Maybe not Christmas 2013, but some Christmas in the not so distant future: Former Enron CEO Jeffrey Skilling, who is serving a 24-year prison term for his role in the energy giant's epic collapse, could get out of prison early under an agreement being discussed by his attorneys and the Justice Department, CNBC has learned. Skilling, who was […]
In case you thought the fair value debate was limited to the U.S. circa 2008, think again. A rule you probably haven’t heard of (but will likely see a version of once government debt becomes as much of a pain in the ass here as it has been in Europe) called IFRS 9 (which replaces IAS 39) would allow banks to price some government debt on their books at cost, instead of current awful prices.
Apparently the European Union doesn’t like this idea. EU Internal Market Commissioner Michel Barnier told a webcast meeting in New York this week “I do not believe this will be the first solution to the problems we face in Europe at the moment,” referring to IFRS 9‘s creative interpretation of “fair value.” Ironically, IFRS 9 accomplishes this feat by eliminating available for sale and held-to-maturity classifications for bonds, leaving only amortized cost and fair value.
IASB Chairman Hans Hoogervorst insists this plan is really only the suck less option, not some sort of magical accounting trick that will suddenly make Greece solvent and Irish banks healthy. “Under IFRS 9 impairments will still be painful but I am convinced it would be more timely done because the cliff effect is much less severe,” he said at a recent joint meeting of the IASB’s trustees and monitoring board of public officials, including Michel Barnier.
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) today issued new guidance on fair value measurement and disclosure requirements for International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP).
The guidance, set out in IFRS 13 Fair Value Measurement and an update to Topic 820 in the FASB’s Accounting Standards Codification® (formerly referred to as SFAS 157), completes a major project of the boards’ joint work to improve IFRSs and US GAAP and to bring about their convergence.
The harmonisation of fair value measurement and disclosure requirements internationally also forms an important element of the boards’ response to the global financial crisis.
Of course what’s most important is that wily Scotsman and knight of the double-entry roundtable Sir David Tweedie will be able to call it a career knowing that he saw this thing through. He sounds pretty pleased with the effort saying, “The finalisation of this project marks the completion of a major convergence project and is a fundamentally important element of our joint response to the global financial crisis. The result is clearer and more consistent guidance on measuring fair value, where its use is already required.” Hans, you can take it from here.
Warren Buffett’s Berkshire Hathaway Inc. (BRKA, BRKB) took an accounting charge to reflect the declines of three stocks in its investment portfolio after regulators asked about the company’s policy for writing down investment losses. But Berkshire Chief Financial Officer Marc Hamburg complained that the current stock prices don’t reflect the worth of the shares, and predicted in a letter to the U.S. Securities and Exchange Commission that “each security’s market price will grow to at least the intrinsic value that existed” when Berkshire made the investments. [Dow Jones]
If the drinks at Davos weren’t already free, we’re pretty sure Stephen Schwarzman would be buying.
From the Journal’s man on the accounting beat, Michael Rapoport:
Accounting rule makers took a key step Tuesday to reverse a proposal that would have required banks to value their loans based on the ups and downs of the market. The Financial Accounting Standards Board agreed that companies could continue to carry a variety of financial assets and liabilities at amortized cost, an adjusted version of their original cost, as they do now. That would reverse a proposal the board introduced last May that would have required bank loans and other financial assets to be carried at “fair value,” based on market prices.
What happened, you ask? What caused the FASB to fold like a cheap lawn chair? Remember all those nastygrams that were sent to Bob Herz? It sounds like the FASB took those personally:
FASB indicated the overwhelmingly negative reaction to its proposal, from companies and investors alike, played a big role in prompting the board to change its mind. The board received more than 2,800 comment letters on its fair-value proposal, most of them opposed to the move, and heard more opposition at a series of public roundtables before it began reconsideration of its proposal for fair-value changes.
So the bankers win this round. Oh, wait…they win every round.
John Carney comments on Sheila Bair’s bellyaching about mark-to-market today by simply wondering why there has to be a debate at all. That is, couldn’t accounting rules just be served up – presumably buffet style – and the banks would choose which treatment they like best and then regulators could judge their health based on their choices:
Here’s what I don’t get: why do we need one set of accounting standards at all? To put it differently, why should banking regulators feel obliged to judge the safety and soundness of financial institutions according to any measure that they do not like? If Bair doesn’t think fair value is appropriate to the banking sector, can’t she just ignore fair value when judging whether banks satisfy regulatory requirements?
It’s an interesting question. Why does the FDIC care what fair value says when determining bank health? Analysts use and refer to non-GAAP data all the time, so what difference does it make if regulators rationalize their analysis on similar non-GAAP measures?
