Review of Current Accounting Issues
New York Times: Management’s Discussion and Analysis of Financial Condition and results of operations (form 10-Q)
The New York Times is one of the global media organizations for newspapers printing, investments, and digital production. The New York Times reports varied news concerning business, politics, health and many more sectors as recorded on its website. Our primary concern is the business news explicitly touching on accounting as a topic. The company generates most of its revenues from advertising and subscriptions. This extends to other services such as building rental income, digital archive licensing, live events, retail commerce, and affiliate referrals. These financial sources are vital in our subsequent analysis of the accounting management if this company as reported on the 5th of April this year. The company analysis of financial information presents accounting information based on the Generally Accepted Accounting Principles (GAAP) (Warren & Jones, 2018). The information presented in the article does not include amortization, depreciation, severance, non-operating retirement costs, postretirement benefit costs and single employer pensions. The article offers the non-GAAP financial measures for purposes of comparison for the year 2017 including the first and second quarters (Schipper, 2003). This takes care of the revised definitions of Non-GAAP financial measures.
The Financial Highlights of New York Times
During the 2018 first quarter, the company reported diluted earnings per share from those operations that were continuing as $ 0.13. This figure is higher compared to that of the first quarter recorded in the previous year. The 2017 first quarter stood at $0.08. When these diluted earnings per share are excluded from the continuing operations, non-operating retirement costs, and special items. This comes at the cost of about $ 0.17 and $0.10 in 2018 and 2017 respectively. The New York Times had an operating profit of $ 34.1 million in the year 2018 and first quarter while in the first quarter ofn2017, it had a profit of $27.8 million. This is again an increase in the amount of profit by $6.3 million. The company advocates the increase to the high digital subscription revenues, high selling, and lower advertising costs. The general and administrative costs also went down from the first quarter in 2017 to the first quarter in 2018 (Schipper, 2003). This is similar to the adjusted profits on the GAAP measure, which were calculated at $55.5 million for the first quarter in 2017 and $50.2 million for the first quarter in the year 2018.
The amount of revenue also increased by 3.8% to $413.9 million as in the first quarter of 2018 from the previous $398.8 million in 2017. The increase was also driven by the increase in digital subscription revenue and reduced costs in advertising and print subscription. Digital subscription revenues include the news products and crossword plus cooking products. The New York Times made a total subscription of 2,783,000 by the end of the first quarter of 2018. This was an increase of 25% from what was recorded back in 2017. New product subscriptions hit 2,330,000 by the end of 2018 first quarter. Also, other product subscriptions added up to 453,000 indicating a 60.1% increase from last year’s figure.
The total amount of advertising revenues showed a positive outcome as they decreased by 3.4% in the first quarter of this year (Schipper, 2003). This represents a 6.0% and 1.8% decrease in digital and print advertising revenues. The factors behind the shift in digital advertising and revenue decrease are attributed to the fact that website advertising was continually decreasing while paving the way for mobile marketing using smartphones (Warren & Jones, 2018). This was also doubled by the use of strategic commercial partnerships and large individual campaigns that were launched. Similarly, the decrease in print media advertising revenues was due to the declines in display advertising and classified forms of advertising.
Analysing the operating cost of the firm, there was an increase in operating costs during the first quarter of 2018 to $378 million. In 2017, the figure was $368.6 million. There were some costs that lead to this figure for example compensation costs mainly offset by low print production and distribution. Based on the adjusted operating costs of a non-GAAP measure, operating costs increased in the first quarter of 2018 to $358.5 million from the previous $348.6 million in 2017. This is normally offset by the costs incurred before depreciation, severance, amortization, and multiemployer pension plan withdrawal costs (Schipper, 2003).
Advertising Revenues
Advertising revenues at the New York Times are derived from proceeds from the sale of advertising products web services, print and mobile platform services. The amount of revenue depends on the time, volume and mix of the advertisements. Promotion products, brands, ads, videos, banners generate display advertising revenue (Scott, 2015). Display advertising media is generally the major source of advertising revenue in most media houses. Industries such as real estate, automotive and help wanted the form of advertisements are key areas of revenue generation in the form of advertising revenue. Other forms of revenue include classified advertising revenue which is majorly included in major line ads. Newspaper delivery in the form of branded bags, reprinted advertising and content studio also form a major source of revenue collection for the company.
