Institute Of Management Accountants

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.

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.

Mentor: John Brozovsky

Mentee: Rebecca Fay

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.

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

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!

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?

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.

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.

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 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. 12

4.

Editor: A.J. Cataldo II, PhD, CMA, CPA acataldo@wcupa.edu

Associate Editor: Peter Oehlers, DBA, CMA poehlers@wcupa.edu

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

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.

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.

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.

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.

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.

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.

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:

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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:

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