intern during her final year of college. The atmosphere at the small supplier of copiers and document management systems was exhilarating. A recent breakthrough in research and development provided the company with an edge over its competitors, and the company began expanding operations into Europe. When the CFO offered Abigail full-time employment upon her graduation, she accepted the position, eager to be part of the company‟s globalization.
Shortly after graduation, Abigail‟s boss, Dave Boone tasked her with a new assignment. New River would like to obtain a $100 million 15-year bank note to finance further expansion into Europe and Asia. In recent phone conversations, the bank‟s loan managers had referenced the performance of Océ N.V. (pronounced Oh-say), the company‟s closest competitor in the European and Asian markets. In an email, Dave asked Abigail to analyze New River‟s 2006 financial performance and compare it to that of Océ.
By spending a little time on the internet, Abigail learned Océ filed with the U.S. Securities and Exchange Commission as a foreign private issuer and prepared its financial statements in accordance with International Financial Reporting Standards. Abigail questioned Dave about the best method of comparing New River‟s US GAAP financial statements with Océ‟s IFRS statements. He told Abigail he was not an expert in IFRS, but had heard the two sets of standards were converging. He asked her to first perform ratio analysis using amounts directly from the financial statements; then, she could perform any additional analysis she deemed appropriate.
Abigail remembered one of her professor‟s mentioning that, until recently, foreign firms were required to reconcile financial statements to US GAAP if they were prepared using a
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foreign GAAP. She wondered if the reconciliation requirement was still in effect for the 2006 financial statements. If so, that should provide her with the necessary information to compare the two companies using US GAAP numbers. She wanted to make sure her analysis was accurate. Since this was her first big assignment as a full-time employee, she wanted to make a good impression!
REQUIREMENTS
1. Obtain Océ N.V.‟s Form 20-F for the year ended November 30, 2006 (filed in 2007) from the Edgar database on the Securities and Exchange Commission website www.sec.gov and answer the following questions:
a. How do you know what set of generally accepted accounting principles were used to prepare the annual report?
b. The company presents selected information in both Euros and US Dollars. What exchange rate does it use to convert currency?
2. Calculate the following financial ratios for Océ, using the IFRS financial statements (in dollars), and New River, Inc., using the US GAAP financial statements provided. Analyze the results and write a brief summary of your findings. Abigail downloaded a copy of Océ‟s 2005 Form 20-F to determine the amount of equity as of November 30, 2005 – $920,601,000 for IFRS and $1,224,283,000 for US GAAP. She found all other necessary information about Océ in the 2006 Form 20-F, including earnings per share calculated for both IFRS and US GAAP. In addition to the information on New River‟s 2006 financial statements, Abigail learned the company employed 2,680 employees in 2005 and 2,800 in 2006. New River‟s equity totaled $150,753,000 as of
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December 31, 2005. The company has one class of common stock, with 10,500,000 shares outstanding at December 31, 2006.
a. Current ratio
b. Return on equity
c. Gross profit margin
d. Net profit margin
e. Debt to equity
f. Sales per employee
g. Selling and marketing expense as a percentage of revenue
h. Research and development expense as a percentage of revenue
i. Earnings per share.
3. Using the information provided in the 20-F reconciliation of IFRS to US GAAP, convert Océ‟s consolidated income statement and balance sheet to US GAAP.
4. Calculate Océ‟s financial ratios using the US GAAP financial statements and answer the following questions:
a. Did your analysis of the two companies change based on the additional information provided in the reconciliation? Based on which ratios?
b. In general, how confident are you in the US GAAP ratios calculated for Océ? Why?
c. Which ratios do you have the greatest confidence in? Why?
d. Which ratios do you have less confidence in? Why?
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5. What do you think about the SEC‟s elimination of the reconciliation requirement for
foreign private issuers filing annual statements in accordance with IFRS? Do you
believe this change is beneficial for users of the financial statements?
EXHIBIT 1
NEW RIVER FINANCIAL STATEMENTS
New River, Inc.
Income Statement
December 31, 2006
US GAAP
( in thousands)
Total revenues $518,253
Cost of sales -310,952
Gross profit 207,301
Selling and marketing expenses -121,789
Research and development expenses -51,825
General and administrative expenses -25,913
Operating expenses -199,527
Operating income 7,774
Financial income 350
Financial expenses -200
Income before income taxes 7,924
Income taxes -2,377
Net income $5,547
7
New River, Inc.
Balance Sheet
December 31, 2006
US GAAP
( in thousands)
Assets
Current assets
Cash and cash equivalents $15,044
Accounts receivable - trade 101,296
Inventories 60,023
176,363
Non-current assets
Accounts receivable - trade 32,456
Deferred income tax assets 8,327
Property, plant and equipment 70,428
Intangible assets 7,720
118,931
Total assets $295,294
Liabilities and Equity
Current liabilities
Accounts payable $81,772
Other liabilities 3,254
Accrued income taxes 301
Deferred income tax liabilities 2,341
Short-term debt 11,998
Current portion of long-term debt 1,517
101,183
Non-current liabilities
Accounts payable 2,112
Long-term debt 31,465
Retirement benefit obligations 4,234
37,811
Total liabilities 138,994
Equity
Common stock 7,100
Additional paid-in capital 1,552
Retained earnings 147,648
Total equity 156,300
Total liabilities and equity $295,294
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TEACHING NOTES
Financial Statement Analysis and IFRS Conversion Case:
Using Form 20-F Reconciliation for Ratio Analysis
CASE LEARNING OBJECTIVES
This case is designed to:
- Familiarize students with the complexity of converting financial statements from IFRS to US GAAP by using the reconciliation of net income prepared by a real world company.
- Conduct financial statement analysis under both IFRS and US GAAP
- Illustrate numerous differences between IFRS and US GAAP and their effect on financial statement analysis
As noted throughout the solution, many of the conversion entries requirement judgment, since insufficient information is available to determine the correct classification of expenses, etc. with 100% certainty. One intended outcome of this case is that students will develop an understanding of the level of subjectivity inherent in converting financial statements using only publicly available information. There is no one „right‟ answer.
IMPLEMENTATION GUIDANCE
Devoting time for discussion during a class session or training meeting would provide an excellent opportunity to discuss the importance of learning IFRS. The case shows how knowledge of IFRS would enhance the user‟s ability to appropriately compare financial performance of companies operating in different countries. The instructor or manager could also discuss the potential adoption of IFRS in the US including the milestones (e.g., improvement in IFRS accounting standards and interactive reporting capability, increased
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accountability and funding stability for the International Accounting Standards Committee, and implementation of education and training programs for US investors, accountants, and auditors) and other considerations (e.g., differences in regulatory environments, etc.) discussed in the SEC roadmap. A copy of the SEC roadmap, including milestones necessary for adoption can be found at http://www.sec.gov/rules/proposed/2008/33-8982.pdf. The Institute of Management Accountants‟ response to the SEC proposal can be found at http://www.imanet.org/pdf/IFRS%20RdmapL.pdf.
SUGGESTED SOLUTION
1. If desired, the instructor may provide the following detailed instructions for downloading Océ N.V.‟s 2006 annual report from the SEC website in order to aid students in meeting the first requirement of the case.
- Under “Filing & Forms (Edgar)”, click on “Search for Company Filings”
- Under “General Purpose Searches”, click on “Companies & Other Filers”
- Enter “Océ” in the “Company Name” box and click “Find Companies”
- From the list of companies, select Océ N V, with CIK (Central Index Key) 0000753058.
- In the box on the right, enter “20-F” as the Form Type and click “Retrieve Selected Findings”
- Click on the “html” version of the annual report filed 3/16/2007.
- The select document “d20f.htm”, the 20-F annual report.
a. Students may submit a variety of answers.
- The first reference to IFRS is found in Part I, Item 3 A – Selected Financial Information on page 2 of the 20-F.
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- IFRS is identified in the Report of the Independent Registered Accounting
Firm on page F-2.
- It is also disclosed in the Notes to the Consolidated Financial Statements –
Note 0. Significant Accounting Policies (pg F-10).
b. As disclosed in Part I, Item 3A – Exchange rate Information (pg 1), the
exchange rate is $1.3261 to 1 Euro, which was the Noon Buying Rate on
November 30, 2006. This information is necessary to calculate the journal
entries used to convert the financial statements to US GAAP.
2. Following are the ratios calculated from Océ‟s IFRS financial statements and New
River‟s US GAAP financial statements. Detailed calculations are listed in Exhibit 2.
While Océ operates on a larger scale than New River, employing approximately
8.5 times more employees and generating approximately 8 times more revenue, there
are similarities between the two companies. Both companies generate a gross margin
of around 40%. While Océ‟s net profit margin is slightly greater than that of New
River, both companies generate profit between 1 and 2% of sales. New River has a
stronger current ratio, reflecting a greater ability to satisfy current liabilities, and
Ocˇ New River
IFRS US GAAP
Current ratio 1.49 1.74
Return on equity 8.07% 7.10%
Gross profit margin 40.80% 40.00%
Net profit margin 1.84% 1.07%
Debt to equity 1.12 0.89
Sales per employee $172,044.67 $189,143.43
Selling & marketing expense
as % of revenue 23.76% 23.50%
R&D as % of Revenue 7.23% 10.00%
Earnings per share $0.84 $0.53
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generates a greater amount of revenue per employee, reflecting efficiency of its workforce. New River has a lower debt to equity ratio, indicating it is not as highly leveraged as Océ. However, if New River obtains the additional debt financing it is seeking, its debt to equity ratio of 1.53 will be greater than that of Océ. A comparison of expenses as a percentage of revenue indicates that New River is operating as efficiently as Océ in the area of sales and marketing. While New River spends a greater percentage of revenue on research and development, this might be viewed as an investment rather than inefficiency of operation, particularly since its current competitive strength lies in cutting edge technology. New River‟s return on equity is just below that of Océ, but New River‟s earnings per share is approximately two-thirds that of Océ, providing an additional indication that shareholders receive a lower return on investment with New River.
