This section deals with certain general background considerations and information related to the FASC and the answers can be found by clicking the

 ACG4111 Intermediate Financial Accounting II

Version 1

Financial Accounting Standards Codification Research Assignment

Write your name and student number in the space below.

Student (L, F):___________________________________________________

Student/Panther ID:_________________________

This assignment is comprised of researching several of the more current technical topics in accounting and responding to several specific technical standard questions about the topics. You may be asked to interpret how the technical standard is applied or what the objective(s) of the related GAAP rules are attempting to address. Note that the FASC is now the one and only source of the technical GAAP standards; other sources are no longer accepted as GAAP.

You can access the Financial Accounting Standards Board (FASB) Financial Accounting Standards Codification database at: http://aaahq.org/ascLogin.cfm. Type in the following:

Username: AAA52092

Password: 92FqjZZ

Click on “FASB Accounting Standards Codification” and the database will open. The topics are found on the left side of the welcome page. Clicking on the topic will return the subtopics and contents. You can access each topic by either scrolling over the topics and subtopics until you find the related content or topic or by using the search box found in the top right of the screen.

I. FASB Accounting Standards Codification (FASC) Questions

This section deals with certain general background considerations and information related to the FASC and the answers can be found by clicking the “About the Codification” and “Notice to Constituents” sections on the FASC Welcome Page. This section is a good general source of information about the FASC and should be reviewed prior to starting to answer the specific questions set forth in all sections. The related research questions that you must answer are:

1. When did the FASC Codification become effective?

Answer

According to About codification page, the Codification is effective for interim and annual periods ending after September 15, 2009

2. Did the FASC change prior GAAP?

Answer

According to Notice to Constituents V4.10_0 All previous level (a)-(d) US GAAP standards issued by a standard setter are superseded. Level (a)-(d) US GAAP refers to the previous accounting hierarchy. All other accounting literature not included in the Codification is nonauthoritative. So FASC did not change but Codification structure is significantly different from the structure of previous standards.

3. What does the FASB expect from the new FASC structure and system?

Answer

According to Notice to Constituents V4.10_0 p.5 Among other things, the Codification is expected to:

1. Reduce the amount of time and effort required to solve an accounting research issue

2. Mitigate the risk of noncompliance through improved usability of the literature

3. Provide accurate information with real-time updates as Accounting Standards Updates are released

4. Assist the FASB with the research and convergence efforts.

4. What are the “topics” used in the ASC?

Answer

According to Notice to Constituents V4.10_0 p.12. The Topics reside in Areas which can be categorized as follows:

1. The General Principles Area (Topic Codes 105–199) relates to broad conceptual matters.

2. The Presentation Area (Topic Codes 205–299) addresses how information is presented in the financial statements. It does not address other aspects of financial accounting such as recognition, measurement, or derecognition for individual financial statement ccounts.

3. The Assets, Liabilities, and Equity Areas (Topic Codes 305–399, 405–499, and 505–599, respectively) contain guidance about specific individual balance sheet accounts (e.g., cash, accounts payable, additional paid-in capital).

4. The Revenue and Expenses Areas (Topic Codes 605–699 and 705–799, respectively) contain guidance about specific individual income statement accounts (e.g., sales revenue, employee compensation).

5. The Broad Transactions Area (Topic Codes 805–899) contains guidance about multiple financial statement accounts and its Topics are generally transaction-oriented (e.g. business combinations, derivatives, nonmonetary transactions).

6. The Industry Area (Topic Codes 905–999) contains guidance about specific industries or types of activity.

5. Are Securities and Exchange Commission (SEC) references included in the ASC?

Answer

Yes, because according to Notice to Constituents V4.10_0 p.20.

SEC content is included for reference to improve the usefulness of the Codification for public companies.

The system attempts to embed relevant SEC content for reference in the same Topics and Subtopics as all other content.

II. Topic-Specific Research

You have been hired at an audit firm as a first year staff. This firm requires that all references to generally accepted accounting principles in the audit workpapers include the corresponding FASC citation (topic and subtopics). Below are three independent situations found at your clients that require research and documentation.

For each question, (1) provide the citation number (topic and subtopic) that addresses the question and (2) answer the question. Document this under the question, indenting your answer or otherwise indicating it is the answer (bold, underline, different color, etc.)

1. Change in Accounting Principles

As part of the year-end accounting process and review of operating policies, Cullen Co. is considering a change in the accounting for its equipment from the straight-line method to an accelerated method. Your supervisor wonders how the company will report this change in principle. He read in a newspaper article that the FASB has issued a standard in this area and has changed GAAP for a “change in estimate that is effected by a change in accounting principle.” (Thus, the accounting may be different from what he learned in intermediate accounting.) Your supervisor wants you to research the authoritative guidance on a change in accounting principle related to depreciation methods.