After explaining that, despite the complaints of a certain billionaire (among others), transparency is actually a good thing, Carney floats an idea:
My truly radical proposal is that we should probably do away with this argument altogether by allowing banks—and every other company for that matter—to choose which accounting standards they want to use. If amortized cost is truly a better standard, banks using that will surely be rewarded by higher stock prices and cheaper access to credit. On the other hand, if fair value is appropriate, the market will reward that. Why not let banks choose and bear the costs of their choice?
While we’re with John in spirit (especially for the banks, they run things after all), the BSDs in the accounting will never let this fly. The idea of letting individual companies determine what accounting rules to follow is enough to cause Big 4 partners to set themselves on fire in the middle of Union Square in protest.
However, if you’ve got thoughts on we could put this thing in motion, it might be kind of fun to see how it works out.
Last month we told you about how the American Bankers Association encouraged anyone that disagreed with the FASB’s proposed fair value rule to write a letter telling Herz & Co. how much the proposal su ind enough to provide a template for said “FASB Blows” correspondence so the anti-fair value crowd could get the gist of what needed to be said.
The ABA did warn, however, that the FASB hates, loathes, DETESTS form letters, so in order to make a valid point, it was advisable to not simple slap your name in the appropriate place but to articular your own special brand of hatred for the FASB.
As you may recall, many ABA groupies did not heed this warning, which no doubt resulted in Bob Herz and the rest of the Norwalk team using the letters to stoke their mid-summer weenie roast bonfire.
As disappointed as the ABA must have been with the lack of originality, we were sent this shining example that has been making the rounds at the Big 4 (or so we’re told). Our guess is that this is more of what the ABA had in mind:
Bravo, James C. Blaine. Bravo. You are most definitely into the brevity thing. You have, presumably, made the ABA proud. But wait, there is a pro-fair value letter worthy of these pages.
Granted, it was written back in May but Brian Cowell is no less passionate than Mr Blaine:
Nicely done, both of you. Everyone take note.
Wells Fargo “Strongly” Opposes Accounting Board’s New Rules on Loan Value [Bloomberg]
“Wells Fargo & Co., the largest home lender in the U.S., said it disagrees with an accounting board’s plan that would require banks to report the fair value of loans on their books.
‘We strongly oppose the expansion of fair value as the primary balance-sheet measurement attribute for virtually all financial instruments,’ Wells Fargo Controller Richard Levy wrote in the Aug. 19 letter. ‘It will only serve to cement a short-term focus on fair-value measures.’
Wells Fargo is the first of the largest U.S. banks to publish its p writers who named an affiliation, according to the Financial Accounting Standards Board website. The letter was written to officials at the board, which said in May that it may require banks to report the fair value and amortized cost of loans and some other financial instruments on their balance sheets.”
PricewaterhouseCoopers to Buy Consulting Firm Diamond Management [WSJ]
PwC is paying $378 million for Diamond Management & Technology Consultants, “[share]holders will get $12.50 a share, a 31% premium to Monday’s closing price. The stock, up 29% in 2010 through Monday, was last at the bid level three years ago.
‘This is an attractive all cash opportunity for our stockholders, creates exciting prospects for our people, and will provide us new and enhanced capabilities to bring to our clients,’ said Diamond President and Chief Executive Adam Gutstein. ‘There’s a clear strategic fit between PwC’s assets and aspirations and Diamond’s positioning.’ ”
Return prudence to accounting [FT]
“What a pity that ultra-theoretical standard-setters around the world have chosen to jettison prudence, a generally accepted accounting convention derived from more than 100 years of experience. This high-risk approach has led to absurdly lengthy and unrealistic annual reports that are now virtually incomprehensible.”
Sex Harassment at Work Gets Weirder, Scarier [Bloomberg]
“Not that I think it’s weird that a brokerage firm chief executive would pin a female clerk on the floor by putting his shoe on her breast (the right one, if you must know), or that some insurance company guy in Fullerton, California, would put a sample of his semen in a female colleague’s water bottle. Twice.
But it did get my attention when I started leafing through this year’s press releases from the U.S. Equal Employment Opportunity Commission and found a case where a supervisor allegedly said that women should outfit themselves in Vaseline, and nothing else; one where a manager in human resources (yes, in human resources) allegedly inquired as to the color of an assistant’s panties; and a case against a company president who the EEOC says pulled a subordinate’s pants down in front of her coworkers.”
Borders CFO resigns for new job [Reuters]
Mark Bierley is moving on after 12 years for a new gig.
Businesses Add iPads to Their Briefcases [WSJ]
“Apple, which said it sold more than three million iPads through the end of June, attributes some of the device’s success to businesses. The Cupertino, Calif., company’s Chief Operating Officer Tim Cook said in July that ‘very surprisingly’ half of the Fortune 100 are testing or deploying iPads.
