For project K, In Q3, FY 2013, when the loss on Project K was estimated to be between 3.5 billion and 8.7 billion, Toshiba booked a loss of only 3.5 billion.Would such an approach be permissible under U.S. GAAP?( This question is on page 10, question 3, part (b)). Thank you so much!

ACC 422 Team Assignment #1 Toshiba's Creative Accounting for Construction Contracts Due Date: Wednesday, 9/20/2017 Learning objectives Identify, interpret and apply the new revenue recognition standard (ASC 606). Appreciate the distinction between a company's stated accounting policies and their implementation. Recognize the importance of estimates and judgments in the accounting process. Understand the critical role played by the senior management and organizational culture in ensuring integrity of financial reports. Requirements Each team should submit one set of written answers on the due date to receive the team grade for the case (see guidelines). Each student himself/herself should also have a copy of answers (not submitted to the instructor) in order to participate in oral discussion of the case during class. Be prepared for exam questions on the topics of the case and related class discussion. Toshiba's Creative Accounting for Construction Contracts "It's not my understanding that I gave orders for improper accounting, but the reality is that such an observation has been made." (Hisao Tanaka, Toshiba's President and CEO when he resigned on July 21, 2015) In one of the most egregious instances of wrongdoing in Japanese corporate history, Toshiba Corporation (hereafter, Toshiba, or the Company) was accused by Japan's Securities and Exchange Surveillance Commission (SESC) of overstating operating profit by 151.8 billion ($1.22 billion). On February 12, 2015, Toshiba received an order from the SESC informing the Company that it was \"subject to a disclosure inspection with respect to some projects in which the percentage-of-completion method was used.\" Realizing the seriousness of the issue, Toshiba set up an in-house investigation committee (hereafter, the Committee) which issued its 334-page report (hereafter, the Report) on July 20, 2015. Eventually, the Company restated earnings for a seven-year period (2008-2014) which resulted in slashing its profits by 224.8 billion ($1.86 billion). Background of Earnings Manipulation Toshiba's 2015 annual report stated that the earnings manipulations resulted from \"pressure caused by an awareness of concerns in the capital market, and a need to find new business opportunities in a harsh environment where individual divisions were recording weak performance as a result of negative impacts from the financial crisis, the Great East Japan Earthquake, the flooding in Thailand and an extremely strong yen, all at a time when traditional business markets were shrinking.\" Westinghouse Electric, a major subsidiary of Toshiba, also weighed down the Company's earnings. The acquisition of Westinghouse in 2006 for $5.4 billion had been widely perceived as expensive and ill-timed because subsequent developments such as the nuclear meltdown in Fukushima in 2011, and the revolution in shale oil and gas extraction, slowed demand for the nuclear technology. The financial press ascribed Toshiba's earnings manipulations to the global financial crisis of 2008 which weakened demand for Toshiba's products. However, the improper accounting at the Company had begun well before the crisis under Atsutoshi Nishida, Toshiba's Chief Executive Officer (CEO). When he was installed as Toshiba's CEO in 2005, Nishida told Reuters in an interview: \"Since 2000 we didn't clear our annual forecasts even once. We've lost the trust of the market. I want to start by getting people to trust Toshiba as a company that's solid in terms of hitting numerical targets\". In 2008, when Nishida heard that the firm was heading for a loss of 18.4 billion, he called the figure \"so embarrassing that we cannot announce it\" (The Economist, July 25th, 2015). His subordinates obliged by turning that number into a profit of 500m. 1 Toshiba used several techniques to manipulate earnings within each of its major divisions. This case deals mainly with the accounting issues related to the construction projects in its Energy and Infrastructure segment, where the use of inappropriate accounting techniques was particularly widespread. As mentioned in the Report, the irregularities included \"instances in which the total estimated cost of contract work was calculated without being based on the latest information regarding incurred costs; instances in which provisions for contract losses were not recorded at the time when it became clear that losses would arise; and instances in which the total estimated cost of contract work was calculated on expected cost reductions that lacked concrete substantiation (2015 Toshiba Annual Report, p.6).\" Of the total amount of overstatement of pretax income (224.8 billion), the amount related to the incorrect application of the percentage-ofcompletion method was 47.9 billion (21 percent). Toshiba Corporation Founded in 1875, Toshiba Corporation is one of Japan's oldest, largest and most diversified manufacturers of consumer electric and electronic products, and industrial and social infrastructure systems. In FY 20141, with sales of over 6.5 trillion (approximately, $63 billion), and about 200,000 employees, Toshiba ranked as the tenth largest industrial conglomerate in Japan. Although more than 60 percent of its sales were domestic, Toshiba brought Japan to the forefront of international business through its overseas sales. 