1. Identify the main authoritative guidance for accounting and reporting guidelines for a change in accounting principle related to depreciation methods?

Answer

The main authoritative for accounting and reporting guidelines for change in accounting principle relating to depreciation methods is under Topic Accounting changes and error correction 250-10

The Accounting Standards Codification (ASC) Topic 250, subtopic 10, which is Accounting Changes and Error Corrections.

​

2. Is a change of depreciation method a change in accounting principle or a change in estimate?

Answer

A change of depreciation method is a change in accounting period.

Under Topic 250-10 Accounting Changes and Error Corrections-Overall-20-Glossary- Change in Accounting Principle is also defined as:

A change in the method of applying an accounting principle also is considered a change in accounting principle.

(c) What are the conditions that justify a change in depreciation method, as contemplated by Cullen Co.?

Answer

When there is a change in estimate being affected by a change in accounting principle or change in entity, as stated in topic 250:

A change in accounting estimate that is inseparable from the effect of a related change in accounting principle. An example of a change in estimate effected by a change in principle is a change in the method of depreciation (as well as amortization, or depletion) for long-lived, nonfinancial assets.

(d) What guidance does the SEC provide concerning the impact that recently issued accounting standards will have on the financial statements in a future period?

According to topic 250 -10 Accounting Changes and Error Corrections The recently issued accounting standards will affect financial statements both directly and indirectly in the future as follow:

Directly the standards will have effect on Assets or liabilities. For example, an adjustment to an inventory balance to effect a change in inventory valuation method. Other examples of direct effects of change in accounting principe are deferred income tax assets or liabilities.

Indirectly the standards will have effects on any changes to current or future cash flows that result from making a change in accounting principle that is applied retrospectively. Like a change in a nondiscretionary profit sharing or royalty payment that is based on a reported amount such as revenue or net profit.

2. Warranty

Pleasant Co. manufactures specialty bike accessories. The company is known for product quality, and it has offered one of the best warranties in the industry on its higher-priced products—a lifetime guarantee, performing all the warranty work in its own shops. The warranty on these products is included in the sales price.

Due to the recent introduction and growth in sales of some products targeted to the low-price market, Pleasant is considering partnering with another company to do the warranty work on this line of products, if customers purchase a service contract at the time of original product purchase. Pleasant has called you to advise the company on the accounting for this new warranty arrangement.

(a) Identify the primary authoritative guidance that addresses the accounting for the type of separately priced warranty that Pleasant is considering.

Answer

The primary authoritative guidance that addresses the separate priced warranty that Pleasant Co is considering is under topic 605 Revenue Recognition – 20 Services – 25 Recognition

The Accounting Standards Codification (ASC) or Paragraphs 605-20-25-1 through 25-6 provide guidance on revenue recognition by sellers of extended warranty or product maintenance contracts.

(b) When are warranty contracts considered separately priced?

Answer

If a customer has the option to purchase a warranty separately, it represents a service warranty that should be accounted for as a separate performance obligation.

Under Accounting Standards Codification (ASC) topic or paragraph 605-20-25-1:

Separately priced contracts for extended warranty and product maintenance contracts provide warranty protection or product services and the contract price of these contracts is not included in the original price of the product covered by the contracts.

(c) What are incremental direct acquisition costs and how should they be treated?

Answer

The incremental direct acquisition costs are those identified with obtaining a specific contract which otherwise would not have been incurred. These costs are deferred and charged to expense account in their proposition to revenue.

Under ASC topic or paragraph 605-20-25-4

Costs that are directly related to the acquisition of a contract and that would have not been incurred but for the acquisition of that contract (incremental direct acquisition costs) shall be deferred and charged to expense in proportion to the revenue recognized.

3. Notes Payable

Your client has been operating for just two years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner and cash flows from operations. However, current expansion plans will require some borrowing to expand the company's production line.

As part of the expansion plan, the company will acquire some used equipment by signing a zero-interest-bearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, the client is unable to determine an established exchange price for recording the equipment (nor the interest rate to be used to record interest expense on the long-term note). They have asked you to conduct some accounting research on this topic.

(a) Identify the authoritative literature that provides guidance on the zero-interest-bearing note. Use some of the examples to explain how the standard applies in this setting.