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EXHIBIT 2
DETAILED CALCULATION OF RATIOS
OCÉ (IFRS) AND NEW RIVER (US GAAP)
Current ratio = Current Assets/ Current Liabilities
Ocˇ = 1,587,844/1,068,237
New River = 176,363/101,183
Return on equity = Net income/ Average Total Equity
Ocˇ = 75,750/((956,708+920,601)/2)
New River = 5,547/((156,300+150,753)/2)
Gross profit margin = Gross profit/Revenue
Ocˇ = 1,683,023/4,124,599
New River = 207,301/518,253
Net profit margin = Net income/Revenue
Ocˇ = 75,750/4,124,599
New River = 5,547/518,253
Debt to equity = Total debt/ Total Equity
Ocˇ = 2,498,672/956,708
New River = 138,994/156,300
Sales per employee = Revenue/ Average Number of Employees
Ocˇ = 4,124,599,000/((24,164+23,784)/2)
New River = 518,253,000/((2,800 + 2,680)/2)
Note: The number of Oce's employees can be found on
page 51 of Form 20-F, at the bottom of the page
Selling & marketing expense as a % of Revenue
Ocˇ = 979,875/4,124,599
New River = 121,789/518,253
Research & development expense as a % of Revenue
Ocˇ= 298,343/4,124,599
New River = 51,825/518,253
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3. The reconciliation from IFRS to US GAAP is included in Note 37 to the Océ Consolidated Financial Statements on page F-55. While companies are required to disclose material reconciling items, the information may not be adequate to translate IFRS financial statements to US GAAP with complete accuracy. Students/staff will need to exercise judgment in converting the statements to US GAAP and will likely submit a variety of answers. Exhibit 3 presents the suggested solution for Océ‟s US GAAP financial statements. Exhibit 4 presents the reconciliation from IFRS to US GAAP, and Exhibit 5 the related adjusting journal entries. A detailed description follows the suggested solution.
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EXHIBIT 3
OCÉ FINANCIAL STATEMENTS (US GAAP)
OC N.V. AND SUBSIDIARIES
Consolidated Income Statement
December 31, 2006
IFRS Adjustments US GAAP
( in thousands)
Total revenues $4,124,599 $4,124,599
Cost of sales -2,441,576 -$10,377 c -2,451,953
Gross profit 1,683,023 -10,377 1,672,646
Selling and marketing expenses -979,875 -12,772 c -992,647
Research and development expenses -298,343 -33,652 c,f -331,995
General and administrative expenses -269,214 -42,219 b,c -311,433
Operating expenses -1,547,432 -88,643 -1,636,075
Operating income 135,591 -99,020 36,571
Financial income 14,067 4,942 g 19,009
Financial expenses -75,097 -5,560 d -80,657
Share in income of associates 668 668
Income before income taxes 75,229 -99,638 -24,409
Income taxes 521 37,984 h 38,505
Net income before change accounting 75,750 -61,654 14,096
Change in accounting principle -4,496 -4,496
Tax effect of change 1,115 1,115
Net income (IFRS) $75,750 -65,035 10,715
Less minority interest -2,845 -2,845
Net income (US GAAP) -$67,880 $7,870
Earnings per share for net income attributable to
Basic $0.84 $0.07
Diluted 0.84 0.07
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OC N.V. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2006
IFRS Adjustments US GAAP
( in thousands)
Assets
Non-current assets
Intangible assets $727,183 $221,484 a,c,f $948,667
Property, plant and equipment 567,746 567,746
Rental equipment 148,403 148,403
Investments in associates 2,414 2,414
Deferred income tax assets 111,723 -15,647 h 96,076
Available-for-sale financial assets 12,451 12,451
Derivative financial instruments 9,435 9,435
Trade and other receivables 275,647 275,647
1,855,002 205,837 2,060,839
Current assets
Inventories 451,435 451,435
Derivative financial instruments 13,748 13,748
Trade and other receivables 966,814 966,814
Current income tax receivables 43,134 43,134
Cash and cash equivalents 112,713 112,713
1,587,844 0 1,587,844
Non-current assets held for sale 12,534 12,534
Total $3,455,380 $205,837 $3,661,217
Equity and Liabilities
Equity
Share capital $71,137 $71,137
Share premium 678,392 678,392
Other reserves -217,718 -$3,936 c,d -221,654
Retained earnings 303,020 435,476 a,b,c,d,f,g 738,496
Net income attributable to shareholders 72,905 -65,035 7,870
Equity attributable to shareholders 907,736 366,505 1,274,241
Minority interest 48,972 48,972
956,708 366,505 1,323,213
Non-current liabilities
Borrowings 706,809 -15,424 d 691,385
Derivative financial instruments 6,270 6,270
Retirement benefit obligations 558,636 -152,172 c 406,464
Trade and other liabilities 20,073 10,641 g 30,714
Deferred income tax liabilities 67,158 67,158
Provisions for other liabilities and charges 71,489 -3,713 b 67,776
1,430,435 -160,668 1,269,767
Current liabilities
Borrowings 238,361 238,361
Derivative financial instruments 4,541 4,541
Current income tax liabilities 2,920 2,920
Trade and other liabilities 783,572 783,572
Provisions for other liabilities and charges 38,843 38,843
1,068,237 0 1,068,237
Total liabilities 2,498,672 -160,668 2,338,004
Total equity and liabilities $3,455,380 $205,837 $3,661,217
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EXHIBIT 4
OC N.V. ANDO CSÉU BRSEICDOINACRIILEISATION FROM IFRS TO US GAAP
IFRS/ US GAAP Reconciliation
December 31, 2006
IFRS Adjustment
Net income attributable to shareholders $72,905
Adjustments
Release of (addition to) provisions -29,189 b
Pensions -36,444 c
Derivative financial instruments -5,560 d
Product development costs -33,387 f
Sale of lease portfolio 4,942 g
Income tax effects on above adjustments 37,984 h
Net income attributable to shareholders under US GAAP
before cumulative effect of change in accounting principle 11,251
Cumulative effect of change in accounting principle -4,496 e
Income tax effect on change in accounting principle 1,115 e
Net income attributable to shareholders under US GAAP $7,870
Equity attributable to shareholders under IFRS $907,736
Adjustments
Goodwill 255,601 a
Provisions 3,713 b
Pensions 152,968 c
Derivative financial instruments 15,424 d
Product development costs -34,913 f
Sale of lease portfolio -10,641 g
Income tax effects on above adjustments -15,647 h
Equity attributable to shareholders under US GAAP $1,274,241
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EXHIBIT 5
OCÉ ADJUSTMENTS TO US GAAP
Adjustment Account/ Line item DR CR Source
(in thousands)
a - Goodwill Intangible Asset 255,601 Notes
Retained Earnings 255,601 Reconciliation
b - Provisions General & admin. expense 29,189 Reconciliation
Provisions 3,713 Notes
Retained earnings 32,902 Reconciliation
c - Provisions Cost of sales 10,377 Sum $36,444 per recon
Selling expenses 12,772
Research & development 265
General & administrative 13,030
Other comprehensive income 2,079 Reconciliation
Pension Liability 332,919 Notes
Minimum liability 180,747 Notes
Intangible Asset 796 Notes
Retained earnings 191,491 Reconciliation
d - Pensions Financial Expense 4,509 Notes - Preference shares
Long term debt 9,017 Notes - Transition
Long term debt 42 Rounding
Financial Expense 5,826 Notes - Transition
Long term debt 6,365 Notes - Fair Value Hedges
Financial Expense 6,100 Notes - Fair Value Hedges
Financial Expense 1,857 Notes - Cash Flow Hedges
Other Comprehensive income 1,857 Notes - Cash Flow Hedges
Retained earnings 22,841 Reconciliation
e - Derivatives Effect of accounting change 4,496 Notes
Tax expense - change in acct 1,115 Reconciliation
Retained earnings 3,381 Reconciliation
f - Development Intangible Assets 34,913 Notes
Amortization-Development 6,498 Notes
Development Expense 39,885 Notes
Retained earnings 1,526 Reconciliation
g - Lease portfolio Trade liabilities 10,641 Notes
Financial income - gain on sale 4,942 Reconciliation
Retained earnings 15,583 Reconciliation
h - Income taxes Tax Expense 37,984 Reconciliation
Deferred income tax assets 15,647 Reconciliation
Retained earnings 53,631 Reconciliation
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The following adjustments are in thousands:
a. The detailed disclosure on goodwill identifies the nature of the adjustment.
