Treatment of leases and pensions: ConAgra Foods

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CWID #50132822

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CWID #50132822

Semester:Summer I

Year:2014

Course Name:Fiscal Accounting

  1. Introduction.

Leases and pensions are advanced accounting topics that have considerable impact on the businesses’ fiscal statements. Due to the large-scale corporate accounting dirts in recent old ages, U.S. Congress intervened by go throughing the Sarbanes-Oxley Act ( SOX ) of 2002 ( Journal of Economic Perspectives, 2007 ) . Harmonizing to Sarbanes-Oxley Act ( 2002 ) , publically traded companies are required to follow by unwraping all of off-balance-sheet minutess. Not merely concerns are required to unwrap off-balance sheet points, but besides they are required to supply an internal control study as good ( SOX, 2002 ) . Given these points, both rentals and pensions are subjected to strict revelation ordinances, which are due to their important influence on capital suppliers and the economic system ( Chartered Institute of Management Accountants, 2012 ) . This paper provides wide overview of rentals and pensions, nowadayss comprehensive analysis of how ConAgra Foods ( packaged nutrient company ) reports rentals and pensions on its fiscal statements, discusses off-balance-sheet stuff and explains how rentals and pensions affect fiscal coverage.

  1. Leases.
  1. Capital Lease – Broad Overview.

Harmonizing to Spiceland ( 2013 ) , renting is a preferable method of support of corporate assets in the United States. We can separate two types of rentals, capital rental and operational rental, and both of them require different accounting methods ( Spiceland, 2013 ) . Capital rental is characterized by plus ownership ; the rental rubric transportations from the lease giver to the leaseholder during or at the terminal of the rental understanding ( Spiceland, 2013 ) . The Financial Accounting Standards Board ( FASB ) has ruled that a rental is classified as a capital rental when it includes a non-cancellable lease term and at least one standard outlined below ( FASB, 1976 ) :

1. The contract specifies that the rubric of the plus will reassign from lease giver to the leaseholder ( Spiceland, 2013 ) ;

2. The contract includes a deal purchase option ( BPO ) ( Spiceland, 2013 ) ;

3. The non-cancellable term of the contract is equal to at least 75 % of the estimated economic life of the plus ( Spiceland, 2013 ) ;

4. The present value ( PV ) of the minimal sum paid for leasing the plus is equal to or greater than 90 % of a just value of the plus ( Spiceland, 2013 ) .

For capital rentals, rental duties are recorded in the liabilities subdivision of the balance sheet. Conversely, leased assets are recorded in the assets subdivision of the balance sheet. Capital rentals have important impact on the overall fiscal image of the company. As a consequence, many concerns prefer to construction their contracts in the signifier of operating rentals in order to avoid entering lease duties on their statement of fiscal place ( The Wall Street Journal, 2004 ) .

  1. Operating Leaseiˆ­Broad Overview.

When it comes to runing rentals, leaseholder has the right to utilize the plus, but the ownership of plus is retained by the lease giver ( Spiceland, 2013 ) . Since the rubric of the plus will non reassign to the leaseholder, rental payments are recorded as an disbursal. Under the U.S. GAAP, the leaseholder is non required to enter the cost of the plus and while off-balance-sheet accounting is acceptable under the jurisprudence, it may conceal company’s true fiscal public presentation ( Investopedia, 2014. ) . Some companies may utilize this as a use method in order to maintain debt-to-equity ratio low and to look as if company’s fiscal public presentation is better than it really is ( Investopedia, 2014 ) . Even though off-balance-sheet accounting is allowable, this pattern may hold black effects as it may be misdirecting to some users of fiscal statements. To exemplify, ABC Company enter their entire debt and equity for the sum of $ 118 million and $ 355 million severally, and leases an extra plus under the operating rental understanding for the sum of $ 710 million. Leased plus does non look on the company’s balance sheet. If we compute ABC Company’s entire debt-to-equity ratio the consequence will be 0.33. If we adjust the Numberss by adding $ 710 million to $ 118 million, and calculate the ratio once more, the consequence will be 2.33, which shows that ABC Company mostly finances their operations with debt.

