“I am proud to say that so far my fellow board members and our staff, both FASB and IASB, have risen to the occasion. But I do fear potential burnout, as it’s not so easy to be running a marathon at sprint speed.”
~ Bob Herz, admitting that maybe these accounting wonks might be working too hard.
Volcker upbeat on “reasonable” reform bill [Reuters]
Former Fed Chair Paul Volcker took note of the FASB and IASB’s divergence on fair value and he’s not too thrilled about it, “[Volcker]…said that U.S. and international accounting standard setters must reach an agreement on how banks value the loans on their books.”
So from Big Paul’s POV, there is no option other than to get your shit together on this even though the two boards seem to be moving in the exact opposite direction. Oh, and could you do that ASAP? Reuters quoted him “What appeared to be two organizations converging … now looks like a collision. I hope they can come together by the end of the year.”
Is Internal Audit Irrelevant? [Norman Marks on Governance, Risk Management and Internal Audit]
The question about the relevancy of the Big 4’s audit business (at least for public companies) has been questioned but now the role of internal auditors is in question. Norman Marks cites a recent presentation at the IIA’s International Conference in Atlanta:
One of his points was that internal auditors have been humiliated – because nobody has held them to blame to any degree for the collapse of the banking sector, the failures in corporate governance and risk management, and the tremendous loss in value of investors’ shareholdings all over the world.
Richard pointed out that the Walker report (in the UK) on the causes of the banking crisis didn’t even mention internal audit. We are irrelevant.
Mr Marks takes exception with this, saying that internal auditors do deserve some blame and that if the NYSE and others get around to issuing some requirements around the function of internal audit, the recognition will come with it.
U.S. Faces ‘Severe’ AIG Losses, Says Panel [WSJ]
Even though the bailout of AIG probably prevented us from bartering over food in a barren wasteland with cars on fire everywhere, taxpayers ‘remain at risk for severe losses.’ A Congressional Oversight Panel also stated that the U.S. Government will continue to be a “significant shareholder through 2012.” The Beard is more optimistic however, saying “AIG, I believe, will repay.”
Earlier in the week we heard the devastating news that the FASB and IASB’s convergence efforts, despite a good hustle, would not meet the G20’s deadline of June 2011.
FASB Chairman Bob Herz indicated that this was a serious case of the Boards having bigger eyeshades than their double-entry stomachs could handle but he tried to squelch the disappointment by assuring everyone that the mission is not a failure and the Boards would “get most if not all of [the accounting standard proposals] done by the end of 2011.”
Roberto and IASB Chair Sir David Tweedie, feeling bad about how the whole thing turned out, decided to send a letter to the G20, presumably to keep them from getting their panties in knot:
It is expected that this action by the FASB and IASB will not negatively impact the Securities and Exchange Commission’s work plan, announced in February, to consider in 2011 whether and how to incorporate IFRS into the US financial system.
We appreciate the support of the G20 for the development of a single set of high quality global accounting standards. The two boards remain committed to achieving that objective. We shall continue to provide timely updates regarding our progress.
Ohhh, right. The SEC. What do they think about all this? Judging by Mary Schapiro’s attitude of “assuming completion of the convergence projects” as a precursor to IFRS, she’s totally cool with it, making her thoughts known in a statement yesterday:
The boards believe that the modified plan will contribute to increased quality in the standards because it provides additional time for stakeholders to thoroughly consider the proposals and give both boards quality feedback. I view this as time that is well invested.
Quality financial reporting standards established through an independent process are threshold criteria against which the Commission’s future consideration of the role of IFRS in the U.S. reporting system will be based. I foresee no reason that the adjustment to the targeted timeline for certain joint projects should impact the staff’s analyses under the Work Plan issued in February 2010, particularly when that adjustment is designed to enhance the quality of the standards. Indeed, focused efforts on those standards the boards consider highest priority for the improvement of U.S. GAAP and IFRS will facilitate the staff’s analyses.