€195.3 increase in general goodwill – €2.6 decrease due to acquisition of
Imagistics = €192.7 adjustments * 1.3261 currency adjustment = $255.54
b. We learn the provision adjustment (€2,800 * 1.3261 = $3,713) is due to two
transactions – onerous rent contracts and termination benefits due to
restructuring – but we do not learn the amount attributed to each one. The
“main adjustment” for onerous rent contracts may reasonably be classified in
operating expenses, but should the contracts be classified as selling expenses or
general/administrative expenses? Without additional information to make an
informed decision, a logical argument could be used to support either
classification. This classification may affect the analysis of certain ratios, such
as return on research and development. The suggested solution classifies the
expense as general and administrative expense.
c. What is the best method of allocating pension expense to functional categories?
The suggested solution uses the release of pension provision discussed on page
39 as the basis of allocating pension expense to functional categories.
Allocate
Release of provision Pension
$ % Adjustment
Cost of sales 4,701 28.47% 10,377
Selling expenses 5,786 35.05% 12,772
Research & development 120 0.73% 265
General & administrative 5,903 35.75% 13,030
16,510 100.00% 36,444
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The remaining calculations are as follows: Pension liability = €251,000 * 1.3261 = $332,851 + $68 rounding. Minimum liability = €136,300 * 1.3261 = $180,747 Intangible asset = €600 * 1.3261 = $796
d. In Note 11, page F-31, we find that financial expense includes interest expense, interest rate swaps for hedges, and interest on preference shares. The detailed calculations are as follows: Expense reduction for preference shares = €3,400 * 1.3261 = $4,509 Transition, debt reduction = €6,800 * 1.3261 = $9,017 + $42 rounding Transition, expenses = €4,400 * 1.3261 = $5,835 - $9 rounding Debt reduction, fair value hedges = €4,800 * 1.3261 = $5,826 Financial expense, fair value hedges = €4,600 * 1.3261 = $6,100 Financial expense, cash flow hedge = €1,400 * 1.3261 = $1,857 Other comp. income, cash flow hedge = €1,400 * 1.3261 = $1,857
e. Much of the necessary adjustment for share-based payment is recorded in 2005. The remaining amount (€3,400 * 1.3261 = $4,509) is reported as a change in accounting principle.
f. The note on research and development costs provides us with the necessary information to adjust for this item. Decrease intangible assets = €26,300 * 1.3261 = $34,876 - $37 rounding Amortization = €4,900 * 1.3261
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Ocˇ New River Ocˇ
IFRS US GAAP US GAAP
Current ratio 1.49 1.74 1.49
Return on equity 8.07% 7.10% 0.63%
Gross profit margin 40.80% 40.00% 40.55%
Net profit margin 1.84% 1.07% 0.19%
Debt to equity 1.12 0.89 0.84
Sales per employee $172,044.67 $189,143.43 $172,044.67
Selling & marketing expense
as % of revenue 23.76% 23.50% 24.07%
R&D as % of Revenue 7.23% 10.00% 8.05%
Earnings per share $0.84 $0.53 $0.07
Development Expense (investment) = €30,000 * 1.3261 = $39,783 +
$102 rounding
g. Similarly, the specific adjustment for sale of the lease portfolio is described in
the notes. Trade liabilities are increased by €8,000 * 1.3261 = $10,608 + $32
rounding. The remaining adjustment increases income by $4,942 for the gain
on sale, and decreases retained earnings by $15,583.
h. The entry for the tax impact of US GAAP adjustments is based on information
provided in the reconciliation. The difference between the impact on net
income ($37,984 decrease in tax expense) and retained earnings ($53,631
decrease) is recorded to the deferred tax asset.
4.
Ocˇ US Current = 1,587,844/1,068,237
Ocˇ US ROE = 7,870/((1,274,241+1,224,283)/2)
Ocˇ US Gross Profit Margin = 1,672,646/4,124,599
Ocˇ US Net Profit Margin = 7,870/4,124,599
Ocˇ US Debt to Equity = 2,338,004/1,274,241
Ocˇ US Sales per Employee = 4,124,599/((24,164+23,784)/2)
Ocˇ US Selling & Marketing Expense as % of Revenue = 992,647/4,124,599
Ocˇ US R&D as % of Revenue = 331,995/4,124,599
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a. A review of US GAAP financial ratios will likely lead to a different analysis
of the two companies than the one arrived at in Step 2 – particularly when
reviewing measures of profitability. When the two companies are compared
under common accounting frameworks, New River shows stronger
profitability than Océ as evidenced by earnings per share ($0.53 vs. $0.07),
return on equity (7% vs. 0.6%), and net profit margin (1% vs. 0.19%). It also
results in a lower debt to equity ratio for Océ (.84) than the one calculated
under IFRS (1.12) and the one calculated for New River (.89). This may lead
to further questions as to New River‟s ability to finance further expansion by
taking on additional debt. The US GAAP ratio for Océ shows an increased
percentage of revenue spent on selling and marketing expense (24%) – greater
than that of New River (23.5%).
b. Confidence in the US GAAP ratios is expected to vary based on confidence in
the adjusting entries.
c. For instance, return on equity and earnings per share are based on components
directly presented in Océ‟s Form 20-F. Students should have a high level of
confidence in these numbers.
d. Other ratios, such as Selling & Marketing expenses and Research &
Development Expenses as a percentage of revenue, are impacted by subjective
Ocˇ US Net Profit Margin = 7,870/4,124,599
Ocˇ US Debt to Equity = 2,338,004/1,274,241
Ocˇ US Sales per Employee = 4,124,599/((24,164+23,784)/2)
Ocˇ US Selling & Marketing Expense as % of Revenue = 992,647/4,124,599
Ocˇ US R&D as % of Revenue = 331,995/4,124,599
22
allocations of expenses. Students are likely to arrive at a variety of answers for these ratios, based on different allocation methods.
5. This question is intended to provoke critical thinking and provide an opportunity for debate about a controversial issue. Common arguments supporting elimination of the reconciliation: The two frameworks are converging standards and the reconciliation is unnecessary. (A question for discussion: Do you believe the differences in Océ„s net income are material?) The reconciliations did not provide line-by-line information for the financial statements, and provided little information to the users of the financial statements. The deadline for filing Form 20-F is six months after year-end. The reconciliation does not provide any timely information to shareholders. Companies devoted significant time and resources to prepare financial information under two sets of accounting standards. Eliminating the reconciliation requirement will allow companies to streamline prOcédures and save accounting costs (both internally, and to the external auditors).
Common arguments against elimination of the reconciliation: Despite reconciliation efforts, the frameworks may still generate material differences despite the convergence efforts. The reconciliation provided valuable information to users of the financial statements who are unfamiliar with IFRS, including the bottom-line amount – US GAAP net income.
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The cost of preparing the reconciliation to US GAAP was reasonable for foreign firms trading on US markets.
24
Journal of Mentored Management Accounting Research
Editor: A.J. Cataldo II, PhD, CMA, CPA acataldo@wcupa.edu
Associate Editor: Peter Oehlers, DBA, CMA poehlers@wcupa.edu
Editorial Board:
Richard J. Barndt, CPA – EdD Candidate, Widener University; rjbarndt@mail.widener.edu
Gary Ellenberger, CMA – Controller, Container Research Corporation; Ellenberger@crc-flex.com Lori R. Fuller, PhD, CPA – West Chester U Col of Bus & Public Affairs; lfuller@wcupa.edu
Preeti Gujral, MBA – Incube Resources; pgujral@yahoo.com
Bob Scanlon, CMA – Asst Dean, West Chester U Col of Bus & Public Affairs; RScanlon@wcupa.edu
Glenn S. Soltis, MBA – West Chester U Col of Bus & Public Affairs; gsoltis@wcupa.edu
Webmaster: Holley Cataldo Holleycataldo@comcast.net
Editorial Policy and Style Information
Editorial Policy
The West Chester Chapter of the Institute of Management Accountants (IMA) introduces the Journal of Mentored Management Accounting Research (JMMAR). JMMAR publishes only original material that contributes to the profession of management accounting and financial management. The primary audience for JMMAR is practicing financial and management professionals.
Publication Format
Manuscripts accepted for publication will be “published” electronically on the West Chester chapter of the IMA website prior to assembly of the annual electronic journal, in January of each year. Academic journal examples of purely electronic journals for American Accounting Association (AAA) sections include Accounting and the Public Interest, Current Issues in Accounting and Journal of Tax Research. We will not charge a subscription fee and will make JMMAR available to all, at no cost. This will assure the greatest possible dissemination of relevant, refereed contributions to practice and applied theory and academic research, within the field of management accounting, to all interested parties.
Recommended Manuscript Focus and Length:
The primary focus for the Journal is on mentored, practical or applied research, likely to be of interest to management accounting professionals, Certified Management Accountants (CMAs), and members of the Institute of Management Accountants (IMA). Suitable manuscript subject matter includes those represented by the broad range of topics covered on the CMA exam: http://www.imanet.org/certification.asp.
While sole-authored manuscripts may be considered, these authors should carefully consider alternative, more suitable outlets for their work. The exception is sole-authored manuscripts by undergraduate or graduate students and/or entry level management accounting professionals with footnote references or acknowledgements to those mentors providing some level of guidance, but insufficient, as determined by the author and mentor team, to warrant co-authorship.
