Sorry for the light blogging, but I have been preparing for the upcoming Financial Reporting Issues Conference.  As always, the cases are a real challenge.  Here are a few questions to ponder:

  • If I write an option, can it possibly be an asset?  Before you instinctively answer “of course not” (after all, you have given someone else a right to demand something of you), assume Wal-Mart writes an option that allows prospective customers to buy fabric softener for $4.00 instead of the usual $5.00 — but it costs only $3.50 to Wal-Mart.  The worst case is that the option (which you might call a coupon) is not exercised, leaving Wal-Mart with no effect.  So it sure doesn’t seem like a net liability.
  • On the other hand, if the coupon is in limited supply and is transferable, we have an odd asymmetry between the two parties to the contract.  They customer has an asset, and Wal-Mart has either an asset or no entry.  Hmmm ….

This may seem like a peculiar question to ask, but it underlies much of the difficulty is determining appropriate accounting for leases and insurance, which have tons of embedded options in them (options to renew or cancel) — and exercise of the option is often beneficial to the one who wrote it.

Anyway, look through the conference materials, and stay tuned for more thoughts….