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Started By
Message
Sears, Going Concern, and Changing Rules
Posted on 3/22/17 at 2:26 pm
Posted on 3/22/17 at 2:26 pm
LINK
My CPA brothers (do we have any sisters on here??) and intrepid investors are well familiar with the concept of going concern - basically, can the company remain solvent through the next 12 months.
Several things coming together here.
1) For periods ending on or after January 1, 2017, management is now required to make a going concern assessment. This is new. Sears seems to be the first major company to do this. The company measures going concern for the 12 months following the financials release date, which was March 21.
2) The auditors are still required to assess going concern and modify the report if needed. Deloitte did NOT issue a going concern paragraph. However, the auditors measure going concern from the balance sheet date - in this case, Jan 27.
3) When the rule for management to assess came out a couple of years ago, there was an assumption that some auditors would issue the paragraph, but the management would not. I don't think anyone really considered what happened here - the auditors didn't but the management did.
4) So, what happened? Are they using different projections? Or is this simply a case of the calendar... at Jan 27, there was no issue, but further deteriorating conditions meant that by March 21, there was now a going concern, well, concern!
I do think the long, slow, painful death march of Sears Holding is heading to a conclusion. As they sell off their best brands, there isn't much reason left for anyone to visit them.
My CPA brothers (do we have any sisters on here??) and intrepid investors are well familiar with the concept of going concern - basically, can the company remain solvent through the next 12 months.
Several things coming together here.
1) For periods ending on or after January 1, 2017, management is now required to make a going concern assessment. This is new. Sears seems to be the first major company to do this. The company measures going concern for the 12 months following the financials release date, which was March 21.
2) The auditors are still required to assess going concern and modify the report if needed. Deloitte did NOT issue a going concern paragraph. However, the auditors measure going concern from the balance sheet date - in this case, Jan 27.
3) When the rule for management to assess came out a couple of years ago, there was an assumption that some auditors would issue the paragraph, but the management would not. I don't think anyone really considered what happened here - the auditors didn't but the management did.
4) So, what happened? Are they using different projections? Or is this simply a case of the calendar... at Jan 27, there was no issue, but further deteriorating conditions meant that by March 21, there was now a going concern, well, concern!
I do think the long, slow, painful death march of Sears Holding is heading to a conclusion. As they sell off their best brands, there isn't much reason left for anyone to visit them.
11
Posted on 3/22/17 at 2:56 pm to LSUFanHouston
I don't know this concept but if Sears does go out of business, I'm going to tear up the tool section when they have sales
Posted on 3/22/17 at 3:21 pm to LSUFanHouston
who would downvote my post? explain?
Posted on 3/22/17 at 4:21 pm to LSUFanHouston
I didn't down vote, and I don't understand why anyone would. I found the post informative.
Posted on 3/22/17 at 4:34 pm to LSUFanHouston
Unusual that Sears did and Deloitte did not.
The bar for management is 'probable' within 12 months of the date of issuance that it will not meet its obligation.
PCAOB rules for auditors is 12 months from date of financials and is a significant doubt standard.
Also auditors can take into account mitigating plans and assess the likelihood of those being effective (although most auditors want these plans in stone).
ASC 205 does not allow management to take into account things that are not fully implemented regardless of probability of implementation. That could be the difference.
But you are right, in general a cold reading of the new standard along with how Firms instituted AS 2415 suggested that the bar for management to conclude it is a going concern issue was much much higher. This runs contrary
So it could be the calendar as you suggested or some mitigating plan that is highly likely (and appeased Deloitte) but management could not bake in.
The bar for management is 'probable' within 12 months of the date of issuance that it will not meet its obligation.
PCAOB rules for auditors is 12 months from date of financials and is a significant doubt standard.
Also auditors can take into account mitigating plans and assess the likelihood of those being effective (although most auditors want these plans in stone).
ASC 205 does not allow management to take into account things that are not fully implemented regardless of probability of implementation. That could be the difference.
But you are right, in general a cold reading of the new standard along with how Firms instituted AS 2415 suggested that the bar for management to conclude it is a going concern issue was much much higher. This runs contrary
So it could be the calendar as you suggested or some mitigating plan that is highly likely (and appeased Deloitte) but management could not bake in.
This post was edited on 3/22/17 at 4:37 pm
Posted on 3/22/17 at 5:05 pm to LSUFanHouston
How are they still solvent?
