Liquidating damages accounting. operating income
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Consent That other is located in further detail in Particular 16 on track approach or comparables.
Selected Financial Data, page 8. Please tell us why you omitted the 5 most recent fiscal years presented under U. A of the Form F.
Accounting. income damages Liquidating operating
Response 1. We acknowledge that we inadvertently omitted certain of the required information, and we will add the prior year information previously included in our prior year annual filings. Accordingly, we will include the 5 most recent opsrating years presented under U. Additional Information. Prices, page Provide accounying. with more Liquidating damages accounting. operating income of the Astrium agreements including your accounting for the post-launch and other payments and for the liquidated damages.
Response 2. Accoutning. under the contracts is structured in terms of progress payments which are based on the completion of specific milestones. The milestones have been split into pre-launch and post-launch milestones, including spacecraft performance incentives. Incentives Liauidating to achieving satisfactory operation also referred to operatinf post accountimg. performance payments or deferred satellite payments are accounted for by opdrating the net present Liqudiating of Lisuidating future payments at the point the satellite becomes operational to property, plant and equipment. Accountiing. liability equal to the capitalised future Liquidaring is recorded and the discount or interest Liquidatign in the net present value calculation unwinds over the period of the deferred satellite payments.
This unwinding interest is charged to the interest damagew in the Income Statement. Liquidatijg addition to remedies for late delivery, Astrium is also liable for remedies for exceeding the specified mass of the completed spacecraft. These two remedies are collectively referred to as liquidated damages. The liquidated damages are calculated by reference to the actual contractual terms and are typically calculated per day. These liquidated damages have been credited to property, plant and equipment. Additionally, due to certain delays caused by Astrium in the anticipated launch date of the new satellites, Inmarsat was required to lease additional capacity for the delay period in order to provide continued service to our R-BGAN customers.
As a result of the delay of delivery by Astrium, the company had negotiated reimbursement of these anticipated additional leasing costs with Astrium in the form of liquidated damages to be paid in While the original construction contract did not include a provision for liquidated damages specifically related to lease costs it did allow Inmarsat other rights of remedy such as the ability to cancel the contact altogether. Negotiations with Astrium resulted in an amendment to the construction contract that addresses the reimbursement of the incurred lease costs in addition to potential additional lease costs in the event of further delays.
This means that where expenditure is recognised in the Income Statement, any re-imbursement is treated as income. Reimbursement of capital expenditure is carried as deferred income and amortised to income over the life of the asset. Specifically, IAS 20 paragraph 20 states: The proposed SoP states that a purchaser of property, plant and equipment must record the receipt of contractually specified liquidated damages that are recoverable from the seller as a reduction of the property, plant and equipment cost. The purchaser should recognise as income any such damages in excess of the total property, plant and equipment cost.
Under U. GAAP the amounts have been dealt with as a deduction to the cost of property, plant and equipment. Financial Statements. Consolidated Income Statement, page F Tell us how you considered IFRS in the accounting for the sales of these subsidiaries. Response 3. Our conclusion in both cases was that the businesses should be classified within continuing operations. Neither Invsat nor Rydex constituted a separate business segment on a standalone basis. It was therefore not considered appropriate to aggregate them for the purposes of this analysis. Invsat contributed approximately 2. When there is less likelihood of having to make a payment or it is not possible to calculate the amount of such a future payment, the company records a contingent liability in the notes to the accounts, but does not record the amount as an expense.
Related-party transactions — companies are required to list transactions with related parties in their financial statements. The related party note can be a useful place to understand the relationship between entities that appear to be under common ownership. Flexibility, consistency and estimates Preparers of financial statements often face a choice of ways of applying accounting policies; for example, the depreciation rate. Indeed, one of the challenging areas of interpreting accounting information is the fact that one is often choosing between two or more reasonable treatments.
Within this flexibility, there is the need for preparers to be consistent Liquidating damages accounting. operating income their treatment from year to year. The very nature of business means that preparers are faced with uncertainty, meaning that estimates must be made. It is worth bearing all of this in mind in relation to damages claims, because accounts are the building blocks of quantum. Basic principles of damages — loss of profit If an entity has suffered damages, but still continues in operation, the goal of a damages award is to put the claimant back into the position in which it would have been, had the company not suffered the damage; for example, if a contract had not been breached.
The second limb is normally relatively straightforward; for example, the profit the claimant actually made. What is more difficult is calculating what would have happened if the contract had not been breached i. The but-for scenario needs to be realistic, and one needs to remember that the calculation can only ever be an estimate — because nobody can ever actually know with complete certainty what would have happened in an alternative universe in which the breach of contract, or treaty, never occurred. The but-for scenario also needs to be possible e. The following graph illustrates the basic calculation of economic damages: The damages suffered by a claimant in a commercial arbitration are likely to be based on the profits that it would have earned, had the breach of contract not occurred, but which it did not actually earn.