Answer

845 Nonmonetary Transactions - 10 Overall – 30 Initial Measurement

Under ASC topic or paragraph 845-10-30-8

Fair value should be regarded as not determinable within reasonable limits if major uncertainties exist about the realizability of the value that would be assigned to an asset received in a nonmonetary transaction accounted for at fair value. An exchange involving parties with essentially opposing interests is not considered a prerequisite to determining a fair value of a nonmonetary asset transferred; nor does an exchange ensure that a fair value for accounting purposes can be ascertained within reasonable limits. If neither the fair value of a nonmonetary asset transferred nor the fair value of a nonmonetary asset received in exchange is determinable within reasonable limits, the recorded amount of the nonmonetary asset transferred from the entity may be the only available measure of the transaction.

Under ASC topic or paragraph 310-10-30-6

Paragraph835-30-25-11explains that, in the absence of established exchange prices for the related property, goods, or services or evidence of the fair value of the note (as described in paragraph (835-30-25-2), the present value of a note that stipulates either no interest or a rate of interest that is clearly unreasonable shall be determined by discounting all future payments on the notes using an imputed rate of interest as described in Subtopic 835-30.Paragraph 835-30-25-11 explains that this determination shall be made at the time the note is acquired; any subsequent changes in prevailing interest rates shall be ignored.

(b) How is present value determined when an established exchange price is not determinable and a note has no ready market? What is the resulting interest rate often called?

Answer

Under ASC topic or paragraph 835-30-25

If an established exchange price is not determinable and if the note has no ready market, the problem of determining present value is more difficult. To estimate the present value of a note under such circumstances, an applicable interest rate is approximated that may differ from the stated or coupon rate. This process of approximation is called imputation, and the resulting rate is called an imputed interest rate.Nonrecognition of an apparently small difference between the stated rate of interest and the applicable current rate may have a material effect on the financial statements if the face amount of the note is large and its term is relatively long.

Under ASC topic or paragraph 835-30-20

Imputed Interest Rate

The interest rate that results from a process of approximation (or imputation) required when the present value of a note must be estimated because an established exchange price is not determinable and the note has no ready market.

Therefore, Present value is determined by approximating an applicable interest rate that may differ from the stated or coupon rate. And the resulting interest rate is often called imputed Interest rate

(c) Where should a discount or premium appear in the financial statements? What about issue costs?

Answer

Under ASC topic or paragraph 835 Interest - 30 Imputation of Interest - 45 Other Presentation Matters

45-1A

The discount or premium resulting from the determination of present value in cash or noncash transactions is not an asset or liability separable from the note that gives rise to it. Therefore, the discount or premium shall be reported in the balance sheet as a direct deduction from or addition to the face amount of the note. Similarly, debt issuance costs related to a note shall be reported in the balance sheet as a direct deduction from the face amount of that note. The discount, premium, or debt issuance costs shall not be classified as a deferred charge or deferred credit.

Accounting Standards Update No. 2015-03—Interest—Imputation of Interest (Subtopic 835-30)

To simplify presentation of debt issuance costs, the amendments in this Update would require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums.

Therefore, They all appear under the balance sheet. That is discount premium and issue costs.

Analyze the economics of the market for large commercial jet aircraft. What are the implications of these economics for the strategy of Boeing?

 Boeing case analysis

Mini-case response – mini-case #

Introduction

The case is about Boeing, a market leader famous around the world for researching, designing, and developing jet aircraft for commercial and military buyers (Levine, 2015). The analysis of this case will focus on the innovative strategies Boeing uses to conquer the market (like the innovation of Dash 80, Jumbo jet 747, commercial jet 787, A300, and many others), together with the challenges faced especially during difficult economic times. The analysis will end with recommendations for improving the reputation and financial position in the future.

What is Boeing and what are the company's mission and goals

According to Dutt (2021), Boeing is a famous aircraft manufacturing company with the following mission statement:

“To connect, protect, explore, and inspire the world through aerospace innovation.”

Therefore, according to the case, Boeing is an innovative company that has inspired millions by creating first -in -the market production methods and systems for large jet aircraft like the Boeing 747.

Critical incidents in a company’s growth and determining why they are important

• Boeing is usually the first in the market to produce large jet aircraft such as the Dash 80 and 747. These innovative strategy has inspired many and led to the generation of revenues.

• Have a full range of aircraft from small to large. Making the company a market leader in the industry.

• Forefront in areas like operation efficiency that lead to growth in traffic volumes by reducing operation costs like labor. This is important when competing with others in the industry.

• The industry faces challenges such as complex production processes. Therefore, delays are common due to slow production and difficulties in managing outsourcing from different countries.