More than 500 of the 11,000-plus applications built specifically for the iPad are in the business category. A free app from Citrix Systems Inc., which allows people to access internal corporate programs from the iPad, has been downloaded more than 145,000 times.
‘Everyone in IT is jumping on this one,’ said Ted Schadler, an analyst at Forrester Research. ‘Rather than wait for people to start complaining they’re saying why don’t we get a few of them in and see what they are good for.’ ”
MLB Confidential: The Financial Documents Baseball Doesn’t Want You To See, Part 1 [Deadspin]
Deadspin got their hands on financial statements for several Major League Baseball teams and even the lowliest of clubs – namely the Pittsburgh Pirates – make truckloads for their owners: $20.4 million in partner distributions for fiscal year ’08.
The sports rag also has financial statements for the Tampa Bay Devil Rays, Florida Marlins and L.A. Angels. And as you might expect, people (MLB and the clubs’ people) are not happy.
Fair value is a simple enough concept even if you aren’t an accountant: stuff is worth what you could sell it for in the normal course of business, so that’s what you value it as when you’re adding up the value of the stuff you have. Easy, right? Not so easy when it comes to convergence.
The IASB has already expressed distaste for our fair value rules (among other things) and Accounting Onion recently shared some concerns that convergence might require a reasonable definition of “High Quality Accountant Standards” (abbreviated HQAS” by AO) agreed upon by both FASB and the IASB. So far I haven’t seen it, has anyone else?
Wait, AO launches off into it f han I ever could.
Moreover, if there are some doubts as to what HQAS is, the SEC’s view could have been attended to more closely at the outset of formal convergence efforts (October 2002); for surely the SEC had convergence in mind when they published their congressionally mandated (see the Sarbanes Oxley Act, Section 108(d)) report on the feasibility of “principles-based” accounting standards in August 2003. According to the SEC, the “objectives-oriented” standards they are looking for from a standard setter should possess the following qualities:
“Be based on an improved and consistently applied conceptual framework;
Clearly state the accounting objective of the standard;
Provide sufficient detail and structure so that the standard can be operationalized and applied on a consistent basis;
Minimize exceptions from the standard;
Avoid use of percentage tests (“bright-lines”) that allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard.”
Now, seven years later, the SEC’s battle plans have been subordinated by the din and desperation of convergence wars. Are any new standards from either board “based on an improved and consistently applied conceptual framework”? Obviously not, for nary a single alteration to any conceptual framework document has occurred in the last seven years. The existing definitions for assets and liabilities are like wooden ships sent to battle against nuclear submarines.
A few weeks back, I talked to David Larsen, CPA, Managing Director of global advising firm Duff & Phelps, LLP about this fair value bullshit that complicates my life by requiring comment every few weeks. David participated on the SEC mark-to-market panel in November of 2008 and serves on FASB’s Valuation Resource Group so he’s familiar with what I’m talking about.
David believes public opinion dominates the fair value argument and really doesn’t see what the big deal is. “The goal is to make financial statements more readable,” he said of fair value’s ultimate intention. He’s a fan of transparency on the face of financial statements and more disclosures. Who doesn’t like that?
He says fair value is purely measurement and disclosure, nothing to get upset about.
In my opinion, fair value was our first test to see if we could handle the principles widely used in international accounting “standards” (hopefully “HQAS”) before we actually committed to adopting them and we failed. If you wonder why the IASB wants to hold the floor when it comes to convergence, you only have to stare our treatment of fair value right between the eyes.
It should have worked but our “P for Principles” in GAAP didn’t adequately prepare us to handle it.
Bush Tax Cuts Roil Democrats [WSJ]
“Sen. Kent Conrad (D., N.D.) said in an interview Wednesday that Congress shouldn’t allow taxes on the wealthy to rise until the economy is on a sounder footing.
Sen. Ben Nelson (D., Neb.) said through a spokesman that he also supported extending all the expiring tax cuts for now, adding that he wanted to offset the impact on federal deficits as much as possible.
They are the second and third Senate Democrats to come out publicly in recent days in favor of extending all the tax breaks for the time being. Sen. Evan Bayh (D., Ind.) made similar comments last week.”
Madoff’s Ghost Still Haunts SEC [Washington Wire/WSJ]
In testimony earlier in the week, SEC Chair Mary Schapiro told a congressional committee that many of the people that investigated Bernie Madoff – 15 of 20 enforcement attorneys and 19 of 36 examination staffers – have left the Commission. However, that isn’t good enough for Rep. Bill Posey (R – FL).
