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Economics

Discussion 1

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Discussion 1

The new accounting standards (ASC 842) introduced by FASB to report operating leases at discounted at the present value of future payments on the balance sheet as a liability (Graham, & Lin, 2018). Operating lease does not transfer ownership of an asset, yet payments are made for asset usage. Before the change, operating leases were not reported in the balance sheet even though assets yet payments are made for usage. Instead, a lump sum lease/rental payments were reported in the income statement. A large amount of liabilities were thus hidden in the notes, but now will be directly seen on the balance sheet. Besides, the change requires firms to report every single lease separately instead of as a lump-sum. I applaud FASB for the move that brings more transparency for investors in public equities. The accounting update will have no material change on accounting models because they were always captured off the balance sheet. However, there will be a significant increase in total liabilities reported in public entities.

Discussion 2

Intel and Microsoft’s balance sheet reported a large amount of investment securities. Short term investments were $3225 and 125,318 million for Intel and Microsoft, respectively. Intel reported assets held for sale valued at $4716, and other long term investments were valued at $7159 while Microsoft had $6,023 equity and other investments. Both firms use similar accounting methods for these securities. Short term investments are sold within 12 months of purchase. The short investment assets are valued at fair market price, and loss or profit on revaluation is reported in the income statement. Long term investments are valued at market price and profit or losses reported in the income statement (Iselin, & Nicoletti, 2017). A cost-based method is applied for specific long term strategic investment in equity share whose value cannot be easily ascertained for some reasons since they are not publicly traded.

References

Graham, R. C., & Lin, K. C. (2018). How will the new lease accounting standard affect the relevance of lease asset accounting?. Advances in accounting42, 83-95.

Iselin, M., & Nicoletti, A. (2017). The effects of SFAS 157 disclosures on investment decisionsJournal of accounting and economics63(2-3), 404-427.

 

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