Philadelphia Communications Inc. (Philly) Accounting Issues

Accounting Research
Name:
Subject:
Date of Submission
MEMORANDUM
TO:
DATE: 
SUBJECT: GROUP PROJECT 2 (PHILADELPHIA COMMUNICATIONS)
Your group will conduct research on an accounting case assigned to you and prepare an accounting issues memo. Each case contains several questions that are essential to the case and should be addressed and incorporated into your memo and presentation. Your memo and presentation should follow the instructions listed in the course syllabus and should address the following issues.
1 Briefly describe the basic facts of the case. Identify the key accounting issue(s) the company needs to solve. List and describe at least two alternative solutions to each of the accounting issues.
Philadelphia Communications Inc. (Philly) is a public company that just completed its initial public offering (IPO) a few months ago. John Sigar is a descendent of the founding family of Philly and serves as CEO and a member on the board of directors. Mr. Sigar is the only member from the founding family still involved in the business.
As a summer intern, we have been assigned to help test accounts receivable, specifically receivables from shareholders. In the past, Mr. Sigar's cousins have frequently received notes and have never failed to repay. These notes are secured by shares of Philly's convertible preferred stock purchased by the family member following the IPO. The receivables do not specify interest or payment terms for the notes. Since the family members are considered "related parties," there are some special presentation or classification issues regarding these sorts of receivables and some extra disclosures as a result. There is nothing in regards to this issue from last year because this is the first year the family has borrowed from Philly in the form of secured notes. Collectability on these notes do not seem to be an issue because the Sigars are very wealthy and the preferred stock that secures the notes are worth a decent amount more than the amounts due.
The key accounting issues here are how to account for receivables from shareholders, specifically officers and executives, and whether or not there are special presentation or classification issues regarding these receivables. The possible options would be to account for the receivables as a debit to current assets (ASC 505-10-45-2), or to account for them as a debit to stockholder's equity (ASC 310-10-S99). Another thing to consider is whether or not to disclose of these notes separately in the footnotes of the financial statements.
2 Search the FASB Codification to identify authoritative literature that either deals directly with the accounting issue or that provides guidance on an analogous accounting issue. List and describe the authoritative literature in support of each of your alternatives. Identify and describe any non-authoritative literature you use, if any.
The FASB Codification ASC 505-10-45-2, addresses the issue of how to account for note receivables from Philly's "related-parties" and whether to debit them as current assets or debit them as shareholders equity.
ASC 505-10-45-2 states:
An entity may receive a note, rather than cash, as a contribution to its equity. The transaction may be a sale of capital stock or a contribution to paid-in capital. Reporting the note as an asset is generally not appropriate, except in very limited circumstances in which there is substantial evidence of ability and intent to pay within a reasonably short period of time. Consequently, the predominant practice is to offset the notes and stock in the equity section. However, such notes may be recorded as an asset if collected in cash before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25).
According to the FASB Codification, it would be appropriate to classify them as current assets only if there is substantial evidence of ability and intent to pay within a reasonably short period of time and if notes are collected in cash before the financial statements are issued or are available to be issued. However, this case doesn't indicate any substantial evidence of those two conditions. Therefore, recording the note receivables as current assets would be inappropriate.
In addition, the FASB Codification ASC 310-10-S99-3 states:
Facts: The balance sheet of a corporate general partner is often presented in a registration statement. Frequently, the balance sheet of the general partner discloses that it holds notes or other receivables from a parent or another affiliate. Often the notes or other receivables were created in order to meet the "substantial assets" test which the Internal Revenue Service utilizes in applying its "Safe Harbor" doctrine in the classification of organizations for income tax purposes.
Question: How should such notes and other receivables be reported in the balance sheet of the general partner?
Interpretive Response: While these notes and other receiv...