Financial Accounting: In an Economic Context

THE ECONOMIC CONSEQUENCES OF REPORTING LONG-TERM LIABILITIES

In recent years, the importance of long-term debt has grown to unprecedented levels in the United States, brought on primarily by numerous takeovers, mergers, and acquisitions involving billions of dollars. In the 1980s and 1990s individuals like Henry Kravis, Robert Campeau, Michael Milken, Rupert Murdoch, Merv Griffin, and Donald Trump as well as large companies like Walt Disney and WorldCom engineered mega-mergers financed by gigantic amounts of long-term debt. Following these mergers, companies were left with the challenge of generating enough cash to meet the staggering debt payment schedules created by such borrowings. In many cases, this situation has increased the pressure on companies to more carefully manage their debt payments and to pay special attention to how this debt is reported on the balance sheet.

Credit ratings have become increasingly important because companies realize that improved credit ratings lead to lower borrowing costs. For example, Emerson, which reports $3.8 billion in long-term debt and over $200 million in interest costs each year, notes in its 2009 annual report that “the company's strong financial position supports” ratings of A2 by Moody's Investor Service and A by Standard & Poor's as of September 30, 2009. Emerson has been approved to issue up to $2.25 billion in additional debt and equity securities.

Prior to Sun Microsystems' acquisition by Oracle Corporation, Standard & Poor's ...