The CFO, King Bernard, of Blackswan Petfood, a large publicly traded manufacturer of organic gourmet dog...

 

Transcribed Image Text:

The CFO, King Bernard, of Blackswan Petfood, a large publicly traded manufacturer of organic gourmet dog and food, is getting ready for the quarterly conference call with major investors and financial analysts in two days. The King has been reviewing a draft of the quarterly financial statements for the fourth quarter ending September 30. 2018, and working with his financial team on how best to present the numbers in the conference call. During the current quarter, the company had two material transactions which to him appear to unfairly distort the financial conion of the company in the GAAP numbers provided by Debbie Doberman, the Senior Manager in charge of financial reporting. The first relates to a loss of $2 million due to a massive tsunami which wiped out their manufac turing facilities in Chihuahua, Mexico. This amount was included in Additional Income/Expense Items. The second item relates to a loss of $1 million from the disposal of their Red Rooster product line of gourmet chicken feed that was discontinued. The income statement currently reads as follows: Blackswan Pet Food Income Statement September 30, 2018 Sales Cost of Goods Sold (in000's) $ 458,543 $/257,678) $ 200,865 $(123,738) $ (25,324) Gross Profit Selling and Administrative Depreciation and Amortization $ (25,000) Non-Recurring Items $ (13.435) Other Operating Items $13,368 Operating Income $ (2.456) Additional Income/Expense Items $ 10,912 Earnings before Interest and Tax Interest Expense $(3.478) $ 7,434 Earnings before Tax $ 1,918 Income Tax $ 5,516 Net Income before Discontinued Operations $ 7.500) Discontinued Operations (net of tax) Net Income (oss) Earnings (oss) per share $ (1,984) (0.20) vide the analysts with a number of GAAP and Non-GAAP metrics. He double majored in accounting and marketing Loyal Doge, the newest member of the CFO's financial team (and recent college graduate), suggests that they pro- to obtain the required 150 credits to sit for the CPA exam. He said he learned in his strategic marketing class that a lot of companies are now using non-GAAP metrics to "better" explain their financial results and provide more the concept of Extraordinary Items was just bad accounting and he believed that alone was reason enough to create useful information to users of the financial reports. He also noted that the recent change to GAAP which eliminated some metrics of their own. King Bernard thought his idea made a lot of sense as he, too, was wondering why the costs related to the tsunami should be included in operating income. - sand The group discussed providing the analysts with the following measures. . Earnings before Interest, Tax, Depreciation and Amortization (EBITDA). • Earnings before Discontinued Operations, . Earnings before Extraordinary Items, . Recurring Earnings which would exclude both the discontinued operation and extraordinary item. Whichever number(s) were to be presented would be net of tax, and an EPS number would be calculated as well. In addition, they discussed highlighting these new measures in the financials presented on their website. The group had a very animated discussion, and excitement continued to build as they realized that, through the use of these new metrics, they could paint a much better picture of the operating results of the company. "Dilly, Dilly", Loyal Doge said expressively. He was excitedly talking about using multiple colors, large fonts, and the bolding of non-GAAP numbers in the quarterly financials when Debbie Doberman decided to speak up. Since it was 5 pm, the group decided to stop for the day and meet at 8 am the following morning at which time they would address Debbie's concerns. Assume you are in Debbie's place. You are a CPA, MBA, CFE. You have purposefully been silent up until now to first gather all the facts, hear everyone's opinion, and then provide guidance on what is and is not acceptable with respect to non-GAAP disclosures. Consider the following in developing a game plan for what to say when you address the group tomorrow. Questions 1. What are the main arguments that you will need to counter? That is, what are the reasons and rationalizations you will need to address? 2. What is at stake should you not convince King Bernard to follow the SEC guidelines on the use of non-GAAP metrics? Include both short and long-term potential consequences in your answer. 3. What levers do you have available? Include in your answer a discussion of the specific rules and guidelines for the use of non-GAAP metrics. 