Facts of Case:
Polluter Corp is an SEC registrant and manufacturer household cleaning products. In the course of operations, Polluter Corp emits emission pollutants; The Company receives emissions allowances, (EAs,) from the government for 2010 to 2030. Polluter Corp will upgrade their production facilities in 2014 in order to reduce their pollutants. Emissions Allowance are given by the government in order to offset pollution expense, with the goal being to reduce pollution 2010 Transactions After 2014, Polluter will emit less pollution, but until then it will need more EAs in order to avoid penalties. Transactions Fiscal Year 2010
After 2014, Polluter Corp will emit less pollution, but until then it will need more EA’s in order to avoid penalties, Polluter buys extra EA’s for 2012 from Clear Air Corp for $3 million. In an effort to offset the cost of the April 2, 2010 purchase of 2012 Eas, the company sold Eas with a vintage year of 2016 to Dirty Chemical Corp for $2 million. Answer Required:
1. What is the appropriate classification in the statement of cash flows in the company’s December 31, 2010, financial statements for its purchase of 2012 EAs from Clean Air Corp ? According to the FASB codification section 805-50-3-1-2, these allowance will be recognized as intangible assets at their cost. When a company buys any assets, the cash outflow due to purchase will be classified in the investing section of the statement of cash flows.
Standard Accounting Entry for Purchase
DRCR
Emissions Allowance, Assets 3,000,000
Cash3,000,000
2. What are the appropriate classifications in the statement of cash flows in the company’s December 31, 2010, financial statements for its sale of 2016
EAs to Dirty Chemical Corp Clean Air Corp? According to the FASB Statement 153 the gain from sale of the 2016 EAs will be recognized at the sale/market price. When a company buys any assets, the cash outflow due to purchase will be classified in the investing section of the statement of cash flows.
Standard Accounting Entry for Purchase
DRCR
Cash 2,000,000
Gain on Sales of EAs2,000,000
3. If the company reported its result pursuant to IFRSs rather than U.S. GAAP, how would the company record the purchase and sale of its Eas differently? The purchase of 2012 Eas will have the exact same transaction under IFRS as under US FASB:
Standard Accounting Entry for Purchase
DRCR
Emissions Allowance, Assets 3,000,000
Cash3,000,000
Due to the fact that IFRS requires Eas given to Polluter to be recognized as a different income there is a revenue associated with a sale of Eas under IFRS
DRCR
Cash 2,000,000
Emissions Allowance 2,000,000
DRCR
Government Grant Differed Income 2,000,000
EA Revenue2,000,000
1. Net Sales – In 2011 L&L had net sales of $74.5 million, which $3.9 million of the revenues were derived from services provided by Sassy Spa. For the year 2012, L&L had net sales of $86.5 million and of which $11.2 million of the revenues were derived from services provided by Sassy Spa. The remaining increase in total net sales of 4.7 million was because of an increase in the average transaction value. a. According to FASB ASC 225-10-S99-2 (b) states if income is derived from more than one of the sub-captions described under § 210.5–03.1, each class which is not more than 10 percent of the sum of the items may be combined with another class. If these items are combined, related costs and expenses as described under § 210.5–03.2 shall be combined in the same manner. b. Net sales and gross revenues. State separately:
(a) Net sales of tangible products (gross sales less discounts, returns and allowances), (b) operating revenues of public utilities or others;
(c) income from rentals;
(d) revenues from services; and
(e) other revenues.
Amounts earned from transactions with related parties shall be disclosed as required under § 210.4–08(k). 2. Gross Profit – L&L had gross profit (net sales less cost of sales) of $28 million in 2011 and $30.4 million in 2012; an increase of $2.4 million (8.6 % increase) Cost of sales includes expenses to acquire and produce inventory for sale but excluding depreciation.
Cost of sales increased from $46.5 million in 2011 to $56.1 million in 2012; an increase of $9.6 million (20.6 percent) due to an increase in the cost of Sassy Spa services.
a. Accordingly, the cost of sales should not include EBITDA and should be stated separately. Like SAB Topic 11 mentions that “Cost of goods sold (exclusive of items shown separately below)” or “Cost of goods sold (exclusive of depreciation shown separately below).” According to FASB •SAB Topic 11: Miscellaneous Disclosure section B: Depreciation and Depletion Excluded from Cost of Sales states that if cost of sales or operating expenses exclude charges for depreciation, depletion and amortization of property, plant and equipment, the description of the line item should read somewhat as follows: “Cost of goods sold (exclusive of items shown separately below)” or “Cost of goods sold (exclusive of depreciation shown separately below).” b. To avoid placing undue emphasis on “cash flow,” depreciation, depletion and amortization should not be positioned in the income statement in a manner, which results in reporting a figure for income before depreciation. (ASC 225-10-S99-8) •ASC 225-10-S99-2 (b) explains that costs and expenses applicable to sales and revenues. State separately the amount of: (a) cost of tangible goods sold,
(b) operating expenses of public utilities or others, (c) expenses applicable to rental income,
(d) cost of services, and
(e) expenses applicable to other revenues
3. Gain on Sale of Corporate Headquarters – L&L relocated its corporate headquarters to Wilton, Connecticut. In connection with the relocation, L&L sold the abandoned building and realized a gain of $1.7 million on the sale. Judgment is required to segregate in the income statement the effects of events or transactions that are extraordinary items. An event or transaction shall be presumed to be an ordinary and usual activity of the reporting entity, the effects of which shall be included in income from operations, unless the evidence clearly supports its classification as an extraordinary item ASC 225-20-45-1. . Other gains or losses from sale or abandonment of property, plant, or equipment used in the business ASC 225-20-45-4d Gain on Sale of Corporate Headquarters Persuant of ASC 225-20-45-1, the gain is to be reported on the income statement under operating income.
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4. Class Action Settlement – L&L became aware that the vintage materials provided by one of it’s suppliers were not in fact vintage. During fiscal year 2006 , L&L settled a class action lawsuit related to the legal case against the suppliers in connection with this scandal and received proceeds of $2.7 million. Persuant of ASC225-10-S99-2(7) Non Operating Income Items are stated separately in the income statement or in a note thereto amounts earned from dividends, interest on securities, profit or loss on securities and miscellaneous other income. The 2.7 million dollars become an item on non- operating income stated separately in the income statement or in a note.
