General Electric Company (GE) is a large U. S.- based conglomerate, with operations that included industrial equipment
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Changes to the expected rate of return on pension plan assets.
Sales of divisions. Such sales generally lead to large special item gains.
Restructuring charges. These are charges to current earnings to provide for expected costs of restructuring the operations of one or more of its many divisions. It is claimed that GE managed the amounts and timing of these charges so as to offset large special item gains, such as from sales of divisions. The objective was to avoid reporting higher earnings than could be sustained in future years.
Buying profitable businesses. GE was constantly acquiring new subsidiary companies. If needed to prevent reporting an earnings decrease, managing the timing and identity of such acquisitions can achieve an immediate contribution to consolidated reported earnings in the year of acquisition.
Conservative accounting. Rapid amortization of, for example, leased aircraft by GE’s commercial finance division enables large profits to be recorded when the aircraft are eventually sold. The timing of such sales can be managed by GE.
Allocation of purchased goodwill upon acquisition of subsidiary companies. When GE acquires a subsidiary, it may decide, or be required, to dispose of segments of the acquired business. The flexibility under GAAP of allocation of the excess of amount paid for a subsidiary company over the fair value of assets acquired (i. e., purchased goodwill) enabled GE to record a gain on such dispositions, by allocating a relatively small amount of the excess amount paid to any subsidiary segments that it intended to dispose of. The important point about the array of earnings management techniques available to GE is that they can be used in concert to report a smooth earnings sequence. Table 11.3 suggests that, until 2008, GE was quite successful in this regard.
Required
a. Evaluate restructuring charges as an earnings management device.
b. Under securities markets efficiency, share prices always fully reflect all public information about a firm’s securities. In the absence of earnings management, would the share price of a complex firm like GE always have reflected all public information about GE? Explain why or why not. Given its earnings management during that time, would GE’s share price have fully reflected all public information? Explain.
c. Was earnings management by GE during the period 1993– 2007 good or bad? Explain.
Goodwill
Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of... GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the...
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