  1. Types of rentals reported in ConAgra’s fiscal statements.

Harmonizing to ConAgra’s Annual Report pursuant to Section 13 or 15 ( vitamin D ) of the Securities Exchange Act of 1934, as of May 26, 2013 the company reported debt and capital rental duties, which amounted to $ 9.30 billion ( ConAgra, 2013 ) . ConAgra besides used off-balance-sheet accounting and the sum that was non recorded on company’s statement of the fiscal place totaled to $ 1.52 billion ( ConAgra, 2013 ) . Furthermore, ConAgra had long-run operating rental duties as outlined in the tabular array below:

Table 1.ConAgra’s runing rentals duties:

Note: Adapted from ConAgra Foods’ 2013 Annual Report pursuant to Section 13 or 15 ( vitamin D ) of the Securities Exchange Act of 1934.

If we calculate ConAgra’s entire debt-to-equity ratio as of May 26, 2013, the ratio was 2.8 or 280 % . In this instance, for every dollar of ConAgra owned by the stockholders, ConAgra owed $ 2.8 to creditors. If we adjust the Numberss by adding $ 1.52 billion ( sum non recorded on ConAgra’s balance sheet ) to $ 15,042.3 million ( entire liabilities ) , and calculate the ratio once more, the consequence will be higher: 3.09 or 309 % . ConAgra’s entire debt-to-equity ratio was high and this means that the company was mostly financing its growing with debt. However, it is of import to advert that debt-to-equity ratio varies from industry to industry and a ratio that high in one industry might be acceptable for another industry ( Adkins, 2014 ) .

  1. Pensions – Broad Overview.

Employer-provided pensions play important map is supplying income to persons during their retirement old ages ( Spiceland, 2013 ) . By and large, we can separate two types of pension programs:

  1. Defined part pension programs, and ;
  2. Defined profit pension programs.

As stated by Spiceland ( 2013 ) , defined part pension programs ( DC plans ) offer one-year part to pension fund and employees can do a determination where they want to put the financess ( Spiceland, 2013 ) . In this instance, the wage depends on the sum accumulated at the retirement ( Spiceland, 2013 ) .

When it comes to specify profit pension programs ( DB plans ) , retirement wage is calculated by a preset expression and the retirement payment is based on: salary history, term of office of service and on juncture age ( Spiceland, 2013 ) . In this instance, employer wages pre-established monthly benefit to employee at the retirement ( Spiceland, 2013 ) . Harmonizing to U.S. Social Security Administration ( 2009 ) , “the per centum of workers covered by a traditional defined benefit ( DB ) pension program that pays a lifetime rente, frequently based on old ages of service and concluding wage, has been steadily worsening over the past 25 years.” Furthermore, the Numberss of companies that consider extinguishing DB plans over clip has grown significantly. The slow diminution of DB programs is due to the fact that:

  1. DB programs are more dearly-won than DC programs ( Workforce Magazine, 2012 ) ;
  2. Employers want to switch the investing duty to employees ( Workforce Magazine, 2012 ) .
  1. Types of pension programs reported in ConAgra’s fiscal statements.

Harmonizing to ConAgra’s Annual Report pursuant to Section 13 or 15 ( vitamin D ) of the Securities Exchange Act of 1934, as of May 26, 2013, the company offered defined benefit ( DB ) retirement programs for qualified hourly and salaried employees ( ConAgra, 2013 ) . The benefits offered were based on term of office of service and mean wage or “stated sums for each twelvemonth of service” ( ConAgra, 2013 ) . In add-on, ConAgra provided financess for postretirement programs, which incorporated alveolar consonant and medical benefits ( ConAgra, 2013 ) . However, effectual August 1, 2013, the company decided to shut DB plans to new salaried employees and alternatively, these employees were eligible to take part in ConAgra’s defined part program ( ConAgra, 2013 ) .

  1. ConAgra’s pension disbursal.

Harmonizing to ConAgra’s amalgamate statement of hard currency flows for the financial twelvemonth ended May 2013, the pension disbursal recognized on the company’s statement was $ 23.5 million. Besides, the company contributed to pension programs $ 19.8 million. In this instance, the $ 19.8 million was non included in pension disbursal and as a consequence ConAgra’s reported net incomes were non reduced by this sum.

When it comes to the expected return on program assets, ConAgra projected it to be $ ( 216.4 ) . It is of import to observe that, the expected return on program assets is controversial in accounting as the companies might utilize “smoothing techniques” in order to better their overall fiscal public presentation ( Flood, 2014 ) .

  1. The Funded Status of the Plan.

As presented in Table 2, the benefit duties at the terminal of the twelvemonth were $ 3,817.5 billion and the just value of program assets at the terminal of the twelvemonth was $ 3,343.3 billion. The just value of the program assets subtracted by the benefit duty resulted in the funded position of $ ( 474.2 ) million. As we can see, ConAgra’s pension program at the clip was under-funded by $ ( 474.2 ) million.

