It says that the netting preocedure affects certain ratios because the firms’s total assets and total liabilities are lower than if the firm reported gross amounts. Why? I mean does it matter if you report something on the asset side and something on the liabilitiy side or if you just net it? And concering the fair value method, compensation expense is spread over the service period. The offset to compensation expense is an increase in paid-in capital (Stockholders equity account). Why offset when it is an expense. I mean its not like in the balance sheet that things have to equal (A= L+E) Thanks
2 things there… 1. Period 1 say you have a net asset. That means your assets are bigger than your liability. Any ratio with Total Assets on denominator will look smaller. D/E will be smaller as well - since Debt (Liabilities) is lower, Equity is higher. Say next period - you have a Net Liab. position - total Assets on Denominator will suddenly become bigger - D/E will also become bigger. If you had an asset part and a liability part - various ratios would change --> and both approaches introduce volatility, wherever your balance sheet items are used. Part 2 of your question: Some portion is an expense. Expense part flows thro’ Net Income to your Equity portion. Other part is a direct adjustment to equity. When it gets to the balance sheet - expense is a part of the Retained earnings. Direct Adjustment to Equity is part of the OCI. Totally both of these would comprise the Equity portion on the Balance sheet.
I can address your first question: Yes, it matters. Without netting both your assets and liabilities will be higher (you’d report an asset for the plan assets and a liability for the pension obligation). However when you net you’ll either have an asset or a liability. The asset or liability will have a smaller net effect than the gross amount. For example: You have a $50 pension obligation and a $30 plan assets. If you reported gross - total liabilities will go up $50 and total assets will go up $30 If you net then you’d report a net liability of $20 and total liabilities would only go up $20 (assets stay the same and liabilities go up, but by a lesser amount than if you reported the liability as a gross amount). Gross vs Net - there is an impact on your ratios
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(1) So lets say i have pension plan investments of 150 and a liability of 200 (results in a net liability on the balance sheet of 50). think about something like asset turnover - if i had reported gross, i would have reported higher assets, and a lower sales/assets turnover ratio. (2) Not sure what your referring to on fair value here - are you referring to fair value for stock based compensation, as opposed to anything pension related (important not to mix these concepts). FOr share based payment, all that means is my journal entry to record the expense would be as follows: Dr Compensation Expense, Cr Additional Paid In Capital Comp expense on stock options (and other share based payment) gets recorded through APIC, as opposed to a liability (because the awards will be settled in stock). If awards get settled in cash, they would be reported as a liability. Hope that helps.
thank you soo much. one last question: I mean share based payment “FOr share based payment, all that means is my journal entry to record the expense would be as follows: Dr Compensation Expense, Cr Additional Paid In Capital” what does Dr and Cr mean? so when the CEO exercised 100 options, Park Glen’s cash increases 6000 (60*100 options). note that compensation expense is not affected. meaning it the journal it is booked: CASH/ Stockholder equity
dr=debit cr=credit.
ah ok… learned accounting in different language, that’s why…and one more question APIC??
additional paid in capital, funds in excess of par when the shares were issued