Option #1: “Back to the Future” (Or How a Product, Sold Almost 60 Years Ago, Resulted in a Current Financial Statement Restatement)
Read the following Case Study:
Franz, D. R. (2018).
“Back to the future” (or how a product last sold almost 60 years ago resulted in a current financial statement restatement)Links to an external site.
. Issues in Accounting Education, 33(2), 9–17.
Answer the following questions:
In preparing your answers for questions 1 to 4, you will need to refer to OI’s amended 10-K for 2015, which can be found by clicking
hereLinks to an external site.
.
- What journal entry would OI have made to record the additional $295 million of asbestos liability?
- Briefly summarize the effect of the restatement on the following financial statements.The income statement.The balance sheet.The statement of cash flows.The statement of share owners’ equity.What accounts were affected? By how much? What other disclosures were impacted? Note 1 in the restated 2015 10-K describes the changes.
- Explain why OI’s treatment resulted in an increase to the earnings for 2015, 2014, and 2013.
- Based on OI’s disclosures in the 10-K prior to restatement, was it clear that the firm was using a three-year period to estimate asbestos litigation? Be sure to explain your response.
- The discussion between the SEC and OI was extensive and interesting. Appendix A shows all of the correspondence between the two and includes web links to the letters. The following questions are based on those letters and the information in the case.Briefly summarize OI’s justification of its treatment of the unasserted asbestos liability. What are the pros and cons of OI’s original treatment of the asbestos liability?Briefly summarize the SEC’s position regarding the treatment of the unasserted asbestos liability. What are the pros and cons of the SEC’s approach?Which approach do you find preferable and why? You can choose either OI or the SEC, but your analysis needs to be based on something other than the fact that the SEC prevailed or OI did not.
- How is OI’s experience with asbestos litigation similar to Garlock’s? How is it different?
- Approaching this issue as a member of OI’s executive management group, describe how your approach to asbestos litigation would be similar to or different from OI’s.
Submission Requirements:
- Your Word document should be 8–10 pages in length (not including the required cover and references pages). Submissions in excess of 10 pages are permitted. It is highly recommended that you include in bold type the questions you are required to answer, with the answers directly underneath each question.
- Format your submission according to APA guidelines in the CSU Global Writing CenterLinks to an external site..
- You must submit an Excel file as a separate file supporting your submission.
- Be sure to discuss and reference concepts taken from the required and recommended readings throughout the course and also from your own relevant research.
- You must include a minimum of six credible academic, or professional references beyond the course text, required and recommended readings, or other course materials.
- Review the grading rubric to see how you will be graded for this assignment.
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Option 1: “Back to the Future”
I have chosen Option 1 for the final portfolio project as it is intriguing and more relevant
to my interests. The option will provide me with a valuable opportunity to improve my
understanding of the intricate approaches companies take to disclose certain transactions,
financial reporting, and 10-K filings (Franz, 2018). The project will also enable me to refine my
auditing skills, considering that I aspire to work in the Audit department after completing my
studies. I will also look at the captivating trajectory of a product’s impact on a financial statement
restatement while exploring the lessons learned and the intricacies involved.
My interest in this project stems from the allure of revisiting the past and understanding
the circumstances and context necessitating the current financial statement restatement. Ideally,
It is possible to embark on a journey through time to trace the unanticipated consequences,
implications, and evolution of a product sold nearly 60 years ago (Franz, 2018). Therefore, this
historical context prepares the stage for highlighting the significance of accurate record-keeping
and disclosure and for unraveling the intricacies of financial reporting.
The significance of this project goes beyond a simple exploration of a financial statement
restatement. The project provides intriguing lessons that positively impact one’s professional
growth. Choosing Option#1 for the final portfolio project gives me an enriching and unique
opportunity of building myself in line with my career aspirations. In this case, the project
provides the perfect nexus with my aspirations of working in the Audit department. It will also
allow me to develop a deeper appreciation for the relevance of transparency and accuracy in
financial reporting. Besides, the project will allow me to boost my skills in auditing.
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References
Franz, D. R. (2018). “Back to the Future” (Or How a Product Last Sold Almost 60 Years Ago
Resulted in a Current Financial Statement Restatement). Issues in Accounting Education,
33(2), 9-17.
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I.
Introduction
a) Owens-Illinois was established in 1929 through the merger of Illinois Glass Company
and Owens Bottle Machine Company.
b) The project portfolio project examines how asbestos sales performed approximately 60
years ago led to the current financial statement restatement in Owens-Illinois (OI).