The Journal will accept manuscripts ranging from column length (750 words) through academic journal article length (9,000 words). For example, the former might represent the work of an undergraduate student or new staff accountant, co-authoring and mentored by an adjunct or full-time faculty member or senior staff accountant, assistant controller, and/or controller, respectively. The latter might represent a graduate student, co-authoring and mentored by an adjunct or full-time faculty member.
Cases will be published with solutions for classroom use, discussion or professional application.
Manuscript Submission and Publication:
It is the intention that articles submitted to the Journal be reviewed and/or published in a timely manner. Electronic submission to JMMAR, electronic distribution to the reviewers, electronic review notes to the
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authors, and electronic acceptance and publication is intended to greatly accelerate the submission-review-publication process.
Submit your manuscript via e-mail to acataldo@wcupa.edu. Include the manuscript as an attachment to your message. Put JMMAR, and nothing else, in the subject line of your emailed submission. Files should be in Word format. We will distribute your submission, electronically, to reviewers. The editor and associate editor and reviewers may use the Word “comment” function to provide comments and recommendations. Therefore, manuscripts may not be submitted and will not be accepted in paper form.
Review Process:
Each paper submitted to JMMAR will be (1) reviewed by the Editor and/or Associate Editor for general suitability before (2) assigning the paper to 2 (or more) members of the editorial board (blind review). Based on these reviews, the manuscript outcome will be determined and the author(s) notified.
Manuscript Submission Outcomes:
Accepted The manuscript has been accepted by the Journal. Upon acceptance, the article will become available on the Journal’s website as forthcoming. Assembly of each volume will follow, annually, in June of each year. This will accelerate the process of information dissemination and also provide interested readers with a timely, electronic citation for reference purposes.
Accepted, with minor revision The manuscript has been accepted, subject to compliance and completion, as recommend by reviewers and the editor. There is a high probability of acceptance.
Accepted, with major revision The manuscript will be accepted after the author(s) have complied with and completed recommendations made by the reviewers and editor. It is still possible for these manuscripts to be rejected, but those genuinely interested in complying with reviewer and editorial recommendations are likely to see their article accepted.
Rejected The manuscript has significant defects and/or is not suitable for the Journal, for any reason, as determined by the reviewers and editor.
Submission Guidelines for Authors:
1. Manuscripts previously published or under consideration by another journal or other publisher should not be submitted. A statement, indicating that your submission is not under review and has not been published elsewhere should be included in the cover letter (email) with your submission attached.
2. The submission fee is $20 and must be made payable to IMA West Chester Chapter and mailed to: JMMAR, c/o A.J. Cataldo II, Professor of Accounting, West Chester University, School of Business and Public Affairs, Department of Accounting, West Chester, PA 19382. The submission fee is nonrefundable. Manuscripts not conforming to guidelines may be rejected without a refund of the submission fee. Upon electronic receipt, your Manuscript will be issued/emailed a control number for future reference. Upon receipt of the $20 submission fee, your Manuscript will be processed.
3. Author(s) should retain a copy of the paper, which must be submitted in English.
4. Revisions must be submitted within 6 months from the request. Otherwise, they will be treated as new or initial submissions and an additional submission fee of $20 will apply.
5. Manuscript preparation and style should be consistent with the Chicago Manual of Style (15th edition; University of Chicago Press) and guidance for usage, style and spelling may be found in The Elements of Style by William Strunk, Jr., and E.B. White (MacMillan) and the Merriam-Webster’s Collegiate Dictionary.
6. Manuscripts should be typed on 8 /12 by 11 format, double-spaced (except for indented quotations), parsimonious, with at least one inch margins for the top, bottom, and sides.
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7. To assure anonymous review, authors should not be identified (directly or indirectly) in the paper. The cover page should include the title of the paper, author name(s), title and affiliation, and acknowledgments.
8. All pages, including tables, exhibits, figures, appendices, and references should be serially numbered.
9. Spell out number from one to ten, except when used in table, exhibits, figures, and lists, and when used with mathematical, statistical, scientific, or technical measures, such as distances and weights (e.g., three weeks, 3 miles, 3 years). All other numbers should be expressed numerically.
10. Tables, exhibits, figures, and appendices should appear on a separate page and placed at the end of the text. Each should bear an Arabic number and a complete title indicating the exact contents of the table, exhibit, figure or appendix. A reference to each table, exhibit or figure should be made in the text. The author(s) should indicate where each table, exhibit or figure should be inserted in the text (e.g., Insert Table X here).
11. Use the word “percent” for nontechnical text.
12. Use only one space after periods, colons, exclamation points, question marks, quotation marks or any punctuation that separates two sentences.
13. Arrange headings so that major headings are centered, bold, and capitalized. Second-level headings should be flush left, bold and both uppercase and lowercase. Third-level headings should be flush left, bold, italic and both uppercase and lowercase. Fourth-level headings should be paragraph indent, bold, and lowercase. Do not number headings and subheadings. Examples follow:
A CENTERED, BOLD, ALL CAPITALIZED, FIRST LEVEL HEADING
A Flush Left, Bold, Uppercase and Lowercase, Second-level Heading
A Flush Left, Bold, Italic, Uppercase and Lowercase, Third-level Heading
A paragraph indent, bold, lowercase, fourth-level heading. Text begins ...
14. An abstract should accompany all articles with a length of 2,000 words or longer. The abstract should be nonmathematical and provide a parsimonious summary of the article topic and conclusion or summary. The title of the article, but not the author name(s) or other identification, should appear on the abstract page. An abstract is not necessary for shorter pieces.
15. Every manuscript must include a “References” section, containing only those works cited in the text. Each entry should contain sufficient information necessary for unambiguous identification of the published work. Use the formats which follow The Chicago Manual of Style.
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ARE YOUR STUDENTS PAYING TOO MUCH FOR TEXTBOOKS?
COULD YOUR DEPARTMENT OR INSTITUTION USE ADDITIONAL FUNDS?
The West Chester University Department of Accounting is developing the below, for external, Fall 2010 launch:
Introductory Financial or Principles of Accounting Text
Introductory Managerial or Cost Accounting Text
Features of both of the above: Acknowledgement, but zero compensation to individuals Adopting institution participates in continuous improvement Adopting institution participation in revenues All revenues shared only between West Chester University (originator and revisions) and adopting institution
Contact for Content Contributions and Distribution:
A.J. Cataldo II, Editor and Professor of Accounting, West Chester University, Department of Accounting at acataldo@wcupa.edu
Contact for Licensing and Revenue Sharing: Amber Junkins,
West Chester University, Student Services Bookstore, Textbook Manager at ajunkins@wcupa.eduVolume 1 2010
___________________________________________________________________________
Journal of
Mentored Management
Accounting Research
(JMMAR)
________________________________________________________________________
Published by the West Chester Chapter of the Institute of Management Accountants
West Chester, Pennsylvania USA
It is with great pleasure that we announce the first issue the Journal of Mentored Management Accounting Research (JMMAR).
The West Chester Chapter of the Institute of Management Accountants (IMA) was chartered and formed in January 2008 to serve accountants and business professional working or residing in Chester County and neighboring areas. Due to the leadership provided by Ali Naggar, President, the Chapter won the First Place Award of Warner Division of the IMA that consist of 94 chapters nationwide. Professor Naggar accepted the award at the IMA Denver National Conference in June, 2009, and an additional award from the Commonwealth of Pennsylvania House of Representatives, where the Chapter was issued a Legislative Citation dated November 5, 2009, congratulating the West Chester Chapter of the IMA for the dedication and commitment to the highest standards of professional development.
A lot of people have gone further than they thought they could, because someone else thought they could ~ Author Unknown
One of the greatest achievements and greatest rewards is when we, as accounting professionals and academics, succeed in providing guidance to those seeking our mentorship. The Journal of Mentored Management Accounting Research unleashes this potential. It provides an opportunity for managers and their subordinates and faculties and their students to organize and share their expertise on contemporary issues in accounting, using a coauthor approach to publication and the broad dissemination of their thoughts and approaches to problem-solving. Our objective is to encourage those at all levels of expertise to contribute to the existing body of applied research and professional literature streams, with the benefit and guidance that formal mentorship provides.
In academia, many universities have adopted a teacher-scholar model. This journal provides the opportunity for academics to truly bring research to their students. Faculty may choose to use JMMAR to improve student information literacy, by mentoring them as they investigating contemporary topics. Similarly, managers may formally contribute to the professional development of subordinates, demonstrating their skills to the profession and the academic community.
Professors Naggar, Cataldo and I look forward to your submissions to JMMAR, as you encourage students and professional staff to contribute to the existing body of applied academic and professional literature streams. These peer reviewed articles will provide the foundation for future research and extensions, and encourage others to continue to contribute by sharing their thoughts and professional and academic expertise.
JMMAR is listed in Cabells and we are looking for high-quality submissions. We also look forward to receiving inquiries and applications for reviewers, from a variety of disciplines, capable of providing review notes to assist and mentor contributors.
