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Accenture: Module 10

Accenture: Module 10. Kevin Overholt 3/30/2014. Agenda. Background of Accenture Operating Leases Share Incentive Plans Adjustments. Background. Accenture is a global leader in the information technology services industry. Spinoff of Arthur Andersen’s consulting branch.

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Accenture: Module 10

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  1. Accenture: Module 10 Kevin Overholt 3/30/2014

  2. Agenda • Background of Accenture • Operating Leases • Share Incentive Plans • Adjustments

  3. Background • Accenture is a global leader in the information technology services industry. • Spinoff of Arthur Andersen’s consulting branch. • Three core businesses are technology consulting, software development, and outsourcing services. • Most recent share price is $78.14 with a market cap of $52.05 billion.

  4. Accenture’s Financial Statements • Balance Sheet • Relatively small Total Assets and Total Liabilities • Zero Long-Term Debt • Largest account balance is Cash • In reality, largest asset is people-not located on the Balance Sheet • Conclusion: NEA = 0 • Income Statement • ~70% of revenues go directly to salary/service expense • Steady growth in Net Income (roughly 10% annually) • 93-94% of income comes from services, 6-7% from non-enterprise activities

  5. Operating Leases

  6. Operating Leases – Discount Rate • Because Accenture does not currently utilize any capital leases, it is impossible to determine the IRR. • Assuming a 8% rate:

  7. Operating Leases: Effect • Assuming a 35% marginal tax rate: • EPAT is increased by the Rent Expense adjustment • FEAT is increased by the depreciation expense and interest expense from the lease obligation • Net Income receives the net of these adjustments

  8. Employee Stock Options

  9. Employee Stock Options

  10. Employee Stock Options Step 1: Value of options exercisable at 8/31/2012 5,715,100 * (59.46-24.32) =$200,828,614

  11. Employee Stock Options Step 2: Value of options exercisable at 8/31/2012 using end-year prices 5,715,100 * (71.30-24.32) =$268,495,398

  12. Employee Stock Options Step 3: Estimated Value of Exercised Options 2,071,005 * (65.38-23.43) =$86,878,660

  13. Employee Stock Options Step 4: Value of Options Forfeited During the Year 51,248 * (65.38-18.06) =$2,425,055

  14. Employee Stock Options Step 5: Value of Options Exercisable at 8/31/2012 3,660,375 * (71.30-25.04) =$169,328,948

  15. Employee Stock Options 5. Value of Options Exercisable at 8/31/2013 $169,328,948 -2. Value of Options Exercisable at 8/31/2012 w/ end year prices $268,495,398 +3. Value of Exercisable Options $86,878,660 +4. Value of Cancelled Options $2,425,055 =6. Share Based Compensation $(9,862,735) Adjustments: Decrease Net Financial Assets: $200,828,614 Decrease Ending Net Financial Assets: $169,328,948 Decrease EPAT: $9,862,735 Decrease FEAT: 67,666,784 - 84,453,605 $16,786,821

  16. Restricted Share Units • Estimated Additional Liability not on Balance Sheet = (78.14-52.32)*31,709,044 = $818,727,516

  17. Restricted Share Units • Adjustment: Add the Estimated Future Liability to the Deferred Revenues account on the Balance Sheet = $818,727,516 • Other side can flow through Income Statement  Retained Earnings

  18. Summary • Accenture has no inventory to consider using LIFO/FIFO. • They only utilize operating leases. After capitalization of these leases, the following adjustments occur: • EPAT Increases by $168,224, or 5.23% • FEAT Increases by $81,561, or 5477% • Net Income Increases by 86,663, or 2.44% • Properly accounting for Stock Options creates the following adjustments: • NFA decreases by $169,328, or 4.6% • EPAT decreases by $9,863, or 0.3% • FEAT decreases by $16,786, or 1127% • Long-Term Deferred Revenues increase by $818,727 • Net Income Decreases by $818,727

  19. Questions?

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