Table 2.The alterations in benefit duties and program assets at May 26, 2013 ( in 1000000s ) .

Note:Adapted from ConAgra Foods’ 2013 Annual Report pursuant to Section 13 or 15 ( vitamin D ) of the Securities Exchange Act of 1934.

As reported by Spiceland ( 2013 ) , “a company’s PBO is non reported individually among liabilities in the balance sheet. Similarly, the program assets a company sets aside to pay those benefits are non individually reported among assets on the balance sheet.” ( Spiceland, 2013, p.1023 ) .

As presented in Table 3, at May 26, 2013, the funded position of the program ( $ ( 474.2 ) ) has non been recognized in ConAgra’s consolidated balance sheet. Alternatively, the net sum recognized, $ ( 474.2 ) , comprised of other assets, other accrued liabilities and other noncurrent liabilities.

Table 3. Funded position and net sum recognized in ConAgra’s consolidated balance sheet at May 26, 2013.

Note:Adapted from ConAgra Foods’ 2013 Annual Report pursuant to Section 13 or 15 ( vitamin D ) of the Securities Exchange Act of 1934.

  1. Drumhead

In drumhead, when analysing fiscal public presentation of ConAgra Foods, the procedure of larning accounting for rentals and pensions helped me to understand fiscal statements on a more advanced degree. It is important to understand off-balance-sheet agreements as they have a important impact on a company’s overall fiscal public presentation. As I reported supra, ConAgra’s used off-balance-sheet accounting and after closer scrutiny it was high that the company funded its day-to-day operations mostly with debt. Under the FASB ordinances, concerns are non required to enter certain assets and liabilities on their statement of fiscal place. However, this facet may be confounding to the fiscal statements users every bit frequently the company will look more responsible than it really is.

Mentions:

Adkins, T. ( 2014 ) .The Optimal Use Of Financial Leverage In A Corporate Capital Structure. Retrieved from: hypertext transfer protocol: //www.investopedia.com/articles/investing/111813/optimal-use-financial-leverage-corporate-capital-structure.asp

Chartered Institute of Management Accountants. ( 2012 ) .Accountants and the economic crisis. Retrieved from: hypertext transfer protocol: //www.fm-magazine.com/feature/depth/accountants-and-economic-crisis #

Coates, J. , C. ( 2007 ) . The Goals and Promise of the Sarbanes–Oxley Act.Journal of the Economic Positions,21 ( 1 ) ,91– 116.Retrieved from: hypertext transfer protocol: //blogs.law.harvard.edu/corpgov/files/2007/03/20070302 % 20JEP % 20Article.pdf

Flood, J. , M. ( 2013 ) .Wiley GAAP 2014: Interpretation and Application of Generally Accepted Accounting Principles. Wiley.

Geisel, J. ( 2012 ) .Fewer Employers Offering Defined Benefit Pension Plans to New Salaried Employees. Retrieved from: hypertext transfer protocol: //www.workforce.com/articles/fewer-employers-offering-defined-benefit-pension-plans-to-new-salaried-employees

Off-Balance-Sheet Financing. ( n.d. ) . In Investopedia online. Retrieved from hypertext transfer protocol: //www.investopedia.com/terms/o/obsf.asp

Sarbanes-Oxley Act of 2002. ( 2002 ) . Retrieved from: hypertext transfer protocol: //www.sec.gov/about/laws/soa2002.pdf

Spiceland, D. J. , Sepe, J. F. , Nelson, M. W. ( 2013 ) .Intermediate Accounting( 7Thursdayed. ) . Commerce, TX: The McGraw-Hill.

U.S. Securities and Exchange Commission. ( 2003 ) .Report and Recommendations Pursuant to Section 401 ( degree Celsius ) of the Sarbanes-Oxley Act of 2002 On Agreements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers.Retrieved from: hypertext transfer protocol: //www.sec.gov/news/studies/soxoffbalancerpt.pdf

U.S. Social Security Administration. ( 2009 ) .The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers. Retrieved from: hypertext transfer protocol: //www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html

Weil, J. ( 2014 ) . Leases Play A Shadowy Role In Accounting.The Wall StreetJournal. Retrieved from: hypertext transfer protocol: //online.wsj.com/news/articles/SB109580870299124246

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