Accordingly, I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers.
In other words, no rush guys. Take it from Mary, this happens all the time.
Yes, that’s your shocking headline of the day. Despite the retripling of efforts via videoconferencing and other fancy-schmancy technology, some Frenchman losing patience, and having a Knight spearheading 50% of the efforts, they will utlimately fall short of the June ’11 goal.
The Norwalk, Connecticut-based FASB and the London-based International Accounting Standards Board expect to announce changes to their convergence work plan in the next week or so that would delay the completion date by about six months and allow for greater public comment on the boards’ proposals, FASB Chairman Robert Herz said in an interview with Reuters.
“We’ve been working on a revised work plan with the IASB,” Herz said.
“We’d all like to see the work done as expeditiously as possible, but we don’t want to sacrifice proper due process.”
Herz said that to issue final standards by June 2011, the boards would have to release about 10 proposals in the next two months and rush through the public comment process.
It was nice of the FASB and IASB to say, “June? No problemo,” to the G20 BSDs but many organizations, including Financial Executives International, and even Chief Accountant Kroeker said that the overachieving might lead to some shoddy accounting standards.
Mr Herz is still optimistic about finishing up before 2012 telling Reuters that the two Boards will “get most if not all of [the accounting standard proposals] done by the end of 2011,” which is probably enough time for IFRS to be adopted by everyone. But then the world is on a strict deadline to end in 2012, so why are we bothering with this again?
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.
Some of you might think that Sir David Tweedie is trying evangelize IFRS all over this great U.S. GAAP land because A) he’s a wily Scotsman who isn’t afraid to wear a kilt to the office and sure as hell isn’t going to let a bunch of know-nothings tell him what’s best and B) he’s trying to throw his title.
Or maybe you just think he doesn’t care if the US of A is down with the financial reporting Kumbaya. Well Tweeds is Stateside putting everyone on notice that if that’s what you believe, you would be wrong. DEAD WRONG.
“The world is moving to a single set of high-quality global accounting standards, and this is too important an area for the U.S. not to be involved…After almost a decade of work to improve IFRS and U.S. GAAP and to seek their convergence, it’s time to finish the job.”
That’s the best he can do. And don’t bother asking him for the title, he can’t give it to you.
Crisis Probes Fail to Meet High Bar [WSJ]
Late on Friday, former AIG executive Joseph Cassano learned that he wouldn’t face criminal charges for his actions as the head of the company’s Financial Products division. According to the Journal, prosecutors did come close to filing criminal charges against Cassano and others but it was felt that the high burden of proof that “there was criminal intent behind executives’ decisions and that they intentionally misled investors” could not be met.
The government isn’t quite finished with Cassano, as he still may face civil charges from the SEC, which has a lower standard of proof.
The SEC’s Mary Schapiro on the Myths of GAAP/IFRS Convergence: The Lady Doth Protest Too Much [Re:Balance]
Jim Peterson took a closer look at Mary Schaprio’s speech at the annual conference of Chartered Financial Analysts where she mentioned IFRS but also convergence efforts between the IASB and the FASB. The SEC has maintained that convergence should be the initial goal for reporting standards.
Jim is concerned that the gap between the ultimate goal of convergence and the reality of some of the key issues at stake are no small feat:
There is, indeed, no more eloquent concession of the “convergence gap” than Schapiro’s own admission that “US GAAP and IFRS are currently not converged in a number of key areas,” including “the accounting for financial assets (the very types of securities at the center of the financial crisis), revenue recognition, consolidation principles, and leases.”
Any other problems, Madame Chairman? These on her list are so comprehensively grave that they will keep the international standards standoff alive until the end of time.
Which would put IFRS on a even longer track to adoption.
IRS audits of schools might delve into salaries of coaches [USAToday]
The IRS’ interest in the determination of the highest paid employees for colleges and universities has a few people worried. Not necessarily because anything is wrong but because the IRS is just a scary beast, “John D. Colombo, a University of Illinois law professor who has written about tax exemption and college athletics, says he doesn’t think the IRS action will fundamentally alter college athletics business. But he adds, ‘Audits are never comfortable. Just the IRS being there asking questions makes people nervous.'”