Peter Oehlers – Associate Editor
A.J. Cataldo II – Editor
Ali Naggar – President, West Chester Chapter of the Institute of Management Accountants
December 31, 2009
Journal of An annual Journal of the West Chester
Mentored Management Chapter of the Institute of Management
Accounting Research Accountants
___________________________________________________________________________
Volume 1 Spring 2010 Number 1
Table of Contents
Financial Statement Analysis and IFRS Conversion Case: Using
Form 20-F Reconciliation for Ratio Analysis ................................................. 1
Mentor: John Brozovsky
Mentee: Rebecca Fay
Editorial Policy and Style Information……………………………………..24
1
West Chester Chapter of the Journal of Mentored Management Accounting Research
Institute of Management Accountants (IMA) ISSN: 1947-4482/Volume 1 (2010), pp. 1-23
© 2009 West Chester Chapter of the IMA
Financial Statement Analysis and IFRS Conversion Case:
Using Form 20-F Reconciliation for Ratio Analysis
Mentor: John Brozovsky
Associate Professor
Virginia Tech
Blacksburg, VA, USA
Mentee: Rebecca G. Fay1
PhD Candidate, Virginia Tech
Blacksburg, VA, USA
CMA KEYWORDS: International Financial Reporting Standards, IFRS, accounting standards, ratio analysis, financial statement analysis, external financial reporting
1 The author gratefully acknowledges the guidance and support of Dr. John A. Brozovsky, Dr. Sam A Hicks, and Dr. Patricia Lobingier. I also express my appreciation to the Deloitte Foundation and to Carl Cronin and Greg Aliff, both Deloitte partners and Virginia Tech alums, for the encouragement and financial support that made this project possible. Any errors or omissions are solely the responsibility of the author.
2
Financial Statement Analysis and IFRS Conversion Case:
Using Form 20-F Reconciliation for Ratio Analysis
ABSTRACT
This case is designed as a teaching case but can easily be used in a professional setting to help newer staff learn about the differences between IFRS and US GAAP and the effect that it can have on financial statement analysis (Section 1E on the CMA exam). A fictitious US corporation, New River, is considering the acquisition of a real European company, Océ N.V. The SEC EDGAR database is used to supply the 20F filing of Océ N.V. for the analysis. The student/new professional is asked to conduct an analysis of the financial statements of Océ prepared under International Financial Reporting Standards (IFRS). They then convert the statements to US GAAP via the 20F reconciliation and reconduct the financial statement analysis using amounts reported for US GAAP. Under IFRS reporting, the analysis appears consistent with New River‟s financial numbers. However, under US GAAP, Océ N.V.‟s financial information is significantly different due to the variations between US GAAP and IFRS on Océ N.V.‟s financial statements.
3
INTRODUCTION
Abigail Leon began working with New River, Inc. as an intern during her final year of college. The atmosphere at the small supplier of copiers and document management systems was exhilarating. A recent breakthrough in research and development provided the company with an edge over its competitors, and the company began expanding operations into Europe. When the CFO offered Abigail full-time employment upon her graduation, she accepted the position, eager to be part of the company‟s globalization.
Shortly after graduation, Abigail‟s boss, Dave Boone tasked her with a new assignment. New River would like to obtain a $100 million 15-year bank note to finance further expansion into Europe and Asia. In recent phone conversations, the bank‟s loan managers had referenced the performance of Océ N.V. (pronounced Oh-say), the company‟s closest competitor in the European and Asian markets. In an email, Dave asked Abigail to analyze New River‟s 2006 financial performance and compare it to that of Océ.
By spending a little time on the internet, Abigail learned Océ filed with the U.S. Securities and Exchange Commission as a foreign private issuer and prepared its financial statements in accordance with International Financial Reporting Standards. Abigail questioned Dave about the best method of comparing New River‟s US GAAP financial statements with Océ‟s IFRS statements. He told Abigail he was not an expert in IFRS, but had heard the two sets of standards were converging. He asked her to first perform ratio analysis using amounts directly from the financial statements; then, she could perform any additional analysis she deemed appropriate.
Abigail remembered one of her professor‟s mentioning that, until recently, foreign firms were required to reconcile financial statements to US GAAP if they were prepared using a
4
foreign GAAP. She wondered if the reconciliation requirement was still in effect for the 2006 financial statements. If so, that should provide her with the necessary information to compare the two companies using US GAAP numbers. She wanted to make sure her analysis was accurate. Since this was her first big assignment as a full-time employee, she wanted to make a good impression!
REQUIREMENTS
1. Obtain Océ N.V.‟s Form 20-F for the year ended November 30, 2006 (filed in 2007) from the Edgar database on the Securities and Exchange Commission website www.sec.gov and answer the following questions:
a. How do you know what set of generally accepted accounting principles were used to prepare the annual report?
b. The company presents selected information in both Euros and US Dollars. What exchange rate does it use to convert currency?
2. Calculate the following financial ratios for Océ, using the IFRS financial statements (in dollars), and New River, Inc., using the US GAAP financial statements provided. Analyze the results and write a brief summary of your findings. Abigail downloaded a copy of Océ‟s 2005 Form 20-F to determine the amount of equity as of November 30, 2005 – $920,601,000 for IFRS and $1,224,283,000 for US GAAP. She found all other necessary information about Océ in the 2006 Form 20-F, including earnings per share calculated for both IFRS and US GAAP. In addition to the information on New River‟s 2006 financial statements, Abigail learned the company employed 2,680 employees in 2005 and 2,800 in 2006. New River‟s equity totaled $150,753,000 as of
5
December 31, 2005. The company has one class of common stock, with 10,500,000 shares outstanding at December 31, 2006.
a. Current ratio
b. Return on equity
c. Gross profit margin
d. Net profit margin
e. Debt to equity
f. Sales per employee
g. Selling and marketing expense as a percentage of revenue
h. Research and development expense as a percentage of revenue
i. Earnings per share.
3. Using the information provided in the 20-F reconciliation of IFRS to US GAAP, convert Océ‟s consolidated income statement and balance sheet to US GAAP.
4. Calculate Océ‟s financial ratios using the US GAAP financial statements and answer the following questions:
a. Did your analysis of the two companies change based on the additional information provided in the reconciliation? Based on which ratios?
b. In general, how confident are you in the US GAAP ratios calculated for Océ? Why?
c. Which ratios do you have the greatest confidence in? Why?
d. Which ratios do you have less confidence in? Why?
6
5. What do you think about the SEC‟s elimination of the reconciliation requirement for
foreign private issuers filing annual statements in accordance with IFRS? Do you
believe this change is beneficial for users of the financial statements?
EXHIBIT 1
NEW RIVER FINANCIAL STATEMENTS
New River, Inc.
Income Statement
December 31, 2006
US GAAP
( in thousands)
Total revenues $518,253
Cost of sales -310,952
Gross profit 207,301
Selling and marketing expenses -121,789
Research and development expenses -51,825
General and administrative expenses -25,913
Operating expenses -199,527
Operating income 7,774
Financial income 350
Financial expenses -200
Income before income taxes 7,924
Income taxes -2,377
Net income $5,547
7
New River, Inc.
Balance Sheet
December 31, 2006
US GAAP
( in thousands)
Assets
Current assets
Cash and cash equivalents $15,044
Accounts receivable - trade 101,296
Inventories 60,023
176,363
Non-current assets
Accounts receivable - trade 32,456
Deferred income tax assets 8,327
Property, plant and equipment 70,428
Intangible assets 7,720
118,931
Total assets $295,294
Liabilities and Equity
Current liabilities
Accounts payable $81,772
Other liabilities 3,254
Accrued income taxes 301
Deferred income tax liabilities 2,341
Short-term debt 11,998
Current portion of long-term debt 1,517
101,183
Non-current liabilities
Accounts payable 2,112
Long-term debt 31,465
Retirement benefit obligations 4,234
37,811
Total liabilities 138,994
Equity
Common stock 7,100
Additional paid-in capital 1,552
Retained earnings 147,648
Total equity 156,300
Total liabilities and equity $295,294
8
TEACHING NOTES
Financial Statement Analysis and IFRS Conversion Case:
Using Form 20-F Reconciliation for Ratio Analysis
CASE LEARNING OBJECTIVES
This case is designed to:
- Familiarize students with the complexity of converting financial statements from IFRS to US GAAP by using the reconciliation of net income prepared by a real world company.
- Conduct financial statement analysis under both IFRS and US GAAP
- Illustrate numerous differences between IFRS and US GAAP and their effect on financial statement analysis
As noted throughout the solution, many of the conversion entries requirement judgment, since insufficient information is available to determine the correct classification of expenses, etc. with 100% certainty. One intended outcome of this case is that students will develop an understanding of the level of subjectivity inherent in converting financial statements using only publicly available information. There is no one „right‟ answer.
IMPLEMENTATION GUIDANCE
Devoting time for discussion during a class session or training meeting would provide an excellent opportunity to discuss the importance of learning IFRS. The case shows how knowledge of IFRS would enhance the user‟s ability to appropriately compare financial performance of companies operating in different countries. The instructor or manager could also discuss the potential adoption of IFRS in the US including the milestones (e.g., improvement in IFRS accounting standards and interactive reporting capability, increased
9
accountability and funding stability for the International Accounting Standards Committee, and implementation of education and training programs for US investors, accountants, and auditors) and other considerations (e.g., differences in regulatory environments, etc.) discussed in the SEC roadmap. A copy of the SEC roadmap, including milestones necessary for adoption can be found at http://www.sec.gov/rules/proposed/2008/33-8982.pdf. The Institute of Management Accountants‟ response to the SEC proposal can be found at http://www.imanet.org/pdf/IFRS%20RdmapL.pdf.
