Finance and Investment Cycle

Finance and Investment Cycle I. Introduction A. Special purpose entities B. Transaction: less frequent, large and complex C. Focus of control activities: authorization of transactions & compete of accounting personnel D. Focus of substantive procedures: understanding of the transactions, verifying amounts and calculations, ensuring presentation and disclosures II. Inherent risks E. Lease accounting 1. The classification of operating or capitalized lease is based on the assumption in ASC840 F. Loan covenants 2. Intend to keep the borrower’s financial position at the same level as it was when the bank initiated the loan 3. Covenants restrict payment of dividends, additional borrowing, use of assets for collateral on other debt 4. If violated, called immediately. If cannot pay, force to bankruptcy G. Related party transactions 5. On that can exert significantly influence over another party H. Complex transactions 6. Managers want to keep risky ventures off the financial statement 7. Transactions: complex, difficult to audit, can be used as vehicles to hide fraud I. Impairments 8. Risk of asset impairments: loss of valuation 9. GAAP requirements: impairments be taken as losses when they occur 10. “Big bath”: writing off assets and building up reserves to reduce expense in future years J. Presentation and disclosure 11. Capital lease: presented in a manner identical to purchased assets 12. Operating lease: disclosed solely in the footnote 13. Fixed assets not used in the operation or projected for future use in the operation should not be classified as PPE, but in “other assets” 14. Impairment of intangible assets must be disclosed III. Typical activities in finance and investment cycle K. Overview: 15. Accounts and records ranging