IBM Please answer all questions for full rating. In its 2005 annual report, IBM
ID: 2639072 • Letter: I
Question
IBM
Please answer all questions for full rating.
In its 2005 annual report, IBM disclosed the following subsequent events:
1) On Feb. 15, 2006, the company completed the acquisition of Micromuse for approximately $875 million. Micromuse is a publicly traded software company that provides network management software. The acquisition will be integrated into the company's software segment.
2) On Jan. 23, 2006, the company completed the sale of one of its real estate holdings in the United States for approximately $18 million. The company had previously recorded an impairment change because it had classified this property in the fourth quarter of 2005 as an asset held for sale approximately $103 million and had recorded this asset in Other Income and as an expense in the consolidated statement of earnings.
3) On Jan 31, 2006, the company announced that the board of directors had approved a quarterly dividend of $0.20 per common share payable March 10, 2006, to shareholders of record on Feb. 10, 2006.
a. Are these type I of type II subsequent events? Explain your answer. The date of the audit report was Feb. 28, 2006. IBM's year-end was Dec. 31, 2005.
b. Why were these events disclosed in IBM's annual report?
c. How did the auditors gather evidence to verify the accuracy of these events?
Explanation / Answer
a. All the given events are Type II subsequent events (non-recognized subsequent events) because they are providing evidence for the conditions that do not exist at the balance sheet date. The given events are occurring after balance sheet date i.e. December 31, 2005.
b. The IBM has disclosed these events in its annual report to inform the stakeholders’ about the current position and activities of the company. IBM depicts its true and fair picture in front of its stakeholders. The transparency of the IBM Would be on the positive side.
c. The auditor may investigate for the supportive documents to verify for the accuracy of these events. The auditor may also consult the higher management level and the related parties for additional information. The documents and records regarding the acquisition, sale, and dividend can be demanded by the auditor from the management.