• Safety and security issues have brought concerns and slowed down sales for large aircrafts

Its internal strengths and weaknesses

Boeing’s strengths lie in its innovation, partnerships, supply chain, variety of products, and market share (Christopher, 2016). The company is regarded as innovative because it was the first to come up with lightweight carbon composites and fuel-efficient innovations in the industry. It acquires and partners with other manufacturers all over the world and is a strong competitor in all markets. Boeing’s weaknesses can be identified with its issues with designs, poor quality of airplanes, and supply issues. The company has encountered numerous production issues and delays. Even after launches, there have been defects and requirements for redesigns (especially with the 737) The suppliers have bargaining power over Boeing because the company relies on them to produce quality supplies and to finish its productions. Boeing’s value has depended on quality supplies and since it has no control over the suppliers the value chain has been poor over the years.

Opportunities and threats

Boeing has lots of opportunities in the industry like to produce environmental-friendly planes (lower noise, harmful emissions, and carbon emissions). It has the experience and capabilities to innovate groundbreaking aircraft and generate more revenue. Another opportunity is the airline industry is growing very fast due to growing technologies that can be used to innovate. Threats being faced by Boeing include trade wars, bans, security issues in terms of the terrorist, pandemic, and hackers. which have contributed to reduced in travelers. High costs involved in the production of aircraft is another threat, together with competition from Airbus ( A320) and other entrants with low-cost airlines.

Company Strategy

Boeing has always had a strategy of innovating first in the market aircraft and to stay ahead of competitors using airplanes of various forms, sizes, and prices. For example, the 737 aircraft varies in size (110 to 215 seats), range (2,000 to over 5,000 miles), and prices ( 737-600, to $282 million). The company outsources its supplies across the world and can acquire other companies to improve its production process, like when it acquired McDonnell Douglas for its strong military business

Boeing differentiates itself by redesigning its commercial jet aircraft to sell more to the buyers and by innovating efficient planes to get more market share with its wide-bodied 787 that became the fuel-efficient largest jetliner in the world. Boeing also tried to cut prices in an aggressive move to gain share from Airbus but this lead to doubling the production schedule between 1996 and 1997.

investment strategy

Boeing uses the cash flow from sales revenue gained from its innovations to fund investments in more versions of the same aircraft to sell to more customers and to replace old versions. For example, the 757 was designed as a replacement for the aging 727 and this goes on and on.

Are its functional competencies are sufficient for achieving SWOT strategy

In this case, it can be seen that Boeing has suffered great losses caused by delays in the production and supply chain. Lack of control of the suppliers and poor quality components for producing the planes led to the need to seek better production systems which in turn led to sending moonshine teams to Japan’s leading manufacturing companies like Toyota to train in lean production techniques being used there to assemble automobiles and try to use it in the aircraft manufacture. This led to a reduction in production costs.

Boeing's current strategies in globalization and innovation and suggestions for improving strategies

For Boeing, The preferred mode of entry into new markets has been merging, acquisition and innovation. For instance in 1996 Boeing merged with its long-term rival McDonnell Douglas to strengthen its presence in the defense and space side of the aerospace business areas, where McDonnell Douglas was traditionally strong. Boeing purchased a Vought Industries Aircraft plant to exert more control over the production process and to fix the supply chain issues. through innovation to switch to just-in-time inventory systems it now saves on space.

Company's structure and control system and if they match or don't match the company's strategy

The company is made up of a complicated supply chain where the items needed to complete the production of an airplane are too many to be produced by one manufacturer, therefore Boeing outsources these parts from different manufacturers located in different countries. It also tries to maintain good relationships with them but there are times when supplies do not meet the quality standards set by Boeing and this has led to problems in the supply chain because of the complexity and lack of control of these suppliers. In turn, Boeing has suffered great losses due to rework, redesigns, and production holdups.

Ethical issues and social responsibility strategy - and my recommendations for changes to the strategy

In the late 1990s and early 2000s, Boeing had struggled with a number of ethics scandals and production problems that had also tarnished the reputation of the company. There were employee scandals and airplane crashes. My recommendation is Boeing should not rush to produce aircraft that are poorly designed not fully tested.

Financial position and my recommendation

Despite all the ethical issues, scandals and losses, Boeing has remained a financial powerhouse in the aircraft industry. In 2001, for example, the commercial aircraft group accounted for $35 billion in revenues out of a corporate total of $58 billion, or 60%. In 2005, with the delivery cycle at a low point (but the order cycle rebounding), the commercial airplane group accounted for $22.7 billion out of a total of $54.8 billion, or 41%. The balance of revenue was made up of a wide range of military aircraft,

Recommendations are done by answering the questions below:

1. Analyze the economics of the market for large commercial jet aircraft. What are the implications of these economics for the strategy of Boeing?