“Republican Rep. Bill Posey of Florida –- home to many Madoff victims -– said he wants to know if those SEC employees ended up at other regulatory agencies, working for companies they were supposed to regulate, or retired with government pensions.
‘There’s a necessity to know where they went,; said Posey. ‘It’s like letting a pedophile slink out the door or change neighborhoods. We’re dealing with the same type of problem here.’
Schapiro strongly disagreed. ‘These aren’t bad people. In some cases they were people who were very junior and not adequately trained or supervised.’ In other cases, she said, they were pulled from one project to another.”
Despite the proclivities of some SEC employees, we haven’t seen anything warrant that particular label.
FASB in “religious war” to bring in fair value [Accountancy Age]
Lawrence Smith believes in fair value, you might say, in a fanatical sense. The FASB Member was quoted in AA, “Some people have advised us that we shouldn’t say this, but I’ll say it – fair value, to some of us, is almost like a religious war out there and we are trying to deal with that as best we can.”
Plus, at the rate things are going, the debate will soon reach Israel/Palestinian ignorability (word?) levels later this year.
Facebook IPO “when makes sense”, Zuckerberg tells ABC [Reuters]
That is, never.
Trust, but verify [MJS]
Just last week we mentioned the American Bankers Association and its efforts to undermine the FASB’s latest fair value proposal that, in the ABA’s mind, could bring down civilization as we know it.
Because of this danger, the ABA encouraged “investors” through email and on its website to write individual letters to the FASB, expressing their displeasure with the worst idea in the modern history of double-entry accounting. We say “investors” because the ABA not-so-subtly asked everyone (i.e. who felt the overwhelming urge to write Bob Herz & Co.) to refer to themselves as such.
Further, the ABA provided a template of a letter to send to the Board for the “investors,” however, it did warn to resist using the example as their own because A) this is far too important and telling the FASB that fair value pains you in the deepness of your soul and takes food out of your children’s mouths will be a far more effective narrative; and B) the FASB hates form letters. HATES. So much so that Bob Herz rips up all his gold stars that he gives for the constructive letters he receives and then your unoriginal ass gets negative points.
The group urges investors to “write your own letter — the FASB does not appreciate ‘form’ letters, and often discounts them in their analyses.”
Simple enough, right? Well, maybe. But In his column today, Jonathan Weil gives an example of one ABA soldier that wasn’t very good at following instructions:
Among the letter writers was Terry L. Stevens of Francesville, Indiana, who identified himself as a bank investor, as the ABA had suggested. He didn’t mention that he also is chief financial officer and executive vice president of Alliance Bank, a closely held lender in Francesville with $270 million of assets.
“As a bank investor, of utmost importance to me regarding the banks in which I own stock is their financial position, and transparent financial reporting is key in order for me to make investment decisions,” Stevens’ letter said. “With this in mind, I am writing to express my deep concerns and opposition to the portion of the proposal that requires all financial instruments to be marked to market.”
Stevens didn’t write those words himself. He copied them verbatim from a sample letter the ABA posted on its Web page. So, too, did a bunch of other bankers who submitted comment letters to the FASB opposing its proposal, notwithstanding the ABA’s warning that they shouldn’t do cut-and-paste jobs.
This had to be a mistake, right? This is far too important of an issue to the banks of this country that a mishap like this could just happen. Bankers are responsible people that take this stuff very seriously and would never risk going through the motions just to serve at the whims of their lobby’s voice…would they?
Stevens told me he didn’t have time to write his own letter from scratch. “The points that I grabbed out of their paragraphs did a good job of explaining how I felt about the situation,” he said.
Stealth Bankers Bomb as Anti-Reform Crusaders [Jonathan Weil/Bloomberg]
Banks hate the FASB. This is understood. They’re especially bent out of shape these days because the Board recently put out its latest fair value proposal that requires them to carry their loans at fair value. Bob Herz knew that this was going to cause hella-belly aching although he may not have predicted the virtual assault that was coming.
Banking lobbyists have launched an e- mail and Web campaign to mobilize investors against a proposed expansion of fair-value accounting rules that may force banks such as Citigroup Inc. and Wells Fargo & Co. to write down billions of dollars of assets.
The American Bankers Association opposes the Financial Accounting Standards Board’s plan to apply fair-value rules to all financial instruments, including loans, rather than just to securities. The group says the rule could make strong banks appear undercapitalized.
The association’s website, noting that FASB’s stated mission is to serve investors, provides a sample letter for people writing to the board and suggests they focus on why the proposal isn’t “useful for investors.”
As you can see, the banks are bringing out the big guns, although this not unfamiliar territory for the FASB. Lynn Turner, a Senior Advisor and Managing Director at LECG and former Chief Accountant SEC wrote in an email to GC, “This campaign is very similar to the efforts of the technology companies campaign against the FASB in 1993-95 to prevent rules that would have required those companies to expense the value of their stock options, something that ultimately led to investor losses and problems in the markets.”