Posted on 3/22/17 at 5:17 pm to LSUFanHouston
Not surprising to me really considering how the stores are run. The Lafayette store's is basically run like your average Burger King. The employees seem to not give a shite about the condition of the store. I asked an employee if he could unlock a torque wrench off the display and he acted like it was a huge inconvenience to him. Partially bare shelves with merchandise all mixed up. The electronics section still has things in the displays that are years old and outdated.
I would imagine the Crafstman brand will survive even if Sears goes belly up.
I would imagine the Crafstman brand will survive even if Sears goes belly up.
Posted on 3/22/17 at 5:19 pm to LSUFanHouston
Pretty interesting considering like the above poster stated, the auditing firm could have felt the mitigating plan to reduce the doubt by managements response was sufficient for it to not be considered substantially doubtful.
But then management did consider it doubtful. Timeframe may be the only true difference? I'll follow this as I'm curious why.
But then management did consider it doubtful. Timeframe may be the only true difference? I'll follow this as I'm curious why.
Posted on 3/22/17 at 5:36 pm to LSUFanHouston
If management properly discloses their inability to continue as a GC, does the audit report really need to state the same?
Posted on 3/22/17 at 5:39 pm to ScrapPack
quote:
I would imagine the Crafstman brand will survive even if Sears goes belly up.
Yes it will. . . because Sears agreed to sell it to Black and Decker earlier this year.
Posted on 3/22/17 at 6:30 pm to LSUFanHouston
Seems odd to me too. My only guess is that Eddie Lampert has several family members who post here.
Posted on 3/22/17 at 6:39 pm to LSUFanHouston
Craftsman and Kenmore are brands I assume would survive in some capacity. Although I bought a more quality tool chest from Harbor Freight than the Craftsman that I compared it to. I feel that Craftsman quality has definitely gone downhill since the 80's. And tires are cheaper at Sams/Costco. I honestly don't see how Sears can survive, now that I look at it. The Kmart merger didn't help things either.
Posted on 3/22/17 at 7:10 pm to LSUFanHouston
The auditors (KPMG) for the City of Detroit issued a similar note in the 2011 CAFR that they could not guarantee the City's ability to continue as a GC. Reading that about one of America's largest cities was ... interesting.
Posted on 3/22/17 at 11:38 pm to igoringa
Thought they just changed rules to auditors assessing 12 months as of report date vs. FS date. Some firms have always done this anyway.
Posted on 3/23/17 at 1:46 am to bbrownso
quote:
Yes it will. . . because Sears agreed to sell it to Black and Decker earlier this year.
Well there you go.
Posted on 3/23/17 at 7:21 am to LSUFanHouston
Sears should sell off the entire business except for their standalone appliance showrooms. We bought our house two years ago and we purchased all of our appliances from a Sears showroom. It was by far the best experience of any place to shop and they have excellent products. I was reading that they are probably going to sell off their Kemore brand just as they did with Craftsman recently.
They should've gotten completely out of the clothing and general retail game a few years ago. They should have focused on being a high-end tool, appliance, and possibly electronics store. Instead they became a store that attracted people who buy discount clothing.
They should've gotten completely out of the clothing and general retail game a few years ago. They should have focused on being a high-end tool, appliance, and possibly electronics store. Instead they became a store that attracted people who buy discount clothing.
This post was edited on 3/23/17 at 7:31 am
Posted on 3/23/17 at 8:36 am to headedwest21
quote:
don't know this concept but if Sears does go out of business, I'm going to tear up the tool section when they have sales
Tools closeout at Cortana mall has been pretty awful. Only weeks left from closing and most stuff is still only 30%, and still more expensive than online.
Posted on 3/29/17 at 3:18 pm to Drive4show
quote:
Thought they just changed rules to auditors assessing 12 months as of report date vs. FS date. Some firms have always done this anyway.
No - auditor is still 'reasonable period of time'. "The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (hereinafter referred to as a reasonable period of time)."
It is ASU 2014-5 that pushes the evaluation to management too and they have the 12 months from issuance horizon.
Posted on 3/29/17 at 7:22 pm to LSUFanHouston
Why couldn't they restructure and get out of clothing. It seems to me that they could still remain competitive if they stuck with big appliances, tools, and kept their auto service centers.
Posted on 3/29/17 at 9:03 pm to bbrownso
quote:
Yes it will. . . because Sears agreed to sell it to Black and Decker earlier this year.
Craftsman has had a huge dip in quality already, Black and Decker will finish the decline by making it the easy bake oven of tools
Sad that these once great tools will be like Stanley tools, bargain shelf at Walmart
This post was edited on 3/29/17 at 9:04 pm
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