Primarily, the IRS is concerned over the business activities that higher education institutions engage in that aren’t “related to the schools’ primary purpose.” The interest in athletic coaches’ salaries is such that these individuals are often some of the highest paid employees of the school. The IRS is interested in how colleges and universities justify these salaries and to ensure that corporate sponsorships (not considered to be a business activity) are complying with certain rules so they are not considered advertising revenue.
FEI Implores FASB, IASB to Slow Down [Compliance Week]
Financial Executives International is concerned that the FASB and IASB have gotten a little too ambitious in their convergence efforts and has written a letter to the Boards’ respective Chairmen that basically says, “Easy, tiger.”
Everyone knows that those knowitalls at the G-20 were insisting the accounting rule mavens to make convergence happen by next summer but FEI is trying to take pragmatic approach to this:
Arnold Hanish, chairman of FEI’s Committee on Corporate Reporting, said in his letter to the two boards the group is concerned about the “unprecedented volume as well as the complexity of proposed standards” that the two boards are developing. The committee fears the vast scope and aggressive timeline for the proposals will not allow adequate analysis of how the rules will work, which will lead to implementation problems and amendments further down the line.
In other words, this isn’t quantum mechanics, but it’s not Fisher Price either. Mr Hanish did his best to remind Bob Herz and Sir David Tweedie just how overambitious this little project is:
Our member companies are extremely concerned with the 10+ Exposure Drafts (EDs) that are in final stages and will be released for public comment through the third quarter of 2010. During any single period in time in its 38-year history, the FASB has had no more than 3 or 4 significant EDs out for public comment.
FEI doesn’t seem convinced that this unprecedented overachieving by Herz and Tweeds is going to result in the “one set of high quality standards.” They would prefer that hte Boards get this right the first time so they don’t have to slap the proverbial duct tape all over the efforts later.
Cabbies, Accountants Look to Chip-Fat Fuel on Cost, Environment [Bloomberg]
PricewaterhouseCoopers’ London office is trying to do its best for the environment by using local chip-fat converted into biodiesel to supplement its energy needs:
PwC is seeking local sources for 45,000 liters of biodiesel to meet one quarter of its monthly office fuel needs, said Jon Barnes, head of building and facilities services at the firm.
“I’m trying to locally source used chip fat from restaurants,” he said. “It’s a pretty pointless exercise of using biofuel if it’s been all round the world on a ship.”
Sounds like a bang-up idea but P. Dubs is always looking for an angle, “Having a renewable source for some of PwC’s office’s energy needs could help the company sell its services to clients wanting to do the same.”
House Holds Hearing Today on Tax and Internet Gambling [TaxProf Blog]
The House Ways & Means Committee is holding a hearing today to kick around the possibility of legalizing Internet gambling here in the US of A (and taxing it, of course). It kicks off at 9:30 am ET and with any luck, you’ll be legally losing your mortgage payments for the 2010 football season.
Adelphia’s Rigases Win New Hearing in Tax-Fraud Case [Bloomberg]
John and Timothy Rigas are both doing time for their convictions in the Adelphia fraud but the their conviction in New York doesn’t seem to have satisfied the Keystone State. The two mean have been indicted on several tax-related charges in PA. Despite the prosecutorial zealousness, the federal appeals court in Philly ruled that prosecutors must allow the Rigases to present evidence that they are getting the double jeopardy treatment, as the tax charges are directly related to their crimes at Adelphia.
FASB Codifies SEC Announcement on Foreign Currency [Compliance Week]
Occurrences in Venezuela are capable of affecting the FASB’s agenda as Compliance Week reports that this recent guidance, “focuses on foreign currency issues related to investments or operations in Venezuela.” So, if you’ve got clients or do business in Hugo Land, you should probably check out Accounting Standards Update No. 2010-19.