The large commercial get aircraft industry is generally taken to mean the market for jet aircraft mainly manufactured by the two giants - Airbus and Boeing. They have more seating capacity, use more fuel, and are much more expensive compared to those manufactured by regional jet aircraft, such as Embraer of Brazil and Bombardier of Canada.

The economies are characterized by the following factors:

• The research and development costs associated with manufacturing a new airliner are very high.

• High start-up costs and long periods to break-even point that a company has to wait for and to capture market share.

• There are significant learning periods in the large aircraft production industry and the need to be more efficient, reducing assembly time, boosting productivity, and lower costs.

• At several times in the history of the industry, problems with the supply of critical components have held up production schedules and resulted in losses because of the complexities of manufacturing an aircraft that has millions of parts. Over the last two decades, however, there has been a trend to contract out production of components and even entire subassemblies to independent suppliers

• All-new aircraft are now designed digitally and assembled virtually before a single component is produced.

Therefore, Boeing has to decide whether to continue redesigning aircraft in this category or wait for future opportunities to first come.

2. What advantages do the two incumbents, Boeing and Airbus, enjoy over potential rivals (most notably Embraer, Bombardier, and the Commercial Aircraft Corporation of China)?

Economies of Scale: Boeing and Airbus benefit from large economies of scale because they produce various large aircraft with lower resources which new entrants cannot manage.

Learning period. The learning cycle of managing and producing these large aircraft is long therefore

the incumbents have a tremendous cost advantage over potential rivals when it comes to knowledge.

Competences. When it comes to experience, knowledge, and skills associated with designing and manufacturing, Boeing and Airbus have an upper hand.

Customer Loyalty. customers are more likely to prefer the products of Airbus or Boeing than those of new entrants.

3. What does this mean for Entry Barriers?

This means that the entry barriers to the large commercial jet aircraft are high for new entrants, therefore the companies like Embraer, Bombardier, and the Commercial Aircraft Corporation of China would rather stick to the production of small planes.

4. Does this mean that Boeing and Airbus are secure from new entry? Which segment of the market are potential new entrants most likely to focus on?

The answer is no because they are new entrants like Southwest Airlines, the Ryanair a 200+ plane order that could go as high as 400, the Embraer and Bombardiers with their regional jets, and the Chinese companies building 170- to 190-seaters.

5. What are buyers looking for from Boeing and Airbus? How much power do they have? What are the strategic implications for Boeing?

When it comes to Boeing and Airbus, their buyers are looking for fuel-efficient, safe, reliable, and inexpensive commercial aircraft that suit their business environment and economy.

The buyers have a lot of bargaining power because both companies (Airbus and Boeing) can not stay in the market without the buyers while buyers can still place orders from companies outside Boeing and Airbus. The buyers also have the ability to make these two companies compete in price wars to get better bargains.

The strategic implication for Boeing are:

Remain an innovative or first in the market inventor of superior designs, safe and efficient airplanes with the latest technology to stand out from the competitors and bargain in their favor.

To be profitable by Continuing to lower manufacturing costs through future innovations like the lean production systems as the case state that The key to the success of the budget airlines is a strategy that gives them a 30 to 50% cost advantage and to create variations of planes produced to suit buyers needs.

Produce smaller aircraft for nonstop flights between cities with no frills on the flights; no in-flight food or complimentary drinks therefore low prices for seats.

charging higher prices than the discount airlines, particularly for business travelers, who pay more to book late and to fly business or first class.

Conclusion

The case covers the history of Boeing since its inception, it has the data and information regarding the company and its rivalry with Airbus. However, it does not cover other pressing issues that Boeing faced like failures and crushes of aircraft, losses of profits due to buyers refusing to order for aircraft, and security issues caused by poor management of the supply chain, handling of suppliers, and incompetence of the workforce. Despite these shortfalls, the case still has valuable insights into the positives achievements of one of the most successful aircraft manufacturers in history.

References

• case 11 Boeing Commercial aircraft 02277_Case11_rev02.indd 39

• Levine, D. A. (2015). The Dragon Takes Flight. Brill.

• Dutt, R. (2021). Radical Product Thinking. Macmillan Publishers.

• Christopher, M. (2016). Logistics & Supply Chain Management. Pearson Education Limited.

• Naimzade, Kamal. (2018). Case study: The Boeing company strategic analysis. 10.13140/RG.2.2.12570.49602. Term project for Strategic management class: A case study The Boeing company, strategic analysis.