Lexicology, a legal website, has published an interesting paper in which attorneys David B. Hardison and Paul H. Pashkoff analyze the first ten years of the PCAOB’s enforcement actions (registration required, and worth it).
Chinese Official Rejects American Regulation of Auditing
Posted November 15th, 2011
The battle-of-words between US auditing regulators – still in their infancy after being hurriedly invented by Congress just ten years ago – got hotter this week with a Chinese economic official’s harsh words. He indirectly accused the PCAOB of “politicizing the matter.”
Senior Shanghai Stock Exchange official Zhou Qinye made the startling statement in this Reuters news story, suggesting companies unhappy with the growing expense of US regulation of capital markets are welcome to relocate their business activity to China. Will any actually do it?
The SEC’s Corporate Finance department has issued guidance on Super 8-K filings that must follow a merger. The guidance is online here.
Some companies who acquire an asset, or combination of assets and liabilities, would like to avoid having to file the Super 8-K. They seem more put off by the tight time frame – it’s due within four days of the acquisition – than by the significant volume of information required.
However, ASC 805-10-25 describes GAAP’s answer to “Did what we just do constitute an acquisition?”
The heart of the matter, for accountants, revolves around whether the assets/liabilities assumed constitute a business, defined as “An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.”
For SEC purposes, the state of the acquirer is just as important. The new guidance includes this:
Item 2.01 of Form 8-K generally requires a company to provide specified disclosure after it has acquired or disposed of a significant amount of assets other than in the ordinary course of business. If that company was a shell company, as defined in Rule 12b-2 under the Exchange Act, immediately before the transaction, it must include the information that would be required if it were filing a Form 10 under the Exchange Act in its Form 8-K. We frequently remind companies that Instruction 2 to Item 2.01 makes clear that the term “acquisition” includes every purchase, acquisition by lease, exchange, merger, consolidation, succession or other acquisition. Where a company’s reverse merger or similar transaction fits within the scope of Instruction 2, we remind it of the Item 2.01 disclosure requirements.
Interesting Shareholder Litigation
Posted June 27th, 2011
Ross Perot, Jr. – son of Bill Clinton’s election spoiler buddy from the 1992 US Presidential election – owns 5 percent of the stock of the Dallas Mavericks basketball team.
As a minority stockholder, he has sued the team alleging, under the majority ownership of Mark Cuban, “a litany of questionable, business, financial, and personnel” decisions amounting to mismanagement of the team.
Cuban’s lawyer filed a motion asking the court to throw out the case. In support the lawyer submitted just 93 words of argument, and a picture worth at least a thousand words:
“On June 12, 2011, the World Champion Dallas Mavericks defeated the Miami Heat to claim the franchise’s first NBA championship. A true and correct photo of one of the many victory celebrations is incorporated herein.
“Under Hillwood’s [Perot’s] ownership, the team was deemed the ‘worst franchise’ in all of professional sports. Under Cuban’s stewardship the Mavericks have become one of the league’s most successful teams and are now NBA champions. Accordingly, there can be no genuine question that Hillwood’s claims of mismanagement lack merit and Hillwood’s claims should be disposed of on summary judgment.”
We’ll see how it all turns out, but it’s an interesting case study in the ongoing saga of Congress lighting up shareholders with the primary importance of their self-interests.
A Linked-In associate, Joseph Rotman, CPA, learned through the school of hard knocks how to manage the process of filing Qs and Ks. Over time, he developed and documented his system (a project management approach to SEC Reporting). He now offers it as a 4-hour CPE class. Check it out here.
S&B Speaks to Entreprenuerial Events
Posted June 1st, 2011
You can catch us at two spots on Interstate 15 in the next couple of weeks… Bob Beers has been selected as a speaker at DealFlow Media’s upcoming Reverse Merger Conference in Los Angeles June 13-14… the topic will be Accounting Challenges for Companies Going Public.
