Key Accounting Policies

Accounting analysis

Key Accounting Policies 

Inventory:

STLD record inventories at lower of cost or market. Cost is determined using a weighted average cost method for scrap, and on a first-in, first-out, basis for other inventory. It also record amounts required to reduce the carrying value of inventory to its net realizable value as a charge to cost of goods sold

Goodwill:

Goodwill is allocated to various reporting units, which are generally one level below its operating segments. STLD use a two-stepped approach to measuring goodwill impairment. 1) Determines if there is potential goodwill impairment. 2) If the carrying

Amounts exceeds the fair value, STLD perform the second step of the test, which measures the amount of impairment loss to be recorded

Depreciation:

The company assigns each fixed asset a useful life ranging from 3 to 15 years for plant, machinery and equipment and 10 to 40 years for buildings and improvements. Repairs and maintenance are expensed as incurred. Depreciation is provided utilizing the straight-line depreciation

Revenue Recognition, Receivable and Allowance for Doubtful Accounts:

STLD recognize revenue from sales and the allowance for estimated returns from these sales at the time the title of the product is transferred to the customer. Provision is made for estimated product returns and customer claims based on estimates and actual historical experience. Net sales from steel fabrication operations are recognized from construction contracts utilizing a percentage-of-completion method.

Assessing Accounting Flexibility

Inventory:

When an item is sold, the income will be the (selling price) - (the average cost). This margin is usually higher than in the LIFO method because the cost of acquiring goods usually goes up over time. Under the LIFO method it is very clearly the income reported for this amount will be less than the income reported using the average costing method. That will increase reported net income for the current year. Actually, selling price is changing all the time, also the impairment of inventories is impacted by estimation and judgment. It has flexibility to manipulate by the management.

Goodwill:

Whether the goodwill should be impaired or write-down in certain amount or not, it is subjected to the estimation and decision by senior management. . There is a flexibility to manipulate by the management.

Depreciation (PPE):

The entity determines the estimated useful lives for property, plant, and equipment. Useful life can be changed by technical innovations. Like, Changing salvage value. Salvage value is the scrap value after the asset is fully depreciated. When salvage value is overstated, the value of the asset subject to depreciation becomes understated. Then will increase the reported earnings. At each reporting date, the residual values, useful lives and depreciation methods are adjusted, so there is flexibility to manipulate.

Revenue Recognition, Receivable and Allowance for Doubtful Accounts:

The company may identify certain expects percentage of its sales based on the company's past experience to become bad debt. The provision for impairment of receivables assessment is based on estimation and judgment. It is acknowledged that recent sales experience and ageing of receivables can affect the impairment of receivables and these two factors have flexibility to be manipulated. So the manager can manipulate receivables (overstate) that is not to record bad debt as uncollectible. For example, Allowance for Doubtful Accounts ratio (AFDA/AR) decrease from 4% to less than 0.5% seems someone manipulate the account. Also, the manager may recognize the total revenue even though the construction is still uncompleted.

Accounting Strategy:

To discuss the strategy of Steel dynamics Inc. adopted, we identified the POSCO as benchmark as a comparison.

Inventory:

STLD used weighted average cost method for scrap, and on a first-in, first-out, basis for other inventory. It will record inventories in a low cost. On the contrary, POSCO used last-in, first out to record the inventory. Due to the cost of acquiring goods usually goes up over time, the reporting income under using LIFO method will less than the one under using FIFO. So, the accounting strategy of recording the inventory that STLD used is aggressive.  

Depreciation (PPE):

The depreciation method that STLD and POSCO both used is straight-line depreciation. It is deducted at the same rate each year. So we can draw a conclusion that the accounting strategy of STLD adopted to depreciate the PPE is general and aggressive because a greater deduction is taken in the first year or two which lowers the reported income in the first year or two after a major purchase.

Useful life identification:

In the annual report at 2012, STLD assigns each fixed asset a useful life ranging from 3 to 15 years for plant, machinery and equipment and 10 to 40 years for buildings. Similarly, POSCO identify the useful life range from 10 to 60 years for buildings and 2 to 25 years for plant, machinery and equipment. Because they use the same depreciation method, the more useful life assigned to the fixed asset, the less depreciation expense will incur. Therefore, the accounting strategy of identifying the useful life for fixed assets that STLD used is aggressive.