Question

Assignment 2

USE GAAP

INCLUDE US GAAP CODIFICATION (CITATIONS)

In 2010, the No-slice Golf Company decided to augment their very successful line of golf clubs with a new line of professional caliber golf balls. The executives at No-Slice were aware of the difficulty of penetrating the golf ball market but feel, with their name recognition and the possibility of receiving endorsements from tour professionals that were playing No-Slice clubs, chances for success were substantial. The company purchased $175 million of equipment and buildings in 2011 to begin production. The No-Slice golf ball has not performed up to expectations. The tour professionals did not care for the ball and did not endorse it. Significant improvements in golf balls by Callaway and Nike and the continued dominance of the Titleist ProV1 series made entering the market very difficult.

On July 1, 2017, the Board of Directors voted to sell off the golf ball manufacturing division. The company continued to operate the facility at current levels of production until the sale of the division was completed on June 1, 2018. No-Slice has a April 30 year end and the controller and CEO are concerned about the proper reporting for the disposal of the golf ball manufacturing division in the year-end April 30, 2018 financials. The company wants to issue the financial statements to the public by the end of June 2018.   You are to draft a report to the controller and CEO identifying the issues and accounting choices associated with reporting the disposal and the authoritative guidance that exists to determine the proper manner of reporting the assets, liabilities, and results of operation for the division.

Answer 1

LEGAL REQUIREMENTS:

Generally accepted accounting principles are a set of 10 accounting standards and guidelines created and maintained by the U.S. Financial Accounting Standards Board

• Principle of regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.
• Principle of consistency: Consistent standards are applied throughout the financial reporting process.
• Principle of sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.
• Principle of permanence of methods: Consistent procedures are used in the preparation of all financial reports.
• Principle of non-compensation: All aspects of an organization’s performance, whether positive or negative, are fully reported with no prospect of debt compensation.
• Principle of prudence: Speculation does not influence the reporting of financial data.
• Principle of continuity: Asset valuations assume the organization’s operations will continue.
• Principle of periodicity: Reporting of revenues is divided by standard accounting time periods, such as fiscal quarters or fiscal years.
• Principle of materiality: Financial reports fully disclose the organization’s monetary situation.
• Principle of utmost good faith: All involved parties are assumed to be acting honestly.

GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons.

Beyond the 10 principles, GAAP compliance is built on three rules that eliminate misleading accounting and financial reporting practices. These rules create consistent accounting and reporting standards, which provide prospective and existing investors with reliable methods of evaluating an organization’s financial standing. Without these rules, accountants could use misleading methods to paint a deceptive picture of a company or organization’s financial standing.

These three rules are:

1. Basic accounting principles and guidelines: These 10 guidelines separate an organization’s transactions from the personal transactions of its owners, standardize currency units used in reports, and explicitly disclose the time periods covered by specific reports. They also draw on established best practices governing cost, disclosure, going concern, matching, revenue recognition, professional judgment, and conservatism.
2. Rules and standards issued by the FASB and its predecessor, the Accounting Principles Board (APB): . The compendium includes standards based on the best practices previously established by the APB.
3. Generally accepted industry practices: Particular businesses follow industry-specific best practices designed to reflect the nuances and complexities of different areas of business. For example, banks operate using a different set of accounting and financial reporting methods than those used by retail businesses.

As Per generally accepted accounting principles (GAAP), companies are responsible for providing reports on their cash flows, profit-making operations and overall financial conditions. There are three major financial statements required under GAAP: the income statement, the balance sheet and the cash flow statement.

The income statement recaps the revenue earned by a company during the reporting period, along with any corresponding expenses. This includes revenue from operating and non-operating activities, allowing investors and lenders to evaluate profitability. It is sometimes referred to as the profit and loss (P&L) statement.

A company's balance sheet summarizes assets and sets them equal to liabilities and shareholder's equity. These three categories highlight what a company owns and how it finances its operations. The balance sheet is an open snapshot of a company at a specific point in time.

GAAP also requires a cash flow statement, which acts as a record of cash as it enters and leaves the company. The cash flow statement is crucial, because the income statement and balance sheet are constructed using the accrual basis of accounting, which largely ignores real cash flow. Investors and lenders can see how effectively a company maintains liquidity, makes investments and collects on its receivables.

IFRS 5, IFRS 10 - Disposal of subsidiaries, businesses and non-current assets

In addition, When a business disposes of one of its components -- usually by selling it off, but also by just shutting it down -- accounting standards require that any gain or loss from the disposal be reported on the income statement. How that's done depends on whether the disposal qualifies as a "discontinued operation."

When you dispose of a component, there are two key questions to ask to determine whether the disposal counts as a discontinued operation. The first is whether the cash flow from the component will be "gone" after the disposal.

The second is whether, by disposing of the component, you are getting out of that component's line of business completely.

If the disposal counts as a discontinued operation, then it gets special treatment. Lenders, potential investors and others looking at your income statement will generally be doing so to get an indication of where your business is headed in the future. Discontinued operations are, by definition, not part of your future, so they should be separated out. First, identify the revenue, expenses and (if your business is a corporation) income taxes attributable to the discontinued component. The revenue minus expenses minus taxes is your income from discontinued operations. Next, determine the gain or loss on the disposal of the component, and, if the disposal has tax consequences, figure your after-tax gain or loss on the sale. These items -- after-tax income from discontinued operations, and net gain or loss on discontinued operations -- go at the bottom of the income statement, after net income from continuing operations and just before total net income.

A discontinued operation is a component of an entity that can be distinguished operationally and financially for financial reporting purposes from the rest of the entity and:

• represents a separate major line of business or geographical area of operation;
• is part of a single co-ordinated plan to dispose of a separate major line of business or major geographical area of operation; or
• is a subsidiary acquired exclusively with a view for resale.

An operation is classified as discontinued only at the date on which the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation. Although balance sheet information is neither restated nor remeasured for discontinued operations, the statement of comprehensive income information does have to be restated for the comparative period.

Discontinued operations are presented separately in the income statement and the cash flow statement. There are additional disclosure requirements in relation to discontinued operations.

FACTS OF THE GIVEN CASE STUDY:

In 2010, the No-slice Golf Company decided to augment their very successful line of golf clubs with a new line of professional caliber golf balls. The executives at No-Slice were aware of the difficulty of penetrating the golf ball market but feel, with their name recognition and the possibility of receiving endorsements from tour professionals that were playing No-Slice clubs, chances for success were substantial. The company purchased $175 million of equipment and buildings in 2011 to begin production. The No-Slice golf ball has not performed up to expectations. The tour professionals did not care for the ball and did not endorse it. Significant improvements in golf balls by Callaway and Nike and the continued dominance of the Titleist ProV1 series made entering the market very difficult.

On July 1, 2017, the Board of Directors voted to sell off the golf ball manufacturing division. The company continued to operate the facility at current levels of production until the sale of the division was completed on June 1, 2018. No-Slice has a April 30 year end and the controller and CEO are concerned about the proper reporting for the disposal of the golf ball manufacturing division in the year-end April 30, 2018 financials.

REPORTING REQUIREMENTS:

Assign specific assets and liabilities to No Slice Golf Ball.

Carve out these numbers from your primary company’s balance sheet to create the division's balance sheet and arrive at a book value.