APPLIED RESEARCH EXERCISES – ACCOUNTING ISSUES MEMO

Your company, Acme Manufacturing Company, is considering entering into a contract with the Chicago Cubs for a suite license at Wrigley Field.

The Chicago Cubs offer multiyear luxury suite licenses to customers including 3-, 5-, and 10-year licenses. Customers who sign these license agreements have the right to use a specified suite in the stadium (say, suite no, 45) for the dates specified in the license agreement. Alternatively, customers with a more limited interest or budget can sign up for a partial season (a 21- or 40- game plan) where the customer can specify which games it wishes to view from the suite. Payment for the suite license is due in full annually by the first day of the baseball season. While the customer is enjoying the suite, a third party concessionaire (similar to Presto’s role in our class assignment discussion) will provide premium food and beverage service to guests in the suite to be billed separately to suite license holders on a monthly basis.

Your manager has asked you to evaluate two scenarios that Acme is considering:

A 10-year luxury suite license

A license for a 40-game plan for next season.

While including cites and guidance from the Codification in your memo are important, a key part of the memo includes your analysis in your own words- e.g., reasons for citing a particular Codification section, your interpretation of how the guidance applies to the two lease scenarios, any assumptions you may need to make about the license contract terms and your conclusion on the accounting treatment. Your conclusion should include a summary of the key factors you considered in drawing your conclusions.

