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Polluter Case Essay

1253 words - 6 pages

Subject: Case 11-1 Polluter Corp.
Statement of Relevant Facts
Polluter Corporation, an SEC registrant, operates three manufacturing plants in the United States.
The Company manufactures various household cleaning products at each facility, which are sold to retail customers. The U.S. government granted the Company emission allowances (“EAs”) of varying vintage years (i.e., the years in which the allowance may be used) to be used between 2010 and 2030. Upon receipt of the EAs, the Company recorded the EA’s as intangible assets with a cost basis of zero. The Company currently emits a significant amount of greenhouse gases because of its antiquated ...view middle of the document...

After reviewing the content of the statement of cash flow, it is apparent that the transactions need to be classified as an operating, investing, or financial activity. In order to do a quality financial analysis of Polluter Corp., these emissions allowances need to be classified correctly. Also, would a switch from GAAP to IFRS change the classification of these transactions? If so, what would be changed?
Conclusions and Authoritative Reasoning
Following is a summary of my conclusions and authoritative reasoning for each of the questions asked in the case:
1) I believe that the emission allowance purchase for 3 million dollars should be classified under the operating activities section of the statement of cash flows. My reasoning is based on the following:
a. ASC 350-30-25-3 states, “Costs of internally developing, maintaining, or restoring intangible assets… that are inherent in a continuing business or nonprofit activity and related to an entity as a whole, shall be recognized as an expense when incurred.” This tells me that the expense must be recognized immediately.
b. ASC 230-10-45-16 states that an operating activity payment is any payment that does not classify as an investing or financing activity. I do not feel this payment meets any of the investing or financing requirements. It is necessary for the company to obtain these emission allowances in order to keep running. To me, this means this is a necessary part of operations and needs to affect the ratios that use the operating portion of the statement of cash flows.
i. One could argue that the payment meets the one of the criteria for an investing activity described in ASC 230-10-45-13 which are:
1. Payments made by the entity for loans, which clearly doesn’t fit here.
2. Payments to acquire another’s equity, which also doesn’t fit into this case.
3. Purchase of PPE or another productive use asset, which could be argued.
If emissions allowances are consider “other productive use assets,” then they could be considered an investment for the future. I do not feel this is a strong argument, however, due to the company not being able to operate without these allowances. They are not investing for their future, but rather continuing operations.
ii. Another, weaker, argument could be made for a financial activity described in ASC 230-10-45-15. You could argue that this payment is made to finance the operations of the company. I do not feel that any of the requirements described in this section are near as persuasive as the investing activity argument. Therefore, I have ruled out a financing activity as a reasonable argument.
2) I...

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