Financial Accounting

Real World Case 12-6

Brief Background

Case 12-6 requires access to Merck & Co., Inc’s 2010 10-K using EDGAR at www.sec.gov (Spiceland, Sepe & Nelson. et al., 2013, p.723).

According to U.S. Securities and Exchange Commission Rule A (1), 10-K is an annual report required by federal securities laws to disclose information that contains a comprehensive summary of a public company’s performance (U.S. Securities and Exchange Commission Rule A (1) par 1).

The information is disclosed using Electronic Data Gathering And Retrieval. Research Financial Applications defines EDGAR (Electronic Data Gathering And Retrieval) as follows, “EDGAR is an online public data base from the U.S. Securities and Exchange Commissions (SEC). [It] performs automated collection, validation, indexing, acceptance, and forwarding … by law to file forms with the SEC” (Margaret Rouse, 2013, par 1).

Requirement 1: What is the amount and classification of any investment securities reported on the balance sheet? In which current and noncurrent asset categories are investments reported By Merck? What criteria are used to determine the classification?

For any company, the classification of these investments depends on the length of time the company intended to hold the investment.

When a company has the intent and ability to hold a debt investment or a bond until it matures, it is classified as a held-to-maturity. Classifying these investments on the balance sheet as short term (current) and long term depends on the maturity dates. For example, if a company owns a bond with six months maturity, even if it is held-to- maturity, it would be classified as current; on the other hand, a bond that is held for five years maturity is classified as non-current investment.

Requirement 1.1. What is the amount and classification of any investment securities reported on the balance sheet?

In the 2010 10-K consolidated Balance Sheet of Merck & Co., Inc. an amount of $1,301 million is reported as the short-term investment or current asset; and $2,175 million is reported as non-current investment. (U.S. Security and Exchange Commission, P. 84)

Requirement 1.2. In which current and noncurrent asset categories are investments reported by Merck?

There is no note disclosed that categorizes investments into current and non-current assets.

Requirement 1. 3. What criteria are used to determine the classification?

The criteria used by Merck & Co., Inc. to determine the classification of assets as current or non-current is: assets which are intended to be held for less than one year or the normal operating cycle, whichever is longer are reported as short term