Coursenotes #14
Effective Documentation and
Communication
Professor Sid Balachandran
Discussion Questions
1. Why is documentation considered one of the dual
objectives of applied accounting research?
2. What are the common ways for us to communicate our
research findings?
3. How do we draft effective emails and issues memoranda?
4. What are the key sections and content items in an
accounting issues research memo?
5. How should we cite the Codification when presenting your
research?
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Objectives of Performing Accounting Research
Recall, the objectives of accounting
research are generally twofold:
o To account for transactions or items in a
manner that is appropriate and supportable
based on authoritative guidance, and
o To create documentation describing the
research performed and supporting the
conclusion reached.
 Audit trail, historical reference, support for position if
questioned
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Communicating Accounting Research
 Two common methods exist for communicating accounting
research:
o Informal: Emails
o Formal: Accounting issues memoranda
 Email is often useful for limited-scope research questions.
o This is often the case when you are not the “owner” of the issue but
are asked to assist with aspects of the research.
 By contrast, a memo is generally necessary to document
the accounting for a transaction that is complex,
judgmental, or highly material.
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Writing an Accounting Issues Memorandum
 Let’s now turn to accounting issues memos. An
example of what we’ll call the standard memo
format appears on the next slide.
o Of course, different entities may use variations of this memo
format. For example, some companies prefer the Conclusion
section to be located earlier in the memo.
o Therefore, be prepared to adapt this memo format as
necessary.
 Notice the headers in the following slide (background,
issues, analysis…).
o Each header should be presented in bold in your memos.
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Writing an Accounting Issues Memorandum
Standard
memo
format
***See
Chapter 4
Appendix
for detailed
example of
a Sample
Accounting
Research
Memo***
Background/Facts
State the relevant facts surrounding the issue.
It may be helpful to draw a picture.
Question/Issue(s)
List the researchable questions you are trying to answer.
Analysis
Include all relevant authoritative guidance, along with analysis in your
own words of how the guidance applies to your fact pattern.
Conclusion
State your conclusion based on your research, highlighting key factors
considered. Provide more detail for highly judgmental issues.
Financial Statement and Disclosure Impacts
Summarize financial statement accounts affected and any disclosures
required. Include journal entries when possible.
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Issues Memos: Background
 The Background section of an issues memo should
include all relevant information necessary for
understanding the transaction and its accounting.
 This section should be concise, but not too sparse.
o Aim to provide enough detail about the issue that a party
uninvolved with the matter could pick up the memo—even years
later—and understand the issue.
 A picture of a transaction, included within the
background section, can enhance a reader’s
understanding of the relationships and parties involved in
the issue.
o Pictures can be fairly easy to create using the “shapes” feature
in Word.
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Illustrate Relationship in a Transaction
Using a Picture
Draw a sample picture illustrating the following arrangement:
 Two unrelated entities are entering into a joint venture (JV). Entity A
contributes $1,000 to the JV for 50% of the equity ownership, and
Entity B makes a $2,000 loan to the JV for 50% of the ownership.
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Issues Memos: Question/Issue
 Immediately after the background section, list each researchable
question that will be addressed in your memo.
 Phrase each issue in the form of a question.
For example, Entity A (from page 8) might list the followingissues
related to its joint venture with Entity B:
Issues:
1. Is Entity A required to consolidate the joint venture?
2. If consolidation is not required, how should Entity A account for the joint
venture?
3. Does Entity A have a variable interest in the joint venture?
4. Does the joint venture qualify for the business scope exception in par. 1517(d) of ASC 810-10 (Consolidations)?
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Issues Memos: Analysis
 Next, the analysis section of the memo addresses
each issue identified, one at a time.
 This section should include guidance excerpts,
plus the researcher’s own commentary about how
the guidance relates to this particular issue.
 In this section, discuss all potential alternatives,
weighing their relative merits.
 This is usually the most substantive section of the
memo
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Analysis Section: “Guidance Sandwiches”
 Commentary – in your own words – should
generally precede and follow all guidance
excerpts.
 Our book refers to this as a “guidance sandwich.”
3 parts:
-Your words: Introduce the quote – what’s the
objective of using this guidance?
-“Direct quote” from guidance (cite its source)
-Your words: Relate the guidance to your situation.
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Guidance sandwich exercise
 Locate the Codification guidance describing how
inventory should initially be measured and present the
excerpt in a guidance sandwich.
 Assume you are answering the question:
o Should inventory be measured initially at its market
value or at cost?
Now you try….
• Introduce the quote
• Direct quote
• Relate the guidance to the question
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Guidance sandwich exercise
 Introduce the quote:
 Direct quote:
 Relate the guidance to the question:
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Issues Memos: Conclusion
 The analysis of each issue should be followed by a conclusion, in the
researcher’s own words.
o The conclusion should emphasize points from the analysis that support the
conclusion.
o The Conclusion should not introduce new guidance excerpts or new arguments.
 Again, when documenting your conclusion, summarize the most compelling
points from your analysis that led you to this conclusion. It is not sufficient to
say:
o In conclusion, these transactions will be accounted for on a net basis.
 Rather, the following text should be added:
o In conclusion, because of factors x, y, and z, these transactions will be accounted
for on a net basis.
 How many Conclusion sections?
o A memo might include one single conclusion, or multiple, depending on the
complexity of each issue analyzed.
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Issues Memos:
Financial Statement/Disclosure Impacts
 When applicable, conclude your memo with a
summary of financial statement and
disclosure impacts.
o Journal entries can be useful in describing anticipated
financial statement impacts.
o A sample of a footnote disclosure, where required, is
helpful to include
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Referencing the Codification
Initial Reference to the Codification in a Memo
 In your first reference to the Codification in a memo, give its full title
(“FASB Accounting Standards Codification”).
 Include the numerical reference for the topic you are citing, and a
topic description (in parenthesis).
o Per FASB Accounting Standards Codification (ASC) topic 840-10-20-1
(Leases), . . .
Subsequent References
 After your initial reference to the Codification, it is acceptable to refer
to the topic using the abbreviation “ASC,” and omitting the
parenthetical topic name.
o Per ASC 840-10-20-2: . . .
In all references to the Codification, go down to the paragraph level
of detail.
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Referencing the Codification
When citing guidance, don’t get creative with sentence structure. The
following strong references will give your memo a professional tone.
o Strong references:
 According to ASC xxx, “Quote”
 ASC xxx states or ASC xxx requires: “Quote”
 Per ASC xxx: “Quote”
 ASC xxx provides the following guidance: “Quote”
 The rate of return shall be based on: “Quote” (ASC xxx)
