Questions for How Adjusting Entries Affect the Quality of Financial Reporting
Describe the business Frosty Co. is in.
What significant risk factor is on the horizon in the near future?
Is Frosty Co. currently regulated by the SEC, PCAOB?
What is seasoned equity offering?
A seasoned equity offering or secondary equity offering (SEO) is a new equity issue by an
already publicly-traded company. Secondary offerings may involve shares sold by existing
shareholders (non-dilutive), new shares (dilutive) or both. If it is a public offering by a seasoned
issuer that meets certain criteria, it may be a shelf offering.
What is a shelf offering ?
Shelf registration or shelf offering is a type of public offering where certain issuers are allowed
to offer and sell securities to the public without a separate prospectus for each act of offering.
Instead, there is a single prospectus for multiple, undefined future offerings. The prospectus
(often as part of a registration statement) may be used to offer securities for up to several years
after its publication.
For example, a company can file a shelf registration statement with a prospectus for 100,000,000
shares, $1,000,000,000 face value of bonds, $500,000,000 face value of convertible bonds,
50,000,000 Series A warrants and 50,000,000 Series B warrants. These five different classes or
series of securities are offered in a single document. The company may offer to sell all of them,
none of them, or any part of some class. It can sell 30,000,000 shares at one time and another
50,000,000 a year later (it will then have 20,000,000 unissued shares covered by the shelf
prospectus).
Before each offering and sale is actually made, the company must file a relatively short statement
regarding material changes in its business and finances since the shelf prospectus was filed.
Shelf registration is usually available to companies deemed reliable by the securities regulation
authority in the relevant country. Shelf offerings, due to their purposefully time-constrained
nature, are examined far less rigorously by those authorities, compared to standard public
offerings
Which type of Fraud Risk Factor would a seasoned offering represent?
Who are the players?
President
CFO
Controller
Accountant
Accountant
Jane Mileton
Doug Steindart
Simon
Elsa Pilebody
John Mortenson
What are the accounting issues in the case?
Capitalizing interest on new factory
Obsolete inventory --new line of industrial snow cone machines / first model had some problems
Asset Retirement Obligation
Allowance for uncollectible accounts
Capitalization of interest. How much interest can we capitalize?
avoidable
How do we record inventory
What is the ceiling
What is an asset retirement obligation
Do we use present value or cost
What is the effect of using a higher discount rate
Is 12% discount rate reasonable
Is a change from the balance sheet approach to the income statement approach a
change in accounting principle or a change in accounting estimate
How do we account for changes in accounting principle?
How do we account for changes in accounting estimates?
Will we need to disclose this change even if we report the change prospectively?
Is it OK to change the method we account for Bad Debt expense, just to increase net
income?
Do we need to change from percent of receivables to the percent of net income to
accomplish this?
However, auditors should keep in mind that accounting estimates, such as the allowance for doubtful
accounts, can be used to manage earnings. For example, a company might opportunistically reduce the
allowance in a period of reduced earnings. Auditors are wise to weigh all available evidence, including
data related to prior estimates and the client’s current financial condition, when a client proposes a
substantial reduction in or increase to its allowance for doubtful accounts.
What is Jane the CEO’s only concern regarding the financial statements?
What is Doug the CFO’s concern with the financial statements?
What affect will the capitalizing interest issue have on EPS (increase of decrease)
What affect will the obsolete inventory have on EPS (increase of decrease)
What affect will the Asset Retirement Obligation have on EPS (increase of decrease)
What affect will changing the way we estimate bad debt expense have on EPS
(increase of decrease)
Doug the CFO “We need good news for the offering to fund our growth strategy
We’ll fix all of these issues after the offering, I promise.”
Jane “Don’t mess with the financial statements. Leave them as they are.”
Jane “ We owe it to our investors to report good numbers; that’s how investments grow.”
If the auditors stumble on (to these issues) them, send them to Doug or to me. We’ll
straighten them out.”
Don’t worry about this so much. Just leave things as they are, ad we’ll take care of you
when bonuses come out. The Board’s going to be thrilled to see these financial
statements and we’ll be sure to tell them how much you helped us get ready for the
SEO. We’re always happy to reward team players.”