Assignment 2 Accounting Changes for Office Depot Dawna Berry, Rochelle Morton, Jose Pinto ACC 499 Undergraduate

e Accounting Capstone Professor Dr. M. Austin Zekeri November 1, 2012

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1. Discuss the primary reason for the restatement and the impact to the financial

results for the company you selected. The primary reason for Office Depot restating their financial statements was because in 2010 the Internal Revenue Service determined some losses were improperly accounted for, which forced the company to restate financial results that turned a meager 2010 profit of $33 million into a $46 million loss (Troy). The companys 2010 financial statements included in the Original Form 10-K were prepared reflecting the expected carry back of certain net operating losses (http://www.annual reports.com). The companys position was based on its view, after consultation with its tax advisor, that its tax losses qualified for extended carry-back provisions enacted in 2009. That position resulted in the company recognizing a tax benefit of approximately $80 million in the 2010 statement of operations (http://www.annual reports.com). The company filed its carry back claim in February 2011 and in March 2011, the claim was denied by the Internal Revenue Service. Because the company has recognized full valuation allowances on its domestic deferred tax assets, the tax benefits recognized in the 2010 financial statements no longer met the accounting recognition criteria (http://www.annual reports.com). The net operating losses included in the denied carry back claim will be available to offset what would otherwise be future tax payments over a 20-year period (http://www.annual reports.com). The impact of correcting that error is to reduce previously recorded full year tax benefits by approximately $79.5 million, change net earnings for 2010 from $33.3 million to a net loss of $46.2 million, increase the net loss attributable to common shareholders from $2.2 million to $81.7 million and increase loss per share from $0.01 to $0.30 (http://www.annual reports.com). Additionally, the current tax receivable of approximately $63 million has been removed from the balance sheet at December 25, 2010 (http://www.annual reports.com). The impact to quarterly
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periods is a reduction in diluted earnings per share of $0.02 in the quarter ended June 26, 2010, and $0.06 in the quarter ended September 25, 2010 as compared to amounts previously reported (http://www.annual reports.com). These restatements relate to non-cash entries in the 2010 financial statements and the reduction in net earnings has been offset in the consolidated statement of cash flows by a change in working capital and other items (http://www.annual reports.com). This change in tax position, however, reduces the companys outlook of projected 2011 cash flow from operations by eliminating the corresponding tax receivable (http://www.annual reports.com).

2. Discuss management responsibility to the investors and stakeholders for the financial restatement. (The expected impact of correcting the 2010 financial statements is to reduce full-year tax benefits by approximately $80 million, change net earnings for 2010 from $33 million to a net loss of $46 million and increase the net loss attributable to common shareholders from $2 million or $0.01 per share to $82 million or $0.30 per share. Additionally, the $63 million current tax receivable associated with the carry back amount will be removed from the balance sheet at December 25, 2010 and will adversely impact anticipated 2011 operating cash flow) (Reference: Office Depot, Press Release- Mar 31, 2011; investor.officedepot.com). Due to misstatements done in previous periods in 2010 the company was forced to correct those errors in the financial statement in the current period of 2011. These conditions suggested a rigid coordination of the internal operations of Office Depot management. The objective is to study and examine why the restatement and what parties were responsible. Moreover, the company
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should examine the operating process, its design, and its activities to follow the flow of its accounting method. Pertaining the financial reporting process, management should report both financial and nonfinancial Key Performance Indicators (KPI) that assists investors to predict the companys future performance. Also, it is a responsibility of management to comply with rules and regulations, laws, including regulatory, legal, tax, and environmental, social, and ethical standard practices. (Reference: Corporate Governance and Ethics, Zabihollah Razzaee 2009). To control adequate reporting, management is responsible to review and audit financial statements to governance any irregularities, and avoiding following GAAP, SEC, and IFRS etc. will result in materially misstated financial statements and therefore unlawful reporting. Post restatement, management should reassess the future of the company, providing all sort of information to interpret financial statements, this information should be provided to higher and lower level of management. Management should also discuss past performances and accurately analyze its financial current conditions and risk exposure in the market (Corporate Governance and Ethics, Zabihollah Razzaee 2009). And ultimately, management is responsible for the direction of the company, which includes reorganization of personnel, reconstruction of its body, and discipline of ethical conduct within the organization.

3. Discuss what changes you would expect the company leadership to make related to

internal controls, accounting principles, or other initiatives as a result of the need to restate the financial statements.
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At their corporate headquarters, their Chairman and CEO resigned in October, and their board of directors is actively searching for a permanent replacement. In the interim, veteran board member Neil Austrian is functioning as their Chairman and CEO on an interim basis, and, among other initiatives, has approved a number of cost reduction programs. However, a permanent CEO may alter the current strategic initiatives or effect other changes. They have reviewed their property lease portfolio and adjusted initial lease terms to include option renewals that are reasonably assured of being exercised and included the straight-line effect over the lease term of escalating rents during the option periods and have recognized the effect of pre-opening rent holidays over the related lease terms. They have also reviewed their leasehold improvements to ensure amortization over the shorter of their economic lives or the adjusted lease term. Tenant allowances have been reclassified from a contra asset in property and equipment, net to other long-term liabilities in the Consolidated Balance Sheets. Tenant allowances have also been reclassified from a reduction of depreciation and amortization expense to a reduction of rent expense in the Consolidated Statements of Earnings and from a reduction of capital expenditures to an increase in cash provided by operating activities in the Consolidated Statements of Cash Flows. Retained earnings at the beginning of fiscal year 2002 have been adjusted for the after-tax impacts of earlier periods.

4. Discuss the impact to the trustworthiness of the companys leadership team based on the need to restate the financial statements.

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Odland as chairman and CEO and a search for a replacement is now in its six month, with Austrian continuing to serve in an interim capacity (Troy). As with having to go through this Im sure some trustworthiness has been lost. The company obviously started at the top by getting rid of the CEO. By eliminating the CEO it helps to reassure some trustworthiness in the company. After all the company only had to restate their 2010 financial results and it had no impact on their previously reported 2010 EBIT or EBITDA and no net impact on 2010 cash flows (Eagan).

References:

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B. Levine, Office Depot, Office Depot Announces Restatement of 2010 Financial Results Following Denial of Tax Claim, 9-22-2012, Retrieved October 26, 2012 at http://investor.officedepot.com/phoenix.zhtml?c=94746&p=irolnewsArticle&ID=1544921&highlight=

Matt Eagan. Published April 1,2011 Fox Business Office Depot to Restate 2010 Results, Shares Slump http://www.foxbusiness.com/markets/2011/04/01/office-depot-restate-2010-resultsshares-slump/

Rochelle Morton Jose Pinto Dawna Berry

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