The FASB prevailed in that particular battle but the ABA is wise to their ways, encouraging everyone to resist going through the motions on this one:
The association’s Web page, titled “Guidance for Investors Regarding FASB’s Mark-to-Market Proposal,” includes a sample letter to the board “for educational purposes only.” The group urges investors to “write your own letter — the FASB does not appreciate ‘form’ letters, and often discounts them in their analyses.” Those who comment should “let FASB know that you are an investor,” the ABA says.
U.S. Banks Recruit Investors to Kill FASB Fair-Value Proposal [Bloomberg BusinessWeek]
The accounting change for reporting the value of banks’ loans, which got the New York Times all hot and bothered yesterday morning, really amounts to a hill of beans, once you take a closer look at it.
In fact, the description in the article left me scratching my head on a couple of counts. How, for example, do banks write down the value of non-performing loans, as accounting rules require them to do, if they don’t mark them to market?
And what’s up with the tortuous explanation of how the Financial Accounting Standards Board decided to have banks mark to market the loans for purposes of the balance sheet but not for earnings? While I’m as big a fan as anyone of Jack T. Ciesielski, the accounting expert who publishes the investment newsletter, the Analyst’s Accounting Observer, his quote calling the decision a “smorgasboard” doesn’t really mean anything without some sort of context.
That context is pretty easy to provide, at least in the eyes of Charles Mulford, a Georgia Tech accounting professor and advisor to CFOZone.
As Mulford sees it, FASB simply is bringing information that’s already contained in the footnotes onto the balance sheet, specifically into the line item on that statement known as “other comprehensive income.” And this quite naturally has no impact on the earnings bank report on their income statements.
Currently, banks’ balance sheets carry loans at historical cost, less an estimate of the portion that is uncollectible, with fair value information in the notes, the accounting professor explains. The proposal would move the fair value information to the balance sheet by reconciling the cost of the loan with its fair value, he continues. But Mulford adds that there would be no change in the income statement, since that already includes any loan impairments. Instead, adjustments to fair value would be accounted for as a component of other comprehensive income, which is reported on the balance sheet.
“I view it more of a change in presentation than a change in accounting,” says Mulford.
In other words, investors who pay attention already understand this, so any complaints on the parts of banks should be seen as just an attempt to continue to fool those that don’t.
Proposed Overhaul of Accounting Standards Contains Mark-to-Market Rule [NYT]
The FASB has rolled out MTM 2.0 and while the usual suspects have already started belly-aching, Bob Herz insisted that “The financial crisis reinforced the need for better accounting in this area.”
The new rule will require loans and loan-related instruments to be valued at their market value immediately, thus accelerating any losses that might occur. Losses will either be booked as a hit to earnings or as a reduction in the value of the asset. The Times quotes Jack T. Ciesielski of Accounting Analyst Observer, who reassures, “It will messier to read, but if you know what you are doing you can figure it out.”
The comment period (which should yield some interesting thoughts) will run through the end of September, after which the FASB will hold roundtables discussing the rule and then make any final changes. Institutions with greater than $1 billion in assets will be required to adopt the rule in 2013 while those with less than $1 billion will have until 2017.
The Property Tax: Unsung Hero [TaxVox]
States have their property tax revenues to thank for their budgets not being in an even bigger mess than they already are, according to TaxVox. “[P]roperty tax revenues have yet to fall both because the levy tends to be backward-looking (it takes a while for assessed values to catch up with reality on both the upside and the downside) and because local governments can raise rates. The strength of the property tax was the main driver of the small positive growth in overall state and local taxes for the fourth quarter of 2009.”
If states are lucky, by the time property tax rates adjust to the reduced home values, sales and income tax revenue may be on their way to recovery. However, it’s unlikely that tax revenues will return to their previous levels which means governments may have to continue (or maybe start?) to – God forbid – cut spending.
“I Didn’t Know What ‘$’ Means” Fails as Tax Defense [TaxProf Blog]
Who let this guy out of the lab? “I am unaware of the meaning of this symbol.”
Yahoo CFO Sees Annual Revenue Growth Of 7%-10% From 2011-2013 [WSJ]
Contrary to what some might believe, Yahoo is still in business and doing quite well, thankyouverymuch. CFO Tim Morse expects things to brighten up with revenue increasing 7-10% from 2011-2013, due mostly to increased advertising business. Yahoo’s partnership with Microsoft and Zynga (they make Farmville) are seen as key to the search engine competing with Google.