SUGGESTED SOLUTION
1. If desired, the instructor may provide the following detailed instructions for downloading Océ N.V.‟s 2006 annual report from the SEC website in order to aid students in meeting the first requirement of the case.
- Under “Filing & Forms (Edgar)”, click on “Search for Company Filings”
- Under “General Purpose Searches”, click on “Companies & Other Filers”
- Enter “Océ” in the “Company Name” box and click “Find Companies”
- From the list of companies, select Océ N V, with CIK (Central Index Key) 0000753058.
- In the box on the right, enter “20-F” as the Form Type and click “Retrieve Selected Findings”
- Click on the “html” version of the annual report filed 3/16/2007.
- The select document “d20f.htm”, the 20-F annual report.
a. Students may submit a variety of answers.
- The first reference to IFRS is found in Part I, Item 3 A – Selected Financial Information on page 2 of the 20-F.
10
- IFRS is identified in the Report of the Independent Registered Accounting
Firm on page F-2.
- It is also disclosed in the Notes to the Consolidated Financial Statements –
Note 0. Significant Accounting Policies (pg F-10).
b. As disclosed in Part I, Item 3A – Exchange rate Information (pg 1), the
exchange rate is $1.3261 to 1 Euro, which was the Noon Buying Rate on
November 30, 2006. This information is necessary to calculate the journal
entries used to convert the financial statements to US GAAP.
2. Following are the ratios calculated from Océ‟s IFRS financial statements and New
River‟s US GAAP financial statements. Detailed calculations are listed in Exhibit 2.
While Océ operates on a larger scale than New River, employing approximately
8.5 times more employees and generating approximately 8 times more revenue, there
are similarities between the two companies. Both companies generate a gross margin
of around 40%. While Océ‟s net profit margin is slightly greater than that of New
River, both companies generate profit between 1 and 2% of sales. New River has a
stronger current ratio, reflecting a greater ability to satisfy current liabilities, and
Ocˇ New River
IFRS US GAAP
Current ratio 1.49 1.74
Return on equity 8.07% 7.10%
Gross profit margin 40.80% 40.00%
Net profit margin 1.84% 1.07%
Debt to equity 1.12 0.89
Sales per employee $172,044.67 $189,143.43
Selling & marketing expense
as % of revenue 23.76% 23.50%
R&D as % of Revenue 7.23% 10.00%
Earnings per share $0.84 $0.53
11
generates a greater amount of revenue per employee, reflecting efficiency of its workforce. New River has a lower debt to equity ratio, indicating it is not as highly leveraged as Océ. However, if New River obtains the additional debt financing it is seeking, its debt to equity ratio of 1.53 will be greater than that of Océ. A comparison of expenses as a percentage of revenue indicates that New River is operating as efficiently as Océ in the area of sales and marketing. While New River spends a greater percentage of revenue on research and development, this might be viewed as an investment rather than inefficiency of operation, particularly since its current competitive strength lies in cutting edge technology. New River‟s return on equity is just below that of Océ, but New River‟s earnings per share is approximately two-thirds that of Océ, providing an additional indication that shareholders receive a lower return on investment with New River.
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EXHIBIT 2
DETAILED CALCULATION OF RATIOS
OCÉ (IFRS) AND NEW RIVER (US GAAP)
Current ratio = Current Assets/ Current Liabilities
Ocˇ = 1,587,844/1,068,237
New River = 176,363/101,183
Return on equity = Net income/ Average Total Equity
Ocˇ = 75,750/((956,708+920,601)/2)
New River = 5,547/((156,300+150,753)/2)
Gross profit margin = Gross profit/Revenue
Ocˇ = 1,683,023/4,124,599
New River = 207,301/518,253
Net profit margin = Net income/Revenue
Ocˇ = 75,750/4,124,599
New River = 5,547/518,253
Debt to equity = Total debt/ Total Equity
Ocˇ = 2,498,672/956,708
New River = 138,994/156,300
Sales per employee = Revenue/ Average Number of Employees
Ocˇ = 4,124,599,000/((24,164+23,784)/2)
New River = 518,253,000/((2,800 + 2,680)/2)
Note: The number of Oce's employees can be found on
page 51 of Form 20-F, at the bottom of the page
Selling & marketing expense as a % of Revenue
Ocˇ = 979,875/4,124,599
New River = 121,789/518,253
Research & development expense as a % of Revenue
Ocˇ= 298,343/4,124,599
New River = 51,825/518,253
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3. The reconciliation from IFRS to US GAAP is included in Note 37 to the Océ Consolidated Financial Statements on page F-55. While companies are required to disclose material reconciling items, the information may not be adequate to translate IFRS financial statements to US GAAP with complete accuracy. Students/staff will need to exercise judgment in converting the statements to US GAAP and will likely submit a variety of answers. Exhibit 3 presents the suggested solution for Océ‟s US GAAP financial statements. Exhibit 4 presents the reconciliation from IFRS to US GAAP, and Exhibit 5 the related adjusting journal entries. A detailed description follows the suggested solution.
14
EXHIBIT 3
OCÉ FINANCIAL STATEMENTS (US GAAP)
OC N.V. AND SUBSIDIARIES
Consolidated Income Statement
December 31, 2006
IFRS Adjustments US GAAP
( in thousands)
Total revenues $4,124,599 $4,124,599
Cost of sales -2,441,576 -$10,377 c -2,451,953
Gross profit 1,683,023 -10,377 1,672,646
Selling and marketing expenses -979,875 -12,772 c -992,647
Research and development expenses -298,343 -33,652 c,f -331,995
General and administrative expenses -269,214 -42,219 b,c -311,433
Operating expenses -1,547,432 -88,643 -1,636,075
Operating income 135,591 -99,020 36,571
Financial income 14,067 4,942 g 19,009
Financial expenses -75,097 -5,560 d -80,657
Share in income of associates 668 668
Income before income taxes 75,229 -99,638 -24,409
Income taxes 521 37,984 h 38,505
Net income before change accounting 75,750 -61,654 14,096
Change in accounting principle -4,496 -4,496
Tax effect of change 1,115 1,115
Net income (IFRS) $75,750 -65,035 10,715
Less minority interest -2,845 -2,845
Net income (US GAAP) -$67,880 $7,870
Earnings per share for net income attributable to
Basic $0.84 $0.07
Diluted 0.84 0.07
15
OC N.V. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2006
IFRS Adjustments US GAAP
( in thousands)
Assets
Non-current assets
Intangible assets $727,183 $221,484 a,c,f $948,667
Property, plant and equipment 567,746 567,746
Rental equipment 148,403 148,403
Investments in associates 2,414 2,414
Deferred income tax assets 111,723 -15,647 h 96,076
Available-for-sale financial assets 12,451 12,451
Derivative financial instruments 9,435 9,435
Trade and other receivables 275,647 275,647
1,855,002 205,837 2,060,839
Current assets
Inventories 451,435 451,435
Derivative financial instruments 13,748 13,748
Trade and other receivables 966,814 966,814
Current income tax receivables 43,134 43,134
Cash and cash equivalents 112,713 112,713
1,587,844 0 1,587,844
Non-current assets held for sale 12,534 12,534
Total $3,455,380 $205,837 $3,661,217
Equity and Liabilities
Equity
Share capital $71,137 $71,137
Share premium 678,392 678,392
Other reserves -217,718 -$3,936 c,d -221,654
Retained earnings 303,020 435,476 a,b,c,d,f,g 738,496
Net income attributable to shareholders 72,905 -65,035 7,870
Equity attributable to shareholders 907,736 366,505 1,274,241
Minority interest 48,972 48,972
956,708 366,505 1,323,213
Non-current liabilities
Borrowings 706,809 -15,424 d 691,385
Derivative financial instruments 6,270 6,270
Retirement benefit obligations 558,636 -152,172 c 406,464
Trade and other liabilities 20,073 10,641 g 30,714
Deferred income tax liabilities 67,158 67,158
Provisions for other liabilities and charges 71,489 -3,713 b 67,776
1,430,435 -160,668 1,269,767
Current liabilities
Borrowings 238,361 238,361
Derivative financial instruments 4,541 4,541
Current income tax liabilities 2,920 2,920
Trade and other liabilities 783,572 783,572
Provisions for other liabilities and charges 38,843 38,843
1,068,237 0 1,068,237
Total liabilities 2,498,672 -160,668 2,338,004
Total equity and liabilities $3,455,380 $205,837 $3,661,217
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EXHIBIT 4
OC N.V. ANDO CSÉU BRSEICDOINACRIILEISATION FROM IFRS TO US GAAP
IFRS/ US GAAP Reconciliation
December 31, 2006
IFRS Adjustment
Net income attributable to shareholders $72,905
Adjustments
Release of (addition to) provisions -29,189 b
Pensions -36,444 c
Derivative financial instruments -5,560 d
Product development costs -33,387 f
Sale of lease portfolio 4,942 g
Income tax effects on above adjustments 37,984 h
Net income attributable to shareholders under US GAAP
before cumulative effect of change in accounting principle 11,251
Cumulative effect of change in accounting principle -4,496 e
Income tax effect on change in accounting principle 1,115 e
Net income attributable to shareholders under US GAAP $7,870
Equity attributable to shareholders under IFRS $907,736
Adjustments
Goodwill 255,601 a
Provisions 3,713 b
Pensions 152,968 c
Derivative financial instruments 15,424 d
Product development costs -34,913 f
Sale of lease portfolio -10,641 g
Income tax effects on above adjustments -15,647 h
Equity attributable to shareholders under US GAAP $1,274,241
17
EXHIBIT 5
OCÉ ADJUSTMENTS TO US GAAP
Adjustment Account/ Line item DR CR Source
(in thousands)
a - Goodwill Intangible Asset 255,601 Notes
Retained Earnings 255,601 Reconciliation
b - Provisions General & admin. expense 29,189 Reconciliation
Provisions 3,713 Notes
Retained earnings 32,902 Reconciliation
c - Provisions Cost of sales 10,377 Sum $36,444 per recon
Selling expenses 12,772
Research & development 265
General & administrative 13,030
Other comprehensive income 2,079 Reconciliation
Pension Liability 332,919 Notes
Minimum liability 180,747 Notes
Intangible Asset 796 Notes
Retained earnings 191,491 Reconciliation
d - Pensions Financial Expense 4,509 Notes - Preference shares
Long term debt 9,017 Notes - Transition
Long term debt 42 Rounding
Financial Expense 5,826 Notes - Transition
Long term debt 6,365 Notes - Fair Value Hedges
Financial Expense 6,100 Notes - Fair Value Hedges
Financial Expense 1,857 Notes - Cash Flow Hedges
Other Comprehensive income 1,857 Notes - Cash Flow Hedges
Retained earnings 22,841 Reconciliation
e - Derivatives Effect of accounting change 4,496 Notes
Tax expense - change in acct 1,115 Reconciliation
Retained earnings 3,381 Reconciliation
f - Development Intangible Assets 34,913 Notes
Amortization-Development 6,498 Notes
Development Expense 39,885 Notes
Retained earnings 1,526 Reconciliation
g - Lease portfolio Trade liabilities 10,641 Notes
Financial income - gain on sale 4,942 Reconciliation
Retained earnings 15,583 Reconciliation
h - Income taxes Tax Expense 37,984 Reconciliation
Deferred income tax assets 15,647 Reconciliation
Retained earnings 53,631 Reconciliation
18
The following adjustments are in thousands:
a. The detailed disclosure on goodwill identifies the nature of the adjustment.
