We all know that championships are won during the off-season. It is this additional preparation that gives contenders an advantage months down the road. Thus, this column will conclude with an accounting concept every week for the next several installments or so. Whether you are just entering the program, a fourth-year student about to take on Intermediate Accounting, or about to finish up, the concepts to be presented should help enforce (or even set) the foundation for what you will see in the next couple of months.

As usual, though, I will begin with some interesting news bits from this past week.

The Sixth Sense?

Researchers from the UMass Medical School say they may have detected a gene that allows people to detect magnetic fields via the retina. Although research is early, they say that this extra sense would be mostly involved in sensing spatial orientation. Read more from the New York Times.

Wal-Mart Stores, Inc. v. Dukes, et al (2011)

The U.S. Supreme Court ruled Monday that a case brought before them could not be tried as a class action lawsuit. A woman accusing Wal-Mart of sexual discrimination tried to file a class action lawsuit with about 1.5 million other women. The Court, however, threw the case out because of a lack of commonality. Justice Scalia, who delivered the opinion of the court, wrote “A regional pay disparity, for example, may be attributable to only a small set of Wal-Mart stores, and cannot by itself establish the uniform, store-by-store disparity upon which the plaintiffs’ theory of commonality depends…[R]espondents have identified no ‘specific employment practice’—much less one that ties all 1.5 million claims together.”

Commonality is “the rule requiring a plaintiff to show that ‘there are questions of law or fact common to the class’” and requires the plaintiff to “demonstrate that the class members ‘have suffered the same injury.’” The Supreme Court did not actually rule on the Title VII violation accusation (which actually caused some dissent amongst the justices because of the timing of the dismissal along which this decision sets a precedent), but, rather, it may have established what is necessary in order to file a class action lawsuit in the first place. The New York Times article may be found here.

Summer Review: SFAS No. 5

It is my intention to go over what I would consider the Ten Essential FASes this summer. SFAS No. 5 is a classic.  This statement is known for its ambiguity because it is so overarching; however, it is because it covers so much—especially in principle—that makes it essential for understanding the nature of accounting.

The gist of the statement relates to loss contingencies: if you can estimate it, and it is probable that it is going to happen, you record it. This concept sounds difficult, but when you consider how mechanical it may be when you record Bad Debt Expense, for example, the concept begins to make more sense. In essence, by the time you know the amount of a perceived loss for certain, it may be too late to release that information in a time frame that is actually helpful to the user of a financial statement. For example, it would be like getting to work late, looking up at the clock, and then telling your boss you will be six minutes late that day. Your boss probably would have much rather preferred that you called him twenty minutes before and estimated that you would be five minutes late because of traffic rather than receive information at a time when he really did not have a chance to prepare or react.

SFAS No. 5 does that exact thing: it says that if you can record it somewhat accurately, then do it. Depending on what sort of contingency you are booking though, this may not be so clear-cut in practice. Bad Debt Expense is pretty routine depending on your industry; if you normally only collect 98% of your sales, then you just take that 2% and expense it. Warranties may become complicated, depending on the product and the terms and conditions, but overall a Warranty Expense is estimated in mostly the same way. The other end of the spectrum involves estimating losses due to litigation. From an accounting standpoint, this does not seem to be that difficult; however, from a negotiation standpoint, you would never want to reveal your thoughts to the opposing party (your statements will probably be public). Thus, when asking the company’s counsel for how much to incur, the legal team will probably reply that they are not able to estimate anything at the time because they do not want to expose the company’s actual position.

Whether or not this is a weakness in the statement is probably up for debate. Overall, however, the statement adds value to financial statements because it increases the relevance and usefulness of the financial statements. It is always helpful to have the statements you are reading help you see somewhat into the future. Timeliness is very much a component of quality financial statements, and waiting for absolute 100% certainty for events to manifest impairs this attribute.

Final Thoughts

It may seem dull to review during your time off—believe me, it is not like I was able to throw a party for this or anything. For an hour a week though, I think reinforcing what we already know (or exposing one’s self to what he is about to learn) provides that competitive advantage that one seeks in such a competitive program such as Texas MPA.

Why is that important? A friend of mine once told me that she had heard that business students’ actual work is not that hard compared to those of the engineering or natural science schools. I paused, thought, and replied that what makes our program great is the competition that one goes through in order to do well in our program. It is not that accounting is so incredibly difficult as much as everyone is going to show up to exams extremely prepared, professors will have to increase the difficulty of the exams to create separation between students, and your performance will be graded on a curve.

Getting the most out of the Texas MPA program, I feel, is to embrace the competition that you are thrust into and to enjoy the feeling of doing the extra little things to do a better job on whatever you are working on. If you take the game of golf, for instance, then you will see that the difference between someone who improves his play by only five strokes and someone who does not is this: one is shooting 70s and contending for titles, and the other is shooting 75s and holding onto his day job. Taking the time to review will make you that much more prepared when you go out into the working world; you want to be the person that someone goes to when he needs answers, and the way to do that is to go over your material until it becomes intuitive.