Sage: Paul Walker CEO’s successor [AccMan]
“Let’s be honest – Sage is in the crapper,” sayeth Dennis Howlett.
Grant Thornton LLP purchases assets of Dallas-based firm Avalion Consulting LLC [GT Press Release]
Grant Thornton’s purchase of the group, “comprises two partners; Avalion’s IT consulting staff; and its IT and governance, risk and compliance (GRC) intellectual property, including Avalion’s patented GRC software solution – ComplianceSet®.”
ComplianceSet is a SaaS solution that “serves as the technical foundation for a process-based approach” for governance, risk and compliance; SOx, internal audit, and enterprise risk management.
Accountancy Age reports his latest soundbite at a speech in Washington today, telling “leaders” that while their efforts to converge international accounting standards and U.S. GAAP are admirable, that he and the entire continent of Europe are getting sick of the stalling.
“I appreciate that the US authorities have made progress towards convergence, but in the EU, we are getting impatient.”
Apparently Mr Barnier has had enough with this little dance going on between the FASB and the SEC. The FASB has been punting to the SEC fairly regularly and we’re all aware of the SEC’s tendency for inaction, so maybe Barns figured that a Frenchman calling out Americans on their own turf would help move things along.
Sen. Sherrod Brown Prods SEC/FASB to Fix Accounting Standards [The Summa]
This is Professor Albrecht’s take on Senator Brown’s amendment SA 3853 to the S. 3217: Restoring American Financial Stability Act of 2010. The Professor is less concerned about this particular attempt at financial accounting legislation, reasoning that the SEC and the FASB have had plenty of opportunities to fix these issues (e.g. repurchase accounting) and have passed them up.
Given the severity of the problems, and the inability of today’s standard setters to gird their loins and solve the problems, is it appropriate for Congress to pass a law directing the SEC and its standard setter to produce a desired outcome? Absolutely. Accounting standard setting is an inherently political process, as I explained in my popular essay, “Economic Consequences and the Political Nature of Accounting Standard Setting.” Because the SEC has passed on its legislative charge to establish accounting standards that adjudicate between competing economic interests, and because the private standard setters follow their own political agendas when preparing accounting standards, it behooves Congress to step in when things get too far out of whack with national priorities. Such is the case here.
In other words, s— or get off the pot, FASB and SEC. The argument is a fine one, however, if legislation of accounting has to force the FASB’s into action, where does it end? When FAS 157 was being decried as the cause of all our problems, Barney Frank called in Bob Herz, scared the living bejeesus out of him, and got the result he wanted. Is that preferable to this situation? That depends. At the very least, the Sherrod Brown method susceptible to the influences of others while the B. Frank method skips the voting and signing stuff altogether (which has proven tricky in the past).
Former H&R Block CFO gets $620,000 cash in severance [KCBJ]
Becky Shulman (no relation to the Commish, as far as we can tell) is getting $620k for walking away from H&RB along with automatic vesting of 148,725 outstanding stock options. There’s no indication that she is eligible for lifetime complimentary tax prep service.
Intuit to buy Medfusion in $91M deal [SV/SJ Business Journal]
Intuit, owner of QuickBooks, Mint.com, Quicken, etc. has now added Medfusion to its stable, expanding its SaaS holdings. The deal is scheduled to close this July, the 4th Quarter of the company’s fiscal year. CEO Brad Smith, from the press release:
“This transaction expands our software-as-a-service offerings with a solution currently used by more than 30,000 healthcare providers, the vast majority of whom are essentially small businesses. The combination of Medfusion’s industry-leading patient-provider communication solutions and Intuit’s expertise in creating innovative solutions that improve the financial lives of small businesses and consumers, will help us create new solutions that make the clinical, administrative and financial side of healthcare easier for everyone.”
