Accounting implications for industrials companies deploying capital

As interest rate reductions compel industrials companies to access capital and deploy it, those that understand the accounting and financial reporting implications can limit how any complexities affect their pursuit of growth goals.

Initiatives such as debt restructuring, mergers and acquisitions, and technology expenditures have implications that range from treatment of expenses to footnotes on financial statements, according to Kelly Cleary, RSM assurance senior manager and industrials audit policy leader, and Kendra Blacksher, RSM assurance partner and industrials senior analyst.

Cleary and Blacksher joined RSM’s “The Audit Statement” to discuss the financial reporting implications of this increased access to capital. Below the video is a transcript of their six-minute conversation, which has been edited for clarity and length.

Kendra Blacksher: Considering the recent 50-basis-point reduction in interest rates by the Fed, and the anticipation of further cuts, how might this affect companies’ ability to access and utilize capital?

Kelly Cleary: This increased access to capital is probably going to come in a few different ways. They are either going to be refinancing or amending their existing credit facilities at better rates, or potentially entering into entirely new credit facilities.

Some industrial companies have been in a holding pattern, as we've seen, on spending and investing in certain things. We're expecting that to start to turn around. And some of the planned areas that we think that might impact could be investments in new technology, such as artificial intelligence, maybe some added activity in mergers and acquisitions, potentially some investment in their existing talent or bringing on new talent, and also product portfolio expansions and plant expansions as well.

KB: Well, let's break this down a little bit. If we take a step back with that first step of debt restructure into new debt arrangements, what are some of the accounting implications that leadership of middle market companies should be thinking through as they're deciding how to move forward?

KC: For those companies that are restructuring existing debt or maybe amending their existing debt, understanding the impacts that those changes have, and recognizing that there are different treatments for some of their expenses—whether they're capitalized or expensed based on the conclusions that are reached. 

And then, in turn, the audit implications there are basically the same. For audit purposes, we'll be reviewing those, ensuring that everything has been done properly, and also noting that sometimes these transactions can be pretty complex, and it may be important to bring in some specialists.

KB: I think the big question is where do we anticipate middle market companies will deploy this capital now that they have access to it? There's a sense of a lot of pent-up demand from a broader perspective. Is it labor that I invest in, or is it plant expansion?

KC: As we know, artificial intelligence is huge. There are just vast opportunities there. So we're expecting that there's going to be some investments on that side of things, as well as potentially new ERP (enterprise resource planning) systems or other sorts of tech that some of these manufacturing and energy sector companies have previously not been able to invest in.

So as companies invest in new technologies, there are going to be some accounting and audit implications that they should be considering. Some of these are primarily focused around the expenses that they're incurring and whether those costs can be capitalized or if they should be expensed in their balance sheet.

There could also be impacts, depending on how much they're spending, to their footnotes and their disclosures. If there are material additions to technology, there could be additional information they need to disclose for the readers of their financial statements.

KB: Could you speak to the accounting implications of plant expansion?

KC: Plant expansion, as well as product portfolio expansion, are two other areas that we expect our industrial companies are going to invest significantly in. So many of our industrial companies have been waiting to get more warehouse space or maybe to add some products to their portfolios that they know there's a demand for, but they just haven't had the capital to invest in. So we're expecting that to also be another area of investment as you've noted.

Again, some of the accounting implications and the audit implications here are similar to (those involving new) technology. Just understanding what costs they're incurring, understanding where those expenses belong on their financial statements can be important.

Also, understanding that if they're spending significant amounts of money on these areas, that they could require some additional disclosures than they typically have, so that the readers of the financials have a full picture of the activity of the company and the expenses that they're incurring.

KB: I think the last thing you noticed in your initial response to where do we expect deployment of capital to go, was mergers and acquisitions. Could you speak a little bit to the impact of that on the accounting for middle market companies?

KC: Mainly, it's important that as companies start to look into M&A that they know they have a reputable third-party valuation provider that can help them to get a good valuation of the target that they're hoping to acquire.

These valuations can be pretty complex depending on the nature of the actual purchase agreement and all the details. So understanding the implications that the valuation can have and making sure that they have a good firm to help them with that is important. And then the second piece, which is just as important, is understanding the actual details of purchase accounting.