Survey finds tax departments more concerned with getting it right than aggressive tax planning [GT Press Release]
Grant Thornton’s latest CFO survey finds that they are more concerned with getting their taxes right than with paying less. Obviously the latter is a goal but considering the regulatory environment (i.e. Democrats are running things), it’s not the priority, despite what those people running for re-election might tell you.
The SEC is interested in securing capital markets and protecting the interests of investors by putting a new level of priority on accounting standards setters… European accounting standards setters, that is.
SEC Chief Accountant James “P is For Principles” Kroeker announced today that the SEC’s new project will revolve around securing funding for the gatekeepers of IFRS, the IASB. “A stable broad based funding system with a diversity of capital market participants providing ‘no strings attached’ funding is of great importance to establishing a structurally sound international standards setter,” he said at a Baruch College accounting conference. Earlier in the week, JP was defending GAAP and calling the planned June 2011 adoption of IFRS in the US an “arbitrary” target but this leads us to believe that he’s since changed his mind and would like to see this convergence thing get rolling once and for all.
About 20 percent of the IASB’s funding is expected to come from US sources this year – the largest chunk of funding from any single source.
While Kroeker was busy cheerleading the IASB telethon this week, SEC Chair Mary Schapiro was off doing a little fundraising of her own, except hers failed miserably when the Senate rejected a request by Schapiro and several former SEC leaders to self-fund the agency. As everyone knows, the SEC has been plagued recently with accusations of regulatory laziness, not to mention problems with employees sitting around watching porn all day when they should be guarding capital markets. No increase in allowance for you, Mary!
Anyway, the main concern is – as always – independence. Without secure funding, the IASB is exposed to excessive political pressure and if you recall the fair value debate, you have already seen what happens when standards setters cave in. With secure funding, the IASB can be bought and sold as easily as some companies A/Rs so it makes sense that Kroeker would shift the SEC’s focus from begging Congress for a raise to funneling in cash to the IASB. You know, for convergence’s sake.
European Central Bank Executive Board member Gertrude Tumpel-Gugerel insists that fair value is useless in illiquid (read: dysfunctional or non-existent) markets, putting forth the all-important query “what is the use of marking-to-market when there is no market?” in a Paris speech yesterday.
Tumpel-Gugerel is also a tad concerned that the push for convergence around the globe by 2011 could mean compromised accounting standards. “The ECB strongly opposes a full fair value approach,” she said. “In this context, convergence should not come at the expense of high-quality accounting standards.”
The ECB has taken the financial crisis as a lesson in valuation, guidance, and a deft accounting system that leaves plenty of slack available for adjustments should the need arise in, say, a crisis situation. That’s all well and good but guidance only gets you so far and without a firm commitment to when and how to use fair value around the globe, we can pretty much keep debating this point indefinitely.
Her views on FASB’s fair value approach are not at all subtle. In short, it appears as though the ECB supports convergence but only if the idiotic American ways are better aligned with the IASB’s. “With regard to recent assertions made by the IASB and FASB that convergence is on track, I would like to highlight that we are not so optimistic,” she said. “In this regard, putting in place a reconciliation mechanism that simply discloses figures at amortised cost and fair value for each item on the balance sheet would certainly not achieve the aim of convergence.”
Well snap, guess she told us.
• Japan embraces new fair value rule [Financial Times via Accountancy Age]
Here’s a novel idea: making a decision on IFRS! Japan’s Financial Services Agency will be allowing companies to adopt the international version of the new fair value rule developed by the IASB, starting Wednesday. Since the world’s second largest economy is opting to pull the trigger on IFRS it may throw the G20’s request/demand for the world to get all kumbaya when it comes to accounting rules.
“Fair value accounting…as unleashed one of the most divisive debates to have emerged from the credit crisis, threatening to disrupt a pledge by the G20 group of leading economies to create a single, global accounting system by mid next year,” reports the FT and judging by the SEC’s indecisiveness, they may be right. With this latest development, now leaders will be able to blame each other’s securities agencies for their particular actions that will likely lead to divergence.
The allowance of Japanese companies to adopt IFRS 9 could also give Knight of the Accounting Roundtable, Sir David Tweedie, even more leverage when dealing with countries around the world to adopt the IFRS.
Right or wrong, the Japanese are sending a signal that they are prepared to move forward while the SEC prepares to have more meetings.
• GAO Criticizes PCAOB Approach to Audit Risk [Web CPA]
The General Accountability Office, never shy to point out the faults of others (that’s kind of what they do, after all), isn’t so keen on the PCAOB’s latest “risk assessment” audit standards. This after the PCAOB originally proposed standards in 2008 and then revised and re-released them late last year.