While in theory one can simply estimate the profits in a but-for scenario, the calculation is likely to be more accurate if the loss of profit is broken down into its constituent parts, which are: The damages expert tends to estimate the loss of future revenue of a business as a separate exercise — this is often the parameter that drives profitability, and it may also be the most difficult and subjective number to estimate. Overhead costs are the costs a company incurs that are not directly related to producing its output for sale. When calculating overheads, it is important to distinguish between variable overheads that are linked to sales such as transport and distribution costs and fixed overheads that remain the same regardless of the level of sales such as general and administrative costs.
Variable costs need to be deducted in calculating the future loss of profits, whereas fixed costs may not change at all whether the company is selling anything or not, and so they are generally not deducted in a loss of profits calculation. There are three commonly used ways of doing this: If the company had its own forecast of the future profits it expected to make, this may be the best data to use to estimate what would have happened, but for the breach. However, before relying on a forecast, one needs to consider the purpose for which it was prepared, and how accurate it is likely to be.
Extrapolating from the past to the future. Where a company has been operating for many years, and has a track record of always achieving a certain level of sales and profit, and where profits have grown consistently at, say, 5 per cent per year, the best estimate of future profits may be an extrapolation of past profits.
This may be based on professional judgement, or it may be based on a statistical regression line, which estimates the future based on the past. Comparison with damagess actually happened to opegating similar company or store. Frequently arising issues Having set out the basic principles of how damages are calculated, some issues that frequently arise in arbitration include the following: Lack of trading history — the claimant may have no history of trading. Many claims arise very early on in a project life cycle, for example, because one party terminated the contract while the factory was still being built and before it started trading.
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However, if the claim is based on the company using the damages recovered from the respondent to recapitalise its business and start trading again, a key question is how long that will take, and what resources it will require for the company to ramp its business back up to its previous Liquicating of operations. The use of hindsight — a key legal question is whether or not one should accoynting. account of hindsight in calculating damages. This may depend on the jurisdiction of the claim — for example, the traditional position in English law was that damages for breach of contract were evaluated at the date of the claim, but this has been modified by the case of Golden Strait Operatng v.
Nippon Yusen Kubishika Kaisha  UKHL 12 known as the Golden Victoryin which the House of Lords held that accointing. an accurate assessment of damages based on the losses that had actually happened was more important than considerations of contractual certainty dqmages finality. In other jurisdictions, Liqujdating use of hindsight in calculating damages is the default position. Sunk costs — generally, costs that have already been incurred at the date of the loss cannot be claimed in addition to lost future profits. This is because profits can only be generated acvounting.
the factory that will be used to generate them already exists, and so it would be double-counting to claim for both loss of profits and the cost of building the factory. Overhead recovery rates — an issue that often arises is the definition of what exactly is a cost. For example, the cost of employees may be measured as the amount actually paid to them including overtime, pension, etc. Management time — again, the principles here may vary between jurisdictions, but generally the rule is that one can only claim damages for lost management time if the claimant can demonstrate that this management time would otherwise have been spent on generating profits on other projects.
This is because management time is a fixed cost that would have been incurred whether or not the event causing the loss had occurred. Chapter 11 on assessing damages for breach of contract discusses the valuation of damages for breach of contract in greater detail. This is because the actual value of the asset or company tends to be zero, while the but-for value tends to be the value of the company immediately before the event of expropriation. Consequently, this approach is commonly used to quantify damages in investment treaty expropriation cases.
The income or discounted cash flow, DCF approach. This approach is commonly used because it can be applied to any company or project that has reliable projections of future income. The approach involves estimating the future cash flows from the company or the project, and then discounting these back to a net present value by applying a suitable discount rate. The big challenges in applying this approach in practice are calculating reliable cash flows into the future and calculating the discount rate. This approach is discussed in further detail in Chapter 14 on income approach and the discounted cash flow methodology and Chapter 15 on determining the weighted average cost of capital.
This simple insight is the basis for discounting. The key, of course — and one can see this when one considers how interest rates have changed over the past decade — is what is a suitable rate to discount at. The market or earnings approach. This approach values a company by multiplying its annual earnings by a multiple based on multiples applicable to other similar quoted companies. This is the method more commonly used for valuing companies being bought and sold in the real world. It is often used as a check on a valuation given by the income approach.
This approach is discussed in further detail in Chapter 16 on market approach or comparables. A company may also be valued on the basis of comparable transactions in similar companies or of the company itself. The net assets approach. This approach values a company on the basis of the value of its assets.