16 percent of its sales in 2014 were in North America, 11 percent in Asia, and 10 percent in Europe. Toshiba is credited for having developed the world's first color video phone (in 1970) and the world's first expanded integrated-circuit color television (in 1971). Capturing its emphasis on innovation, in 2006 Toshiba adopted the brand tag line, "TOSHIBA Leading Innovation". Although it is well-known globally as a major manufacturer of PCs, tablets, TVs, washing machines, and robot vacuum cleaners, the segment of Toshiba that manufactures these products (\"Lifestyle Products and Services\") accounted for only 16 percent of Toshiba's sales in 2014. The other major segments of the Company consisted of Energy and Infrastructure (28% of sales), Electronic Devices and Components (24%), and Community Solutions (19%). Toshiba's business segments (groups) were comprised of seven companies. Of the seven companies, the three that dealt in long-term construction projects included Power Systems Company (PSC), Social Infrastructure Systems (SIS) Company, and Community Solutions Company (CSC). PSC designed and constructed facilities such as nuclear power plants, fast reactors, and reprocessing plants, and manufactured and sold steam and water turbines, turbine generators, power generation monitoring and control systems, etc. The SIS Company provided a wide range of products such as power distribution systems, railway and automotive systems, solutions and 1 All companies in Japan, including Toshiba, are required to follow a uniform fiscal year (FY) that starts on April 1 and ends on March 31 of the following year. 2 automation equipment, and radio wave systems. CSC developed smart solutions for society as a whole, by using information and communications technology and promoting the use of renewable energies. Corporate Governance and Performance Evaluation at Toshiba Each of Toshiba's major business segments (groups) was headed by a Group CEO (GCEO). In 1999, Toshiba introduced an in-house performance evaluation system, under which each division was treated and operated as an independent business segment. Each segment had a profit and loss responsibility and its president (called Company President or CP) had the authority over most business execution matters. The CPs reported to the GCEOs, who in turn reported to the President and CEO of Toshiba Corporation. The reports submitted by CPs to their GCEOs were deemed to be reports provided directly to the President and CEO of Toshiba Corporation. The Group CEOs were required to report any material violation of laws and regulations to Toshiba's Audit Committee. The Company also had a Corporate Audit Division, whose general manager reported to the Board of Directors on internal audit results. Toshiba's performance evaluation system was designed to energize the organization, promote autonomous responsible management, and improve the corporate value of the Group through continuous operational innovations. Every month, each division/company submitted its performance results and forecasts for the upcoming one-month and six-month periods to the Corporate Finance & Accounting Division, which was headed by Toshiba's CFO (Chief Financial Officer). The CFO compiled and reported this information to Toshiba's CEO. Based on the actual performance results for the preceding month and forecasts for the current month, the Corporate Accounting & Finance Division submitted proposals to the CEO designed to improve performance (called "Challenges") and the CEO determined the content of each Challenge. Company Presidents reported on their respective companies' performance results relative to forecasts at CEO Monthly Meetings, and at these meeting the CEO issued \"Challenges\" to them as necessary. Accounting Policies for Long-term Projects Although Toshiba follows accounting principles generally accepted in Japan, certain adjustments and reclassifications are made in its consolidated financial statements to conform to the accounting principles generally accepted in the U.S.2 The Power Systems Company and the SIS Company use the completed contracts method for smaller contracts (less than I billion for the 2 This practice is acceptable to Japanese regulators. Indeed, Japanese companies can choose from one of the four sets of accounting standards to file their consolidated financial statements: Japanese GAAP, IFRS, U.S. GAAP, and Japan's Modified International Standards. (Accounting Standards Board of Japan, accessed at: https://www.asb.or.jp/en/jp-gaap/about.html) 3 Power Systems Company, and less than 500 million for the CS Company), and for contracts with a construction period of one year or less (the Report, p. 42). Toshiba's 2014 Annual Report (p. 47) disclosed the following accounting policies3 for its longterm construction projects. For bigger and/or longer duration projects, when estimates of the extent of progress toward completion and contract costs are reasonably dependable, revenue from the contract is recognized based on the percentage of completion. To measure the extent of progress towards completion, the Group generally compares the costs incurred to date to the estimated total costs to complete based upon the most recent available information. A provision for contract losses is recorded in its entirety when the loss first becomes evident. For equipment that requires installation, such as Energy and Infrastructure, revenue is recognized when the installation of the equipment is completed, the equipment is accepted by the customer and other specific criteria of the equipment are demonstrated by the Group. Revenue from services, such as maintenance service for plant and other systems, that are priced and sold separately from the equipment is recognized ratably over the contract term or as the services are provided. Role of Culture in Accounting Manipulation As previously mentioned, Toshiba's corporate leadership often issued aggressive profit targets, known as \"Challenges\