4. If you cannot convince the King to follow the guidelines for using non-GAAP metrics, what is your next step? 5. If the earnings call goes forward and the non-GAAP measures are prominently highlighted as Loyal Doge sug- gests, what are your options then? The CFO, King Bernard, of Blackswan Petfood, a large publicly traded manufacturer of organic gourmet dog and food, is getting ready for the quarterly conference call with major investors and financial analysts in two days. The King has been reviewing a draft of the quarterly financial statements for the fourth quarter ending September 30. 2018, and working with his financial team on how best to present the numbers in the conference call. During the current quarter, the company had two material transactions which to him appear to unfairly distort the financial conion of the company in the GAAP numbers provided by Debbie Doberman, the Senior Manager in charge of financial reporting. The first relates to a loss of $2 million due to a massive tsunami which wiped out their manufac turing facilities in Chihuahua, Mexico. This amount was included in Additional Income/Expense Items. The second item relates to a loss of $1 million from the disposal of their Red Rooster product line of gourmet chicken feed that was discontinued. The income statement currently reads as follows: Blackswan Pet Food Income Statement September 30, 2018 Sales Cost of Goods Sold (in000's) $ 458,543 $/257,678) $ 200,865 $(123,738) $ (25,324) Gross Profit Selling and Administrative Depreciation and Amortization $ (25,000) Non-Recurring Items $ (13.435) Other Operating Items $13,368 Operating Income $ (2.456) Additional Income/Expense Items $ 10,912 Earnings before Interest and Tax Interest Expense $(3.478) $ 7,434 Earnings before Tax $ 1,918 Income Tax $ 5,516 Net Income before Discontinued Operations $ 7.500) Discontinued Operations (net of tax) Net Income (oss) Earnings (oss) per share $ (1,984) (0.20) vide the analysts with a number of GAAP and Non-GAAP metrics. He double majored in accounting and marketing Loyal Doge, the newest member of the CFO's financial team (and recent college graduate), suggests that they pro- to obtain the required 150 credits to sit for the CPA exam. He said he learned in his strategic marketing class that a lot of companies are now using non-GAAP metrics to "better" explain their financial results and provide more the concept of Extraordinary Items was just bad accounting and he believed that alone was reason enough to create useful information to users of the financial reports. He also noted that the recent change to GAAP which eliminated some metrics of their own. King Bernard thought his idea made a lot of sense as he, too, was wondering why the costs related to the tsunami should be included in operating income. - sand The group discussed providing the analysts with the following measures. . Earnings before Interest, Tax, Depreciation and Amortization (EBITDA). • Earnings before Discontinued Operations, . Earnings before Extraordinary Items, . Recurring Earnings which would exclude both the discontinued operation and extraordinary item. Whichever number(s) were to be presented would be net of tax, and an EPS number would be calculated as well. In addition, they discussed highlighting these new measures in the financials presented on their website. The group had a very animated discussion, and excitement continued to build as they realized that, through the use of these new metrics, they could paint a much better picture of the operating results of the company. "Dilly, Dilly", Loyal Doge said expressively. He was excitedly talking about using multiple colors, large fonts, and the bolding of non-GAAP numbers in the quarterly financials when Debbie Doberman decided to speak up. Since it was 5 pm, the group decided to stop for the day and meet at 8 am the following morning at which time they would address Debbie's concerns. Assume you are in Debbie's place. You are a CPA, MBA, CFE. You have purposefully been silent up until now to first gather all the facts, hear everyone's opinion, and then provide guidance on what is and is not acceptable with respect to non-GAAP disclosures. Consider the following in developing a game plan for what to say when you address the group tomorrow. Questions 1. What are the main arguments that you will need to counter? That is, what are the reasons and rationalizations you will need to address? 2. What is at stake should you not convince King Bernard to follow the SEC guidelines on the use of non-GAAP metrics? Include both short and long-term potential consequences in your answer. 3. What levers do you have available? Include in your answer a discussion of the specific rules and guidelines for the use of non-GAAP metrics. 4. If you cannot convince the King to follow the guidelines for using non-GAAP metrics, what is your next step? 5. If the earnings call goes forward and the non-GAAP measures are prominently highlighted as Loyal Doge sug- gests, what are your options then?

Answer rating: 100% (QA)

The purpose of this paper is to analyze the case study The Potential Darkside of Using NonGAAP Metrics that highlights the acceptability of presenting ... View the full answer