Structuring Membership Fees
To meet the ‘matching principle’ of GAAP, Bally should the organization should account for the one-time enrolment fees pro-rata for the 36 month period to which the fees are applicable. The portion of the one-time enrolment fee attributable to the periods occurring beyond the year of receipt (relating to the second and third calendar years) should be reflected in the books of the company at the close of the respective accounting period as unearned or deferred income. The organization can charge off the cost of enrolling and certain other operating expenses as prepaid membership costs. These operating expenses can be deducted pro-rata over the same periods over which the company recognizes the enrolment fees as income. The company can account for the monthly membership fees as income for the respective months and charge the operating expenses against such membership fees.
Impact of Financial Restatement on Stakeholders
The restatement of the company’s accounts incorporating the intended changes in the accounting policies may not have any effect on its members. The members would continue to pay the enrollment fees for the defined period and enjoy the benefits of continuing the membership at concessional rates once they complete the contracted period. The employees would get affected to the extent of the benefits payable to them which have a link to the profits of the company. For instance, if the employees are to receive bonuses or other incentives based on the net earnings of the company, the changed accounting policies may impact them adversely. The stockholders are the worst hit people by the change in the accounting procedures. Because of the changes, the profitability of the company has been adversely impacted for the year 2003 which ultimately had its effect on the share prices in the market (Exhibit 7). Since the company’s shares are publicly traded, the investors who had invested in the shares of the company at higher prices would stand to lose because of the decline in the share price due to lower profitability.
Aspects that make Bally vulnerable for a Takeover
Even though Bally could see a surge in the number of members and membership fees as at the end of the year 2003 and early 2004, the reduced profitability and the inability of the company to present the restated accounts for the year 2003 would have created a doubt in the minds of the investors. This negative feeling in the minds of the investors would have made the price of Bally’s shares go down further. This created an impression that the company is a financially weak one eligible as a potential candidate for takeover by strong competitors in the market. The changes in the accounting procedures have resulted in the company declaring a loss for the year 2003 (Exhibit 6) which made the investors shy away from investing in the shares of Bally. Apart from the reduced profitability for the year 2003, the company’s announcement that it was finding problems in the past accounting methods would create an impression that the company had continuously misrepresented its financial position by inflating profits. This is a vulnerability that would encourage the competitors to offer a possible takeover of Bally. The reduced share price would provide additional support to their claim for takeover.