 The rate of return shall be based on: “Quote” fn 1
(at end of page) Footnote 1: ASC xxx
o Weak references:
 ASC xxx asks readers to . . . “Quote”
 ASC xxx believes . . .”Quote”
 The Codification writes . . .”Quote” (ASC xxx)
 The FASB says . . . “Quote” (ASC xxx)
 I found the following guidance . . . “Quote” (ASC xxx)
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Referencing the Codification:
Use of Quotation Marks
When referencing the Codification:
 Use actual excerpts (rather than your own summary of guidance) when
possible.
 Guidance copied from the Codification must be:
o Enclosed in double quotation marks, and
o The source must be cited, down to the paragraph-level.
To improve the professionalism/readability of your memo:
 If you are including a long excerpt from the Codification (roughly 3+ lines),
indent the guidance. In such cases, quotation marks are not needed.
Example: ASC 715-30-35-47 requires that companies consider future
expected returns on investments in selecting an EROA assumption:
Indent
The expected long-term rate of return on plan assets shall reflect the average rate of
earnings expected on the funds invested or to be invested to provide for the benefits
included in the projected benefit obligation….
Therefore, Calpers’ asset return assumption is appropriate if fund
management believes this rate is achievable in the future.
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Referencing the Codification:
Brackets and Ellipses
 Use brackets [ ] if you must insert your own
explanations into an excerpted quote.
 Use ellipses (…) if you skip over some text in a
quote or don’t quote the full sentence.
o This is sometimes helpful if you only want to quote a portion
of a long paragraph.
o Caution: Check and re-check that any omitted text is not
essential to understanding the excerpted passage.
Example, ASC 840-10 Para. 15-6.
“…The right to control the use of the underlying [PP&E] is conveyed if any of
the following conditions is met …” [Emphasis added]
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Citing Codification Content
 Neither FASB nor SEC standards require reporting
entities to cite specific provisions of U.S. GAAP in the
notes that accompany entities’ financial statements.
o Furthermore, the FASB and SEC have discouraged financial
statement preparers from doing so.
 However, if you choose to cite specific provisions of U.S.
GAAP in financial statement notes, as is common in
practice, you must cite those provisions as found in the
Codification.
o You may use any citation style and you may cite any level of the
Codification hierarchy that you consider appropriate. There is no
one “right” way.
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Citing Codification Content
 A proper Codification citation specifies the exact location
of the cited content within the Codification’s hierarchical
structure.
 To cite specific Codification content correctly and
completely, you must first identify where the content is
located in the Codification’s hierarchy. You then
construct a citation from data elements that describe a
path through the various levels of the hierarchy to the
content’s location.
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Citing Content at or above the Section Level
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Citing Content within a Section
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Citation Styles
 The elements of Codification citations can be presented in different
ways. In other words, there are different citation styles that you can
use as you write accounting policies, financial-statement note
disclosures, presentations for clients, articles for publication, and so
forth.
o The citation refers specifically to the Codification, not some other source
of guidance.
 Citation styles
o Number-based citation styles
o Title-based citation styles
o Mixed citation styles
o Breadcrumb citation styles
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Number-Based Citation
 Examples consistent with FASB suggestion for referencing
Codification content from outside the Codification:
a)
b)
c)
d)
e)
Topics—FASB ASC Topic 840 [, Leases]
Subtopics—FASB ASC Subtopic 840-10 [, Leases – Overall]
Sections—FASB ASC Section 840-10-25 [, Leases – Overall –
Recognition]
Paragraph—FASB ASC paragraph 840-10-25-1
Subparagraph—FASB ASC subparagraph 840-10-25-1(b).
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Title-Based Citation Styles
 Title-based citations can be constructed in different ways.
o In every case, a title-based citation must unambiguously describe
a path to the cited content through the various levels of the
content hierarchy.
o Title-based paths are described backwards starting with the
most-detailed level and ending with the least-detailed level.
 The following examples illustrate title-based citations:
a) The Broad Transactions Area of the FASB ASC
b) The Leases Topic of the FASB ASC
c) The Overall Subtopic of the Leases Topic of the FASB ASC (if a Subtopic is
shared between two Topics, the Topic specified in the Subtopic’s citation should
be the dominant Topic)
d) The Recognition Section of the Overall Subtopic of the Leases Topic of the
FASB ASC
e) The General Subsection of the Recognition Section of the Overall Subtopic of
the Leases Topic of the FASB ASC.
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Title-Based Citation Styles
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Mixed Citation Styles
 Some acceptable citation styles are neither purely
number-based nor purely title-based. Citation styles that
mix numbers and titles are common in practice, for
example, “Section 25, Recognition, of Subtopic 10,
Overall, of Topic 840, Leases, of the FASB ASC.”
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Breadcrumb Citation Styles
 Breadcrumb citation styles may be purely title-based, purely number-based,
or based on a mix of titles and numbers. In every case, a breadcrumb citation
establishes a least-to-most-detailed path to the cited content. The “>” symbol
is often used to separate the steps of the path.
 The following examples illustrate several variations of the breadcrumb citation
style for a specific Section:
a)
b)
c)
d)
FASB ASC Leases > Overall > Recognition
The Leases > Overall > Recognition Section of the FASB ASC
FASB ASC Topic 840, Leases > Subtopic 10, Overall > Section 25, Recognition
Topic 840, Leases > Subtopic 10, Overall > Section 25, Recognition, of the FASB ASC.
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Navigate to Cited Content
 When you are working in the System, there are two
techniques that you can use to navigate to cited
Codification content.
o The first technique is to systematically browse through the Area,
Topic, Subtopic, and so forth as indicated by the citation. It can
be used with any citation style.
o The second technique is much faster than systematic browsing,
but it can be used only with numerical citations. You can use the
System’s “GO TO” feature to navigate directly to the cited Topic,
Subtopic, Section, or paragraph. The “GO TO” feature is found
near the upper left-hand corner of every page in the System.
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Navigate to Cited Content
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Walk-through a Sample Memo
 Refer to the Chapter 4 Appendix. In this:
o Circle an example of guidance excerpts that are indented.
o What does the “Re” line communicate?
o Where in the memo do you see a picture of the transaction?
o Circle any bold memo headers (Facts, Issues, etc.)
o What is the role of italicized subheaders?
o Are the issues phrased as questions?
o Are guidance excerpts ever split between the introduction and
paragraph? (Such as 715-10, and then par. 25-1)
o Put a star next to a guidance sandwich. Underline the words that
introduce the quote. Then underline the words that tie the excerpt
to this fact pattern.
o Underline words in the conclusion that are used to explain the
rationale for the conclusion selected.
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Upcoming classes
Have A Great Spring Break!
• When we return, we will learn
about how the Scope Section of the
guidance works
• We will then examine other
important parts of the codification
• We will also understand how to use
“Non Authoritative Guidance”
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