Production Costs
The items that makeup production cost includes labor costs, cost of raw materials, cost of machinery and expenses incurred in the purchase of equipment. According to the New York Times first quarter of 2018, production costs increased from 2017 due to increases in wage and benefits totaling to about $1 million. Other expenses also contributed to about $0.3 million to the production cost. Such expenses include the decline in raw materials of about $0.2 million (Scott, 2015). Selling and general costs of administration increased during the first quarter of 2018 by $9.5 million. Compensation costs and miscellaneous costs were higher at $8.4 million and 4.1 million respectively. This was largely accelerated by the lower print production and distribution costs which amounted to $2.4 million.
Depreciation and Amortization cots decreased during the first quarter of 2018 by $1.1 million. This is because assets were being fully depreciated at this point (Schipper, 2003). Non-operating items, joint ventures, interest expenses, and income tax are other expenses that lead to the high costs of production in the company. Management conducts the regular review of the non-GAAP financial measures because they are used in the Assessment and management of the company’s operations. They are a source of vital information to investors because they contain information about losses per share concerning the operations that are continuing, profits and operating costs (Warren & Jones, 2018).
Non-operating retirement costs are often tied to financial market performance and changes in market interest rates or investment performance. They do not include any service costs that are a representation of the operating costs; these are on-going costs such as pension and medical benefits to employees that are retired (Scott, 2015). For purposes of increased transparency, the New York Times would consider non-retirement costs to be outside the performance of ongoing core business operations. This will also give a better understanding of the tends of the business regarding performance.
Adjusted diluted earnings per share are useful information for Assessment of periodic performance. This is because they do away with those items that do not give direct indications about direct earnings from operating activities (Schipper, 2003). Adjusted operating profits, on the other hand, are useful for business Assessment. Non-cash impact of depreciation and amortization is omitted. Investors need supplemental information concerning the running operating costs for purposes of financial and operational decision-making (Warren & Jones, 2018). Special items such as impairment charges, pension settlement charges and any other items that keep on arising as outside the course of operation of the business. According to management, the decision to avoid these items gives the company an opportunity to understand the trends of operation performance. It is also an accurate comparison of the company’s operating results to historical performance. Severance costs are also excluded especially those that fluctuate from time to time. This is because these costs are not a true representation of the future expectations of operating costs. Such costs do not also provide a good comparison of the company operating results to historical performance (Scott, 2015).
Liquidity and Capital Resources
The company firmly believe s that the available cash balance and the operating cash is enough to meet the operations of the company for the next financial year, a period of 12 months. The cash that was available as at the end of 1st April this year was $ 749.3 million, the debt and marketable securities balance was $ 251.1 million (Scott, 2015). Cash equivalents and marketable securities exceeded the total debt and capital lease obligations by $498.2 million. Cash investments for the company increased since the year 2017 because of the high proceeds from stock options and operating activities. Quarterly dividends of $0.04 per share for both class A and B type of common stock have already been paid. The company is likely to continue paying comparable cash dividends in the future based on the decision made by the board of directors (Warren & Jones, 2018). This decision must be based on the capital requirements, earnings, and financial conditions of the company.
This analysis provides a vivid view of the financial structure of the New York Times Company regarding financial position and results of operations. The GAAP principles have been followed in every calculation of financial data a topic already discussed in class. The analysis is a true representation of the practical theory learned in class to real-life situations.
References
http://www.4-traders.com/NEW-YORK-TIMES-CO-13865/news/NEW-YORK-TIMES-Management-s-Discussion-and-Analysis-of-Financial-Condition-and-Results-of-Operatio-26518291/
Schipper, K. (2003). Principles-based accounting standards. Accounting Horizons, 17(1), 61- 72.
Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
Question 2
The Exposure Draft and Comment Letters-Accounting Policies and Accounting Estimates (Amendments to IAS 8)
• An outline of what the exposure draft is introducing or changing.
The international Accounting Standards Board recently published a public consultation with amendments on the IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. This amendment is meant to help companies to differentiate between accounting policies and accounting estimates. The need to differentiate these two principles is vital as it has a direct impact on the company’s profits or losses unlike the general changes witnessed in accounting policies (Glaum, Keller, & Street,2018).
The proposed amendments are mainly aimed defining accounting policies and accounting estimates as laid down in the IAS 8 section (Comiran, & Graham, 2016). The member team tries to explain the relationship between the accounting estimates and accounting policies. This is because of lack of clarity in the definitions provided by the IAS 8. There is an overlap in the two definitions of changes in accounting estimates and accounting policies. Secondly, the ability to differentiate accounting policies from accounting estimates is likely to experience some consequences due to the need to account for the proposed changes for both aspects of policy and estimates (Collier, 2015).
The basis definition provided for accounting policies as stipulated in paragraph 5 is that there are five terms describing accounting policies. These are the principles, bases, conventions, rules and lastly practices. This can be explained in a more concise and clear way by first removing the some terms such as conventions and rules (Kang, Trotman, & Trotman, 2015). The removal of these terms is based on the conclusion that they cannot be found or used in any other IFRS standards. Therefore, the terms convention and rules have been removed (Comiran, & Graham, 2016). Their removal from the definition of accounting policies is for the purpose of clarity and not making the definition any narrower of broader. Certain terms such as practices have been retained to make it as brad as possible by not limiting the definition to the word principles alone. According to paragraph 35 of the IAS 8, any change in the measurement basis that is used to change any existing accounting policies must be applied or refer to measurement bases (Collier, 2015). Bases in this case are used instead of bases in the definition of accounting policies for purposes of alignment of accounting policies in IAS 8 and paragraph 38.
The definition of accounting estimates has also been laid down in paragraph 5 of the IAS 8. The board proposes that a definition should start by stating that accounting estimates are important during the application of any accounting policy (Kang, Trotman, & Trotman, 2015). In this case, the accounting policy becomes the overall objective and accounting estimates acts as the estimate for purposes of achieving set goals or objectives. Since the definition for accounting policies does not provide for accounting estimates by defining the change and policies, a proper definition must combine both accounting policies’ definition and changes in accounting estimates. This helps avoid any challenges in differentiating the two, an aspect of clarity (Collier, 2015). The board further wants to bring more clarity by omitting some definitions such as the definition of change in accounting estimates. This paves way for a better definition of accounting estimates. Another proposition from the board is to include the definition of accounting estimates as not being able to measure items in financial statements with required precision. This is well stipulated in paragraph 32 of the IAS 8. According to this paragraph, a number of items included in financial statements can only be estimated and not measured via precision. This is because the level of precision varies based on the type of accounting estimates used form low to high and vice versa (Glaum, Keller, & Street,2018). According to the board’s agreement, the words, Judgement and assumption must be included in the definition of accounting estimates because they are included in the IFRS definition standards. The IAS sections that use these terms include the IAS 1 and IAS 19 for presentation of financial statements and employee befits respectively. The term judgement and its inclusion is vital for the purpose of developing accounting policies. In this case, Items cannot be measured through precision since judgements made when applying accounting policies are just but accounting estimates (Kang, Trotman, & Trotman, 2015).
Paragraph 34 and 38 describes the changes recommended for the accounting estimates as stipulated by the IAS 8. The act defines how an organization accounts for any changes during an accounting estimate. The board therefore settled to a conclusion that the paragraphs will not be amended. According to the current definition of the accounting estimates, it refers to changes in the carrying amount of assets or liability and how an asset is periodically consumed. Since the definitions are not required in the definition of an accounting estimate, there is no need for them to be included in the definition therefore there is any harm retaining them. The definitions are also found in paragraphs 32d and 38 of the IAS 8. There are some components of the definition of accounting estimates proposed and it does not contain certain elements. These elements include the changes in the accounting estimates that come about as a result of new information and developments. Second is the changes in accounting estimates that are not correction of errors as contained in paragraph 34 of the IRS 8 and there is no harm retaining them in the definition (Comiran, & Graham, 2016).