The GAO feels that the ‘duplication and inconsistencies’ created by the PCAOB’s new standards would likely lead to…more billable hours! So, as you might imagine, some firms are on board:
PricewaterhouseCoopers told the PCAOB, “We fully support the board’s objective to update interim standards regarding risk assessment,”
And some, not so much:
McGladrey & Pullen…warned that “unnecessary differences between the board’s standards and those of other standard-setters increase the costs of performing all audits because firms must develop and maintain two, and even three, audit methodologies and training programs, with no corresponding benefit to audit quality.”
Personally, we’re skeptical of anything that has the unmitigated support of the biggest players in the industry but from a more practical standpoint, do auditors really need more rules to follow? And now this could add to the workload? Is that really necessary?
• Oscar Swag Bags to Result in $91k Income to Celebrity Presenters [TaxProf Blog]
Celebrities have enough tax trouble the way it is, how is giving them gifts going to make their tax returns easier? We’re guessing most of them have smart CPAs working for them that will suggest that they give it all to charity but we may be underestimating the temptation of free luxury swag.
Bob Herz must be feeling a little blue now that his buddy Tweeds announced that he is hanging up his eyeshade.
This melancholic state has apparently led Herz to the conclusion that it’ll be okay to let banking regulators “use their own judgment” when it comes to letting banks stray from almighty GAAP:
“Handcuffing regula orting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,” Mr. Herz said in the prepared text.
“Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,” he added. “And, conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. To do so could degrade the financial information available to investors and reduce public trust and confidence in the capital markets.”
Mr. Herz said that Congress, after the savings and loan crisis, had required bank regulators in 1991 to use GAAP as the basis for capital rules, but said the regulators could depart from such rules.
Herz is calling it “decoupling” of the rules which sounds a hell of a lot like “the rules are the rules only when they don’t work out so well for banks.” Not sure about anyone else but it sounds like Herz is caving to political pressure after insisting that everyone butt out.
Because if we read that correctly, any time banking regulators are feeling sketchy about the market’s ability to put value on the banks’ assets, they’ll just call a time out on fair value with no ringing up the FASB, auditors, or anybody else to get a permission slip?
Will banking regulators even know when the market is being irrational? If you were to ask JDA, she’d probably say, “No fucking way.”
A less irreverent but similar point of view from Daniel Indiviglio at the Atlantic:
I worry that if regulators are provided this flexibility, then they will always suspend mark-to-market accounting when a crisis hits. But in cases where the market permanently corrects the value of assets downward, their values would remain elevated in the regulators’ eyes. Then, once the crisis appears to improve, banks will eventually cause a sort of secondary crisis when they are forced to begin realizing the decline in the value of those assets.
Moreover, I worry about how investors will react to this change. Imagine you’re an investor. A crisis hits, and regulators step in to suspend mark-to-market accounting for a bank you own equity in. Are you worried? I sure would be — regulators were so concerned about the bank’s assets that they felt forced to suspend mark-to-market accounting! As an investor, I’ll still do my own math to figure out what I think the bank’s assets are worth. So investors might dump the stock anyway, endangering the value of the institution despite this move by regulators.
So it’s fair value unless we’re in a potential shit + fan situation. In the off-chance that the regulators recognize the impending disaster, they’ll tell the banks to forget fair value for now. Then once everything is hunky dory, we go back to fair value. Whatever, we’re over it.
Board to Propose More Flexible Accounting Rules for Banks [Floyd Norris/NYT]
Should Regulators Be Able To Suspend Accounting Rules? [The Atlantic]
Also see: Decouple US accounting rules, bank regulation-FASB [Reuters]
Editor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
Of the 111 comment letters FASB published on Fair Value Measurements and Disclosures: “Improving Disclosures about Fair Value Measurements”, this one was my favorite:
Please don’t require Companies not SEC registered to spend any more money on reports under this rule.
The usual suspects left the usual complaints; BDO said excessive disclosures would be both costly and useless, Uncle Ernie implied it was an interesting concept but an expensive flop in practical application, and PwC prefers once a year disclosures instead of quarterly.
Verizon even got in on the action, insisting, “proposed additional extended sensitivity disclosures would unnecessarily complicate financial statement disclosures without providing any meaningful benefit to financial statement users.”
I think it is entirely reasonable to point out that FASB is feeling the pressure to converge and the IASB is encouraging slightly less optimistic financial statements. The IASB openly admits that it is under outside pressure to adopt such a stance:
Responding to requests by the G20 leaders and others, in June 2009 the IASB published a Request for Information on the practicalities of moving to an expected loss model. The responses have been taken into account by the IASB in developing the exposure draft.
The IASB continues:
The IASB will also cooperate closely with the US Financial Accounting Standards Board (FASB) with a view to agreeing a common approach to the impairment of financial assets.
Since when is this for the IASB to decide?