€195.3 increase in general goodwill – €2.6 decrease due to acquisition of
Imagistics = €192.7 adjustments * 1.3261 currency adjustment = $255.54
b. We learn the provision adjustment (€2,800 * 1.3261 = $3,713) is due to two
transactions – onerous rent contracts and termination benefits due to
restructuring – but we do not learn the amount attributed to each one. The
“main adjustment” for onerous rent contracts may reasonably be classified in
operating expenses, but should the contracts be classified as selling expenses or
general/administrative expenses? Without additional information to make an
informed decision, a logical argument could be used to support either
classification. This classification may affect the analysis of certain ratios, such
as return on research and development. The suggested solution classifies the
expense as general and administrative expense.
c. What is the best method of allocating pension expense to functional categories?
The suggested solution uses the release of pension provision discussed on page
39 as the basis of allocating pension expense to functional categories.
Allocate
Release of provision Pension
$ % Adjustment
Cost of sales 4,701 28.47% 10,377
Selling expenses 5,786 35.05% 12,772
Research & development 120 0.73% 265
General & administrative 5,903 35.75% 13,030
16,510 100.00% 36,444
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The remaining calculations are as follows: Pension liability = €251,000 * 1.3261 = $332,851 + $68 rounding. Minimum liability = €136,300 * 1.3261 = $180,747 Intangible asset = €600 * 1.3261 = $796
d. In Note 11, page F-31, we find that financial expense includes interest expense, interest rate swaps for hedges, and interest on preference shares. The detailed calculations are as follows: Expense reduction for preference shares = €3,400 * 1.3261 = $4,509 Transition, debt reduction = €6,800 * 1.3261 = $9,017 + $42 rounding Transition, expenses = €4,400 * 1.3261 = $5,835 - $9 rounding Debt reduction, fair value hedges = €4,800 * 1.3261 = $5,826 Financial expense, fair value hedges = €4,600 * 1.3261 = $6,100 Financial expense, cash flow hedge = €1,400 * 1.3261 = $1,857 Other comp. income, cash flow hedge = €1,400 * 1.3261 = $1,857
e. Much of the necessary adjustment for share-based payment is recorded in 2005. The remaining amount (€3,400 * 1.3261 = $4,509) is reported as a change in accounting principle.
f. The note on research and development costs provides us with the necessary information to adjust for this item. Decrease intangible assets = €26,300 * 1.3261 = $34,876 - $37 rounding Amortization = €4,900 * 1.3261
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Ocˇ New River Ocˇ
IFRS US GAAP US GAAP
Current ratio 1.49 1.74 1.49
Return on equity 8.07% 7.10% 0.63%
Gross profit margin 40.80% 40.00% 40.55%
Net profit margin 1.84% 1.07% 0.19%
Debt to equity 1.12 0.89 0.84
Sales per employee $172,044.67 $189,143.43 $172,044.67
Selling & marketing expense
as % of revenue 23.76% 23.50% 24.07%
R&D as % of Revenue 7.23% 10.00% 8.05%
Earnings per share $0.84 $0.53 $0.07
Development Expense (investment) = €30,000 * 1.3261 = $39,783 +
$102 rounding
g. Similarly, the specific adjustment for sale of the lease portfolio is described in
the notes. Trade liabilities are increased by €8,000 * 1.3261 = $10,608 + $32
rounding. The remaining adjustment increases income by $4,942 for the gain
on sale, and decreases retained earnings by $15,583.
h. The entry for the tax impact of US GAAP adjustments is based on information
provided in the reconciliation. The difference between the impact on net
income ($37,984 decrease in tax expense) and retained earnings ($53,631
decrease) is recorded to the deferred tax asset.
4.
Ocˇ US Current = 1,587,844/1,068,237
Ocˇ US ROE = 7,870/((1,274,241+1,224,283)/2)
Ocˇ US Gross Profit Margin = 1,672,646/4,124,599
Ocˇ US Net Profit Margin = 7,870/4,124,599
Ocˇ US Debt to Equity = 2,338,004/1,274,241
Ocˇ US Sales per Employee = 4,124,599/((24,164+23,784)/2)
Ocˇ US Selling & Marketing Expense as % of Revenue = 992,647/4,124,599
Ocˇ US R&D as % of Revenue = 331,995/4,124,599
21
a. A review of US GAAP financial ratios will likely lead to a different analysis
of the two companies than the one arrived at in Step 2 – particularly when
reviewing measures of profitability. When the two companies are compared
under common accounting frameworks, New River shows stronger
profitability than Océ as evidenced by earnings per share ($0.53 vs. $0.07),
return on equity (7% vs. 0.6%), and net profit margin (1% vs. 0.19%). It also
results in a lower debt to equity ratio for Océ (.84) than the one calculated
under IFRS (1.12) and the one calculated for New River (.89). This may lead
to further questions as to New River‟s ability to finance further expansion by
taking on additional debt. The US GAAP ratio for Océ shows an increased
percentage of revenue spent on selling and marketing expense (24%) – greater
than that of New River (23.5%).
b. Confidence in the US GAAP ratios is expected to vary based on confidence in
the adjusting entries.
c. For instance, return on equity and earnings per share are based on components
directly presented in Océ‟s Form 20-F. Students should have a high level of
confidence in these numbers.
d. Other ratios, such as Selling & Marketing expenses and Research &
Development Expenses as a percentage of revenue, are impacted by subjective
Ocˇ US Net Profit Margin = 7,870/4,124,599
Ocˇ US Debt to Equity = 2,338,004/1,274,241
Ocˇ US Sales per Employee = 4,124,599/((24,164+23,784)/2)
Ocˇ US Selling & Marketing Expense as % of Revenue = 992,647/4,124,599
Ocˇ US R&D as % of Revenue = 331,995/4,124,599
22
allocations of expenses. Students are likely to arrive at a variety of answers for these ratios, based on different allocation methods.
5. This question is intended to provoke critical thinking and provide an opportunity for debate about a controversial issue. Common arguments supporting elimination of the reconciliation: The two frameworks are converging standards and the reconciliation is unnecessary. (A question for discussion: Do you believe the differences in Océ„s net income are material?) The reconciliations did not provide line-by-line information for the financial statements, and provided little information to the users of the financial statements. The deadline for filing Form 20-F is six months after year-end. The reconciliation does not provide any timely information to shareholders. Companies devoted significant time and resources to prepare financial information under two sets of accounting standards. Eliminating the reconciliation requirement will allow companies to streamline prOcédures and save accounting costs (both internally, and to the external auditors).
Common arguments against elimination of the reconciliation: Despite reconciliation efforts, the frameworks may still generate material differences despite the convergence efforts. The reconciliation provided valuable information to users of the financial statements who are unfamiliar with IFRS, including the bottom-line amount – US GAAP net income.