Proposed amendments to examples of accounting estimates as stipulated in paragraph 32 of the IAS 8 propose the deletion of some terms such as financial. This term is found on paragraph 32c of the definition and the reason for deletion is that it has no fair value to financial assets and financial liabilities (Collier, 2015). More clarifications have been provided for paragraphs 32 A and 32B. According to the board, an estimation technique or valuation method applied in case an item in the financial statements cannot be measured with precision, results in the selection of an accounting estimate as stipulated in paragraph 32A. Therefore, the board decided that both terms that is valuation techniques and estimation techniques must be used due to their appearance in the IFRS standards (Kang, Trotman, & Trotman, 2015). This includes the IRFS 9 and 13, which state that financial instruments ad value measurements use these terms. Other propositions from the board are that ordinary interchangeable inventories, selection of cost formulas such as FIFO or LIFO or the application of the WACC (Weighted Average Cost) during the application to the IAS 2 inventories involves selecting an accounting policy. This is well explained in paragraph 32B of the IAS 2 (Comiran, & Graham, 2016). According to paragraph 24 of the IAS 2, specific identification of costs on inappropriate when there are numerous numbers of items in an inventory that can easily be interchanged. Inappropriate Specific identification of such items’ costs method of selecting items that remain in the inventories could be used to come up with effects on the profit or loss. Therefore, the board decided that at least one of the two formulas is not an attempt to estimate the actual flow of inventory hence it cannot be used to make any accounting estimations. The use of LIFO as a cost analysis tool for inventory was eliminated back in 2003 (Kang, Trotman, & Trotman, 2015). This can be found in paragraphs BC9 to BC21 as stipulated by the IAS 2 basis for conclusions. According to the board, LIFO is ineffective because it imposes an unrealistic cost flow assumption for interchangeable items. FIFO and weighted average cost were most preferable cost analysis methods as they reflect a realistic cost flow assumption for ordinary interchangeable items (Collier, 2015). I strongly believe the proposed changes are for the good of the interests of the public as they emphasize on accuracy, and precision.
According to the comment from the Financial Reporting Council of the United Kingdom, they seem to support the IASB’s objective of clarifying the criteria used in distinguishing between change in accounting policy and accounting estimates for purposes of consistency in the application of IAS 8 policies (Kang, Trotman, & Trotman, 2015). They are also in agreement with the decision to revise the definition of accounting policies and replacement of the definition of change on accounting estimates. This is because it helps make accounting policies to be more clearer. The body further backs up the proposed definition for accounting estimates as it provides a clearer definition of accounting principles (Collier, 2015). It is only that they feel that the proposed definitions leave some potential for overlap in interpretation for example the decision to retain the term practice needs a broader interpretation for clarity purposes and understanding. Compared to other comments, most of them feel the decisions of the board to amend the definitions are for the good of the accounting profession in general. This is also best for the good of the general public which deserves clarity and openness in service through different firms and institutions whether private or public.
References
Comiran, F., & Graham, C. M. (2016). Comment letter activity: A response to proposed changes in lease accounting. Research in Accounting Regulation, 28(2), 109-117.
Kang, Y. J., Trotman, A. J., & Trotman, K. T. (2015). The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates. Accounting, Organizations and Society, 46, 59-76.
Capkun, V., Collins, D., & Jeanjean, T. (2016). The effect of IAS/IFRS adoption on earnings management (smoothing): A closer look at competing explanations. Journal of Accounting and Public Policy, 35(4), 352-394.
Glaum, M., Keller, T., & Street, D. L. (2018). Discretionary accounting choices: the case of IAS 19 pension accounting. Accounting and Business Research, 48(2), 139- 170.
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