Political influences are nothing new to accounting rulemakers but what happens when those influences come from foreign bodies far outside of our control? It is a known fact that the European Union has a large stake in IASB, so how can we be sure their intentions are pure as we move forward at their urging?
The Financial Crisis Advisory Group, an international body set up by the IASB and FASB to advise them on standard-setting issues related to the financial crisis, warned recently that that political pressure on accounting standard-setters posed a threat to “the very existence of international accounting standards.”
Integrity in financial statements? Keep looking, not going to find any of that here.
Our only point is that if it wasn’t for the nice little explanation of the survey on the website, we would have assumed they had a huge room filled with survey elves working day and night.
Anyway, today GT issued its latest press release of its “national survey of U.S. CFOs and senior comptrollers”.
This installment shows that CFOs are homers when it comes to who sets their accounting rules (just so long as it isn’t the government). Seventy-one percent of those surveyed said that rules should be set by “A national independent board supervised by a national regulator” while only 24 percent want an international board. This despite the belief of some that Bob Herz is the most dangerous man in the country.
Only 3% thought a “national legislature” should set rules, which is a relief. Plus it probably gives Barney Frank a little vindication but definitely upsets Newt Gingrich.
The survey also states that the respondents are split on how to report debt on their balances sheets, either amortized cost or fair value, which may be why the FASB and IASB are talking contingency plan.
The last bit of interesting information is that CFOs are still scared shitless of eXtensible Business Reporting Language (“XBRL”) because 84% of those surveyed have no plans to start using it. If you assume most of the CFOs were in Big 4 at one time, then this isn’t so surprising.
elves are off until spring next CFO survey will occur in the spring when another spectacular round of press releases will inform all of us what is on the minds of financial bigwigs.
Earlier: Grant Thornton Survey: Financial Statements Are Still Too Complex for the Average Shmo Investor
Also earlier: Grant Thornton Survey: 40% of CFOs Never Ever Ever Want IFRS to Replace GAAP
Sounds like Bob Herz and Sir David Tweedie are phoning it in with regards to fair value rules.
Herz and Tweedie and their respective accounting wonks met in Norwalk, CT on Monday and they’re all but admitting that there’s no chance that they’ll get on the same page:
At a joint meeting in Norwalk, Connecticut on Monday, members of the London-based International Accounting Standards Board (IASB) and U.S. Financial Accounting Standards Board (FASB) sparred over whether fair value, or “mark-to-market,” accounting rules should be expanded to a broader array of financial assets, such as loans and deposits.
In a move opposed by the banking industry, the FASB has proposed that all financial instruments be valued at market levels, while the IASB has proposed to have those assets valued at “amortized cost,” which would mostly provide information about expected cash flows.
“If FASB and IASB can’t agree on mixed model or full fair value model … the next best thing is something to move between the two,” Sir David Tweedie, chairman of the IASB, said on Monday…”By the end of 2010… if we can’t get it together, we should be appreciably together,” Tweedie said.
Plan B is already in full effect! Instead of one fair value rule, the two standard setters will provide a “presentation for fair value for more financial assets on corporate balance sheets so that investors would be able to quickly reconcile numbers in U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).”
Some board members are worried that this approach may be too confusing, however. Confusing financial statements? That’s only a problem for average investors. No biggie.
Oh, well. We know 2010 is coming up fast and those politicians get impatient when the bank lobbyists are threatening to cut off the money. Thanks for trying guys. You did your best.
Accounting boards try to reconcile fair value views [Reuters/Emily Chasan]
There’s no doubt that you’ve been awaiting the IASB’s new fair value rule with feverish anticipation. Well, your wait is nearly over because when Sir David Tweedie says he’s going to do something, by God, he means it:
In an address to a meeting of European Finance Ministers, which have in the past been critical of the IASB’s response to the financial crisis, Tweedie has sought to ease concerns by announcing that he is on track to deliver a new fair value standard by the end of this year.
“I gave a commitment to deliver on this timetable. We will publish the new standard in November,” he said.
This is all very exciting for Tweedie and the IASB since it feels pretty damn good anytime you stick it to your critics but…
Small problem: The new rule still won’t require loans to be marked to fair value which is the exact opposite plan of Bob Herz and the FASB, “FASB’s proposal will see all assets measured at fair value. The IASB’s mixed measurement model would see banks’ loan books valued on an amortised cost basis.”
Obviously the two rulemakers, fresh off the tongue lashings they received from their respective governments for their part in the worldwide economic meltdown, decided that they had no choice but to put out the fair value fire pronto. Meanwhile, convergence of accounting standards (what the IASB is really serious about and could be the next Big 4 gravy train) remains a pipe dream.
Fair value standard will be released next month: Tweedie [Accountancy Age]