The increasingly regulated US capital markets are attracting fewer and fewer participants. Data gathered by international accounting powerhouse Grant Thornton led it to conclude:
The decline means it will be harder for companies to grow, Kim says; it also weakens the capital-raising reputation of the United States against its global peers. Stock exchanges in virtually every other country continue to grow…
Company Expenses Paid By Others and the Statement of Cash Flows
Posted May 10th, 2011
Financial statements are not considered complete without a Statement of Cash Flows, which is designed to classify “cash receipts and payments as either operating activities, investing activities or financing activities” (ASC 230 describes the requirements for a Statement of Cash Flows – the quote comes from paragraph 230-10-05-2 (a)).
Often, development stage companies find themselves economically benefitting from a shareholder, executive or other “friend of the company” paying an expense on the Company’s behalf.
This transaction is recorded as an increase (debit) to expense and increase(credit) to Related Party Payable.
The change in Related Party Payable becomes an item for the Statement of Cash Flows – but the question is how to classify it? Most changes in related party payables end up classified in the financing activity section, as they seem to fall within the glossary definition “Financing activities include obtaining resources from owners” as well as “borrowing money and repaying amounts borrowed, or otherwise settling the obligation” (ASC 230-10-20). It might be an easy argument to make that the economic benefit the Company receives via the related party’s payment of an expense should be included as a “resource” obtained from an owner.
But the special case of an expense paid on the Company’s behalf by a related party first has to clear another hurdle – is it a cash flow at all? If it is not, then it belongs with things like depreciation expense, classified under “Reconciliation of Net Income and Net Cash Flow from Operating Activities” in accordance with ASC 230-10-45-28 (b).
I discussed this issue with an SEC Corp Fin analyst today. She thought there might be a rule somewhere regarding a company’s “constructive receipt of cash” which might allow the classification of this transaction as a cash flow, but could not find it. Later, I searched all of ASC 230 for the word “constructive” and it was not there.
Our conclusion is that these transactions are not cash flows, and should be included as an item reconciling Net Income to Net Cash Flow from Operating Activities rather than as a cash flow from financing.
SOX 404 Just Fine, SEC Reports to Washington
Posted April 26th, 2011
The Dodd-Franks bill Washington passed last year still doesn’t have a good shorthand notation. Sarbannes-Oxley was rapidly shortened to SOX, but no one has started calling last year’s round of financial reform “DANK” – and “FRODD”, of course, is out the question.
Dodd-Franks called on the SEC to take a look at whether its implementation of SOX 404 has caused the United States to no longer be a competitive home for capitalism.
The SEC released its report last Friday, which says, in part:
The Staff’s analysis shows that the United States has not lost U.S.-based companies filing IPOs to foreign markets for the range of issuers that would likely be in the $75-$250 million public float range after the IPO… While U.S. markets’ share of world-wide IPOs raising $75-$250 million has declined over the past five years, there is no conclusive evidence from the study linking the requirements of Section 404(b) to IPO activity.
So the United States is losing market share but it’s not SOX’s fault.
Reverse Merger attorney David Feldman wrote on his blog this week about an interesting point-counterpoint discussion between the Wall Street Journal and Fortune Magazine regarding the causes of the decline in the volume of Initial Public Offerings in the United States.
The Wall Street Journal op-ed (not available online without a subscription) contended SOX was the problem. It’s just become more difficult to become and stay public than any benefit warrants.
Fortune Magazine (whose article is available online here) says, no, it’s not SOX. IPOs started declining in popularity before SOX. Instead, Fortune says, early-stage investors have learned that it is cleaner and simpler to exit their investment via a merger or acquisition.
Meanwhile, I had an interesting lunch yesterday with an old friend who recently re-emerged into the world after a multiple-year project starting up a community bank here in Las Vegas. The bank has run its regulatory gauntlet and now has two branches open. I figured she’d solicit Seale & Beers’ banking business, to build her deposits.
Surprise! She said she couldn’t handle any more deposits. Her problem is finding collateralized commercial loans to make.