Chapter 1, Introductory Cases Dublin Small Animal Clinic, Inc. 1 page; introductory
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- Revised revenue recognition rules for multiple-element sales
- Business combination Hostile takeover
14 pages; advancedIncreased retained interest needed to securitize receivablesDebt to equity ratiosValuationThis case is an extension of Harley-Davidson (A). It shows Harley-Davidson’s financial statements through the end of 2009, when Harley-Davidson reported its first loss in at least 15 years, and when Harley-Davidson could no longer issue additional debt. The case also shows the details from Harley-Davidson’s last securitization in early 2008 and from Harley-Davidson’s first new securitization in late 2009. In the 2008 securitization, Harley’s securitization trust issued notes equal to about 96.5% of the combined collateral deposited into the trust (motorcycle receivables plus cash). In the 2009 securitization, the securitization trust issued notes equal to about 70% of the combined collateral deposited into the trust. Although that will let Harley-Davidson return to nearly its pre-recession operations, it will either need to stop redeeming stock, or else maintain some level of debt to finance its receivables. The case can be used with Harley-Davidson (A) to discuss how the availability of financing influences Harley-Davidson’s operations and its market value.
Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA Financial accounting Financial reporting Financial statement analysis Valuation
Use with:Brief Excel Case: Securitization (Chapter 8) 34.Apple, Inc.: Retrospective Adoption, Revenue Recognition Rules 13 pages; intermediateRevised revenue recognition rules for multiple-element salesFinancial restatementsRetrospective adoptionValuationAICPA Statement of Position 97-2 from 1997 required that if a firm made a multiple element sale that included software, the revenue must be pro-rated over the life of the contract using the subscription model unless the firm had vendor specific evidence as to the value of each element comprising the sale. When Apple sells an iPhone, it offers free software updates for about two years. Because Apple does not sell the software separately, it has no evidence as to the fair value of the software. As a result, Apple recognized revenue from iPhone sales equally over a 24 month period. If it sold an iPhone for $480, its initial journal entry would be a debit to cash for $480, a credit to revenue for $20, and a credit to unearned revenue for $460. Because the cost of software is trivial relative to the value of the hardware, nearly everyone ignored Apple’s reported net income. Instead, they treated the sale as if all revenue should have been recognized on the sale date. As iPhone sales grew, Apple had nearly $12 billion of deferred revenue at year end September 26, 2009. In October 2009, possibly in response to Apple’s deferred revenue, the FASB issued two Accounting Software Updates that substantially changed reporting rules for sales with multiple elements that include software. The primary change was that firms no longer needed specific evidence for the fair value of each element in a sale that included software; management judgment would be sufficient. This case covers Apple’s January 25, 2010, retrospective restatement of its 2009 financial statements because of changes to those rules. The restatements increased Apple’s 2009 pre-tax net income by $4.1 billion and its 2008 pretax net income by $2.1 billion. The revised financial statements had no detectable effect on Apple’s share price because investors essentially ignored Apple’s use of SOP 97-2. Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA Financial accounting Financial reporting Financial statement analysis Valuation
22 pages; advancedBusiness combinationHostile takeoverCapital structure/multiple classes of equityCorporate governanceThis case covers Arby’s acquisition of Wendy’s. Arby’s was far smaller than Wendy’s and far less profitable. The case provides information on the acquisition process, on capital structure, and on corporate governance. Arby’s was controlled by two individuals who owned a majority of the firm’s class A common stock, which had one vote per share. The public owned class B common stock, which had one-tenth of a vote per share. Arby’s two top executives were paid in excess of $15 million annually even though the firm was operating at about break even. Arby’s and an investment firm run by the individuals who controlled Arby’s purchased 9.8% of the voting shares in Wendy’s and then accused Wendy’s executives of mismanagement. They also convinced Wendy’s management to spin off two major divisions, Tim Horton’s and Baja Fresh. In late 2007, Arby’s announced it would acquire Wendy’s. Arby’s management had successfully used similar tactics to gain control of and profit from several other firms. It also tried similar tactics at the much larger Heinz, but without success. The case includes a letter from Heinz to the SEC detailing alleged wrongdoings by Arby’s management and the out-of-court settlements they had agreed to. The case can be used to discuss capital structure, corporate governance, and the acquisition process. The teaching note discusses the actual acquisition of Wendy’s by Arby’s. The acquisition was for stock, the combined firm had only one class of stock, and Wendy’s shareholders received a majority of the outstanding voting stock in the new firm (Wendy’s Arby’s Group Inc.). This leads to a discussion of the difficulty of ousting existing directors, because they control the proxy process. Outsiders who wish to contest a directors’ election must do so at their own expense. As a result, Arby’s Directors continue to run the combined firm. Since 2007, the firm’s stock declined from the $15-$20 range to about $5 per share. In contrast, most major competitors’ stock price remained steady or increased during that same period. Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA Financial accounting Financial reporting Financial statement analysis Valuation
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