23
The cost of preparing the reconciliation to US GAAP was reasonable for foreign firms trading on US markets.
24
Journal of Mentored Management Accounting Research
Editor: A.J. Cataldo II, PhD, CMA, CPA acataldo@wcupa.edu
Associate Editor: Peter Oehlers, DBA, CMA poehlers@wcupa.edu
Editorial Board:
Richard J. Barndt, CPA – EdD Candidate, Widener University; rjbarndt@mail.widener.edu
Gary Ellenberger, CMA – Controller, Container Research Corporation; Ellenberger@crc-flex.com Lori R. Fuller, PhD, CPA – West Chester U Col of Bus & Public Affairs; lfuller@wcupa.edu
Preeti Gujral, MBA – Incube Resources; pgujral@yahoo.com
Bob Scanlon, CMA – Asst Dean, West Chester U Col of Bus & Public Affairs; RScanlon@wcupa.edu
Glenn S. Soltis, MBA – West Chester U Col of Bus & Public Affairs; gsoltis@wcupa.edu
Webmaster: Holley Cataldo Holleycataldo@comcast.net
Editorial Policy and Style Information
Editorial Policy
The West Chester Chapter of the Institute of Management Accountants (IMA) introduces the Journal of Mentored Management Accounting Research (JMMAR). JMMAR publishes only original material that contributes to the profession of management accounting and financial management. The primary audience for JMMAR is practicing financial and management professionals.
Publication Format
Manuscripts accepted for publication will be “published” electronically on the West Chester chapter of the IMA website prior to assembly of the annual electronic journal, in January of each year. Academic journal examples of purely electronic journals for American Accounting Association (AAA) sections include Accounting and the Public Interest, Current Issues in Accounting and Journal of Tax Research. We will not charge a subscription fee and will make JMMAR available to all, at no cost. This will assure the greatest possible dissemination of relevant, refereed contributions to practice and applied theory and academic research, within the field of management accounting, to all interested parties.
Recommended Manuscript Focus and Length:
The primary focus for the Journal is on mentored, practical or applied research, likely to be of interest to management accounting professionals, Certified Management Accountants (CMAs), and members of the Institute of Management Accountants (IMA). Suitable manuscript subject matter includes those represented by the broad range of topics covered on the CMA exam: http://www.imanet.org/certification.asp.
While sole-authored manuscripts may be considered, these authors should carefully consider alternative, more suitable outlets for their work. The exception is sole-authored manuscripts by undergraduate or graduate students and/or entry level management accounting professionals with footnote references or acknowledgements to those mentors providing some level of guidance, but insufficient, as determined by the author and mentor team, to warrant co-authorship.
The Journal will accept manuscripts ranging from column length (750 words) through academic journal article length (9,000 words). For example, the former might represent the work of an undergraduate student or new staff accountant, co-authoring and mentored by an adjunct or full-time faculty member or senior staff accountant, assistant controller, and/or controller, respectively. The latter might represent a graduate student, co-authoring and mentored by an adjunct or full-time faculty member.
Cases will be published with solutions for classroom use, discussion or professional application.
Manuscript Submission and Publication:
It is the intention that articles submitted to the Journal be reviewed and/or published in a timely manner. Electronic submission to JMMAR, electronic distribution to the reviewers, electronic review notes to the
25
authors, and electronic acceptance and publication is intended to greatly accelerate the submission-review-publication process.
Submit your manuscript via e-mail to acataldo@wcupa.edu. Include the manuscript as an attachment to your message. Put JMMAR, and nothing else, in the subject line of your emailed submission. Files should be in Word format. We will distribute your submission, electronically, to reviewers. The editor and associate editor and reviewers may use the Word “comment” function to provide comments and recommendations. Therefore, manuscripts may not be submitted and will not be accepted in paper form.
Review Process:
Each paper submitted to JMMAR will be (1) reviewed by the Editor and/or Associate Editor for general suitability before (2) assigning the paper to 2 (or more) members of the editorial board (blind review). Based on these reviews, the manuscript outcome will be determined and the author(s) notified.
Manuscript Submission Outcomes:
Accepted The manuscript has been accepted by the Journal. Upon acceptance, the article will become available on the Journal’s website as forthcoming. Assembly of each volume will follow, annually, in June of each year. This will accelerate the process of information dissemination and also provide interested readers with a timely, electronic citation for reference purposes.
Accepted, with minor revision The manuscript has been accepted, subject to compliance and completion, as recommend by reviewers and the editor. There is a high probability of acceptance.
Accepted, with major revision The manuscript will be accepted after the author(s) have complied with and completed recommendations made by the reviewers and editor. It is still possible for these manuscripts to be rejected, but those genuinely interested in complying with reviewer and editorial recommendations are likely to see their article accepted.
Rejected The manuscript has significant defects and/or is not suitable for the Journal, for any reason, as determined by the reviewers and editor.
Submission Guidelines for Authors:
1. Manuscripts previously published or under consideration by another journal or other publisher should not be submitted. A statement, indicating that your submission is not under review and has not been published elsewhere should be included in the cover letter (email) with your submission attached.
2. The submission fee is $20 and must be made payable to IMA West Chester Chapter and mailed to: JMMAR, c/o A.J. Cataldo II, Professor of Accounting, West Chester University, School of Business and Public Affairs, Department of Accounting, West Chester, PA 19382. The submission fee is nonrefundable. Manuscripts not conforming to guidelines may be rejected without a refund of the submission fee. Upon electronic receipt, your Manuscript will be issued/emailed a control number for future reference. Upon receipt of the $20 submission fee, your Manuscript will be processed.
3. Author(s) should retain a copy of the paper, which must be submitted in English.
4. Revisions must be submitted within 6 months from the request. Otherwise, they will be treated as new or initial submissions and an additional submission fee of $20 will apply.
5. Manuscript preparation and style should be consistent with the Chicago Manual of Style (15th edition; University of Chicago Press) and guidance for usage, style and spelling may be found in The Elements of Style by William Strunk, Jr., and E.B. White (MacMillan) and the Merriam-Webster’s Collegiate Dictionary.
6. Manuscripts should be typed on 8 /12 by 11 format, double-spaced (except for indented quotations), parsimonious, with at least one inch margins for the top, bottom, and sides.
26
7. To assure anonymous review, authors should not be identified (directly or indirectly) in the paper. The cover page should include the title of the paper, author name(s), title and affiliation, and acknowledgments.
8. All pages, including tables, exhibits, figures, appendices, and references should be serially numbered.
9. Spell out number from one to ten, except when used in table, exhibits, figures, and lists, and when used with mathematical, statistical, scientific, or technical measures, such as distances and weights (e.g., three weeks, 3 miles, 3 years). All other numbers should be expressed numerically.
10. Tables, exhibits, figures, and appendices should appear on a separate page and placed at the end of the text. Each should bear an Arabic number and a complete title indicating the exact contents of the table, exhibit, figure or appendix. A reference to each table, exhibit or figure should be made in the text. The author(s) should indicate where each table, exhibit or figure should be inserted in the text (e.g., Insert Table X here).
11. Use the word “percent” for nontechnical text.
12. Use only one space after periods, colons, exclamation points, question marks, quotation marks or any punctuation that separates two sentences.
13. Arrange headings so that major headings are centered, bold, and capitalized. Second-level headings should be flush left, bold and both uppercase and lowercase. Third-level headings should be flush left, bold, italic and both uppercase and lowercase. Fourth-level headings should be paragraph indent, bold, and lowercase. Do not number headings and subheadings. Examples follow:
A CENTERED, BOLD, ALL CAPITALIZED, FIRST LEVEL HEADING
A Flush Left, Bold, Uppercase and Lowercase, Second-level Heading
A Flush Left, Bold, Italic, Uppercase and Lowercase, Third-level Heading
A paragraph indent, bold, lowercase, fourth-level heading. Text begins ...
14. An abstract should accompany all articles with a length of 2,000 words or longer. The abstract should be nonmathematical and provide a parsimonious summary of the article topic and conclusion or summary. The title of the article, but not the author name(s) or other identification, should appear on the abstract page. An abstract is not necessary for shorter pieces.
15. Every manuscript must include a “References” section, containing only those works cited in the text. Each entry should contain sufficient information necessary for unambiguous identification of the published work. Use the formats which follow The Chicago Manual of Style.
27
ARE YOUR STUDENTS PAYING TOO MUCH FOR TEXTBOOKS?
COULD YOUR DEPARTMENT OR INSTITUTION USE ADDITIONAL FUNDS?
The West Chester University Department of Accounting is developing the below, for external, Fall 2010 launch:
Introductory Financial or Principles of Accounting Text
Introductory Managerial or Cost Accounting Text
Features of both of the above: Acknowledgement, but zero compensation to individuals Adopting institution participates in continuous improvement Adopting institution participation in revenues All revenues shared only between West Chester University (originator and revisions) and adopting institution
Contact for Content Contributions and Distribution:
A.J. Cataldo II, Editor and Professor of Accounting, West Chester University, Department of Accounting at acataldo@wcupa.edu
Contact for Licensing and Revenue Sharing: Amber Junkins,
West Chester University, Student Services Bookstore, Textbook Manager at ajunkins@wcupa.edu

Institute Of Management Accountants