II.
Asbestos Liability
a) The financial statement reinstatement conducted in 2015 enabled OI to account for the
$295 million asbestos liability incurred through past operations.
b) Asbestos exposure is considered a long-tail liability resulting from its environmental and
occupational exposure at manufacturing, mining, and usage levels.
III.
Financial Statements Restatements
a) The asbestos liability affected restatement on different Owens-Illinois’ financial
disclosures, including share owner’s equity, balance sheet, income statements, and cash
flow statement.
b) Cash Flow Statement
i.
A major annual increase in net earnings for Owens-Illinois company helped in
compensating for the cost increase resulting from the adjustment for asbestos
liability.
c) Income Statements
i.
Failure to account for asbestos-related costs led to the representation of highincome values in OI’s financial statements for 2013 ($133 million), 2014 ($89
million), and 2015 ($209 million).
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d) Share Owner’s Equity
i)
Annual financial reports shareholder’s equity and retained earnings decreased by
$593 million, $504 million, and $295 million in 2013, 2014, and 2015,
respectively, due to adjustments for costs associated with the asbestos liability.
IV.
Balance Sheet
a) Retained losses and asbestos-related increased by $504 million and $295 million in 2014
and 2015, respectively.
V.
Account Balance Materiality
a) Materiality represents the magnitude of accounting information’s misstatement and
omission that interferes with decision-making processes among users.
VI.
Affected Account Balances
a) Asbestos-related liabilities affect multiple account balances for the company, revenue,
debt, equity, and expense account balances.
VII.
Materiality Impacts
a) Asbestos-related liabilities understatement is a highly material account item that deceives
investors and reduces organizational financial statements’ reliability.
b) Omitting asbestos-related liabilities in OI’s financial statements forces investors to make
wrong investment decisions and taint the company’s brand image.
VIII.
Impacted Disclosures
a) OI’s management observes that financial statement restatements affected disclosure notes
22, 20, 17, 12, 10, and 2.
IX.
Financial Statements Restatement and Net Earnings
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a) OI’s management failed to include the asbestos-related liability in its financial statements
for 2013, 2014, and 2015.
b) The intentional omission of asbestos-related liability from financial statements is a
fraudulent activity that revealed a weak ethical environment in OI.
X.
Estimating Asbestos Litigation
a) Owens-Illinois estimated the asbestos litigation within three years to address uncertainties
and the related complexity.
b) OI’s management considers that reporting unasserted liability beyond three years is
difficult.
XI.
Treating Unasserted Liability
a) The management perceives liabilities as possible sacrifices of financial benefits related to
current organizational obligations to offer services to other parties due to past
transactions.
b) Owens-Illinois failed to adhere to accounting standards specified in ASC 450 and allocate
sufficient funds to future expenses related to asbestos-related litigations.
XII.
Asbestos Litigation Experience
a) Handling the unasserted asbestos liability creates the need for OI to improve its
transparency regarding investor communication.
b) Owens-Illinois has dealt with multiple lawsuits related to asbestos utilization and
manufacturing processes since the 1980s.
c) The management should implement proper interventions to protect OI from reputational
damage related to multiple asbestos litigations.
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XIII.
Conclusion
a) The omission of asbestos-related liability from financial statements has exposed OI to
costly lawsuits and reputational damage risk.
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References
Christensen, B. E., Eilifsen, A., Glover, S. M., & Messier, W. F. (2020). The effect of audit
materiality
disclosures on investors’ decision making. Accounting, Organizations and Society, 87,
101168. https://doi.org/10.1016/j.aos.2020.101168
Reason for selection: The article assesses the impact of material misstatements in
financial statements on investor’s decisions-making processes.
Franz, D. R. (2018). “Back to the Future” (Or How a Product Last Sold Almost 60 Years Ago
Resulted in a
Current Financial Statement Restatement). Issues in Accounting Education, 33(2), 9-17.
Reason for selection: The article provides comprehensive information about the OwensIllinois’ asbestos-related liability and the resulting financial statement restatement.
Moerman, L., & Van der Laan, S. (2011). Accounting for long-tail asbestos liabilities: Metaphor
and meaning.
Accounting Forum, 35(1), 11-18. https://doi.org/10.1016/j.accfor.2011.01.002
Reason for selection: The article provides detailed information on the corporate long-tail
liabilities associated with asbestos mining, manufacturing, and sale under diverse
regulatory frameworks.
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