American Superconductor Company - Essay Example

? Accounting Changes Contents Contents Introduction 3 Company Background 3 Reasons for Re ment 4 Impact of Financial Re ment 5 Impact of Trustworthiness of the Company after Financial Restatement 6 Other Changes 6 Conclusion 6 Reference 8 Introduction Every company prepares financial statements quarterly or half yearly every year. These financial statements are prepared maintaining the company policies, accounting standards and principles followed in that country, like in USA accounting is done on the basis of US GAAP model and based on international accounting standards. They also have to follow the guidelines given by Securities and Exchange Commission. Financial statements are used by all the stakeholders of the company. They are made to provide true and fair view of the financial health of the company. Hence if the statements do not give true and fair view of the financial health of the company statements have to be restated. Company Background In this project, restatement of financial statements of the company American Superconductor (AMSC) has been studied. American Superconductor deals in power generation systems. It develop system both mechanical and electrical equipments which are used in wind turbine system. They are also into the business of manufacturing power cables and system of voltage stabilization (American Superconductor-a, 2011). It is quoted in NASDAQ. The current share price is $7.78 (American Superconductor-b, 2011). Its last five years it had grew annually by 27.56% and the revenue grew by 40.22%. In terms of profitability currently its operating margin is 16.23% (American Superconductor-c, 2011). Most of its shares are held by Douglas. They hold about 10797500 shares. Many financial institutions like RCM Capital Management LLC, Columbia Partners LLC Investment Management etc also hold shares of American Superconductor (American Superconductor-d, 2011). The president and chief executive officer of American Superconductor is Dan McGahn (American Superconductor-e, 2011). The main decisions are taken by its board of directors. The board of directors comprises of six members. Reasons for Restatement On 11th of July American Superconductor announced that they will restate the financial statements of second and third quarter of 2010. The main change which they want to implement is to record its transaction as per cash basis. Previously American Superconductor had recorded some receipts on the basis of receipts of shipments but the payments were still due on those transactions. They had a pile of pending money due from the customers. As a result they had a history of operating losses. Most of the shipments receipts were not ever paid. All these things were increasing the operating loss. This also resulted on incorrect disclosure of revenues. Hence it decided that after 31str of August. AMSC will not consider revenues from certain Chinese customers until they are paid. This excluded Sinovel from whom American Superconductor had not received any amount in the first quarter. As the amount of debtors was increasing, the company was falling short of liquid cash. The new projects were getting delayed because of unavalibility of liquid cash. The company was also suffering because of exchange rate. The company also has many foreign buyers who made the payments at a later date due to which the company had also suffered loss because of exchange rate fluctuations. They had a plan of acquiring the company but because of not having enough funds, the plan was getting delayed. There was also a risk that if they failed to acquire the Switch their share price may decline and there goodwill will also be affected. Therefore they decide to restate the financial statements which will present true and fair view of their revenues, the actual revenues which they can use (Davens, 2011). Impact of Financial Restatement As we it is already discussed that when the financial statements does not give true and fair view of financial health of the company the financial statements need to be restated. The American Superconductor also decided to restate the financial statements on cash basis so they can have a proper idea of the actual revenues which they are having and which can be invested. The restatement has a great impact on the stakeholders of the company which includes the shareholders, creditors, customer etc. Shareholders: When the financial statements of the company are restated then the people who are most affected are the shareholders. In the case of American Superconductors the restatement of financial statements will result in decrease in net profit as the revenues will decrease. The management of the company predicts that restatement will result into decrease in revenues of 3rdand 2nd quarter to about $43 million and $98 million respectively. This can lead to a decrease in share price which in turn will affect the shareholders. Creditors: Restatement of financial statements will decrease the net profit but by adopting the cash basis method of accounting the creditors will now be able to assess the credit worthiness of the company more accurately as they will now be able to judge the revenue earning capacity of the company. Investors: Investors are mainly concerned with the profitability and solvency position of the company. The restatement of financial statements will make them aware of the true profitability position of the company as well as the solvency position of the company. Customers: Customers will be able to trust the company more because the company will present the true and fair view of revenue. Financial results: Financial restatement will have a major impact on financial result. On one hand the net profit will decrease on the other hand the burden of debtors will reduce. Revenues can be directly related with the liquidity position of the company. Impact of Trustworthiness of the Company after Financial Restatement When a company does a restatement it gives a clear message to its stakeholders that they have done any mistake in the financial statement for which it is not showing the true financial health of the company and thus they want to correct it. This can on one hand boost up the trust of the stake holders because this type of decision shows the company’s concern about its stakeholders on the other hand the stakeholders can be suspicious that there may be some other wrong decisions and policies which also need to be corrected. Other Changes With the restatement of the financial statements the company should also consider some other change which can be brought in the company so that the restatement can be properly done and in future it won’t be needed to restate it again. The company should hire good financial analyst who will analyse the company as a whole and will point out the other grey areas which needs to be corrected. Conclusion Restatement has both pros and cons. The management of the American Superconductor’s decision to restate the financial statement will surely give a clearer picture of actual revenue but whether it will increase the profit from operations is a matter of concern. Therefore, investors must go for a comprehensive research for analysing the operational performance of the company. Reference American Superconductor-a. (2011). About us. Retrieved on July 21, 2011 from http://www.amsc.com/aboutus/index.html American Superconductor-b. (2011). About American Superconductor. Retrieved on July 21, 2011 from http://www.amsc.com/investors/index.html American Superconductor-d. (2011). Top Shareholders. Retrieved on July 21, 2011- from http://www.amsc.com/investors/topshareholders.html American Superconductor-c. (2011). Fundamental Ratios. Retrieved on July 21, 2011 from http://www.amsc.com/investors/fundamentals.html American Superconductor-e. (2011). Management Team. Retrieved on July 21, 2011 from http://www.amsc.com/aboutus/management_team.html Davens, M. (2011). American Superconductor to Restate Financial Statements for Second and Third Quarters of Fiscal 2010. Retrieved on July 21, 2011 from http://www.amsc.com/investors/index.html Read More