Audit chief welcomes debate on international regulator [Accountancy Age]
The idea of an international audit regulator is being kicked around in the EU with about as much seriousness as returning to the moon. That is, it’s absolutely something to be discussed but at this point nobody’s firing up the boosters just yet. IFRS has been proved to be, putting it lightly, a challenge but ever since the Lehman Brothers/E&Y fiasco, reform of the auditing business doesn’t seem far behind.
And while the idea is being entertained, the hurdles to an international regulator sound a little familiar:
Ian Powell, senior partner at PwC UK, said the establishment of an international regulator is “worthy of debate” but believes global consensus among nations may prove difficult.
“Most countries think their regulation is good and it is their system which should be applied – that is going to make it difficult to convince them to give up their system,” he said.
“If you talk to virtually any regulator in any country they do want to see more globalisation of regulation, but the big problem is there are certain political issues that are different in different countries.”
GMAC Said to Consider Ex-Citigroup Banker Yastine as Next CFO [Bloomberg Businessweek]
GMAC is hot on the trail for a new CFO after their last one bolted in March shortly after his TARP testimony. The ward of the state is said to be considering Barbara Yastine, who formerly was the CFO at both Credit Suisse’s and Citigroup’s investment banking groups.
FASB Defendant in Suit Alleging Antitrust Violations and Patent Misappropriation [Silicon Economics, Inc. Press Release]
Silicon Economics, Inc. is suing the FASB, alleging “antitrust violations and with willfully attempting to misappropriate patented technology,” according to the San Jose-based company’s press release.
The lawsuit concerns Silicon Economics’ EarningsPower Accounting™ (EPA™) – a patented method developed by the company to improve the accuracy, validity, and usefulness of financial statements. Silicon Economics recommended the merits of EPA to FASB in response to FASB’s request for public comment on the objectives of financial accounting (No. 1260-001, July 6, 2006). FASB claims that its website terms and conditions gave it ownership of Silicon Economics’ technology, even though such terms were not part of FASB’s invitation for public comment or otherwise disclosed to Silicon Economics.
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.
It’s not surprising that FASB’s Bob Herz was called to submit comment on the House Financial Services Committee’s hearings on Lehman – more specifically, Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner – and it’s even less surprising that Herz stated that the FASB will be ready when the SEC is to alter repo accounting rules should this be, you know, a big deal going forward.
As many of you already know, the FASB has a history of taking a reactive stance to accounting issues during the financial crisis (case in point: mark to market) and repo accounting is no exception. Sort of like the SEC cracking down on Madoff-esque Ponzi schemes after Madoff, it defeats the purpose as financial criminals very rarely repeat techniques that have already been uncovered and prosecuted. But oh well, showing up late to the party is still showing up and proves FASB is at least paying attention.
Herz’s testimony reinforces FASB’s position as standards setter, not regulator. Working with the SEC will allow the regulators to put together a case for accounting standards that could address repo accounting should the SEC discover it is widespread among financial firms but for now, FASB will be sitting back and waiting to see what the SEC comes up with.
As it turns out, FASB isn’t nearly as reactive as it appears on the surface: plenty of guidance already exists for handling these transactions and perhaps had Ernst & Young been looking hard enough, they would have easily found something amiss.
When developing the guidance for determining whether a company maintains effective control over transferred assets, the FASB noted repo transactions have attributes of both sales and secured borrowings. On one hand, having a forward purchase contract is not the same as owning the asset. On the other hand, the contemporaneous transfer and repurchase commitment entered into in a repo transaction raises questions about whether control actually has been relinquished. To differentiate between the two, the FASB developed criteria for determining whether a company maintains effective control over securities transferred in a repo transaction.
Control? Is that was this about?
Regardless, FASB is prepared to offer even more guidance on the matter should current guidance not be sufficient to make sense of future contracts that could be used in a fraudulent manner. Of course, the financial criminals have likely already discovered a new, innovative way to hide liabilities or stash nasties off-sheet but instead of looking for those, the SEC will be working closely with FASB in the future to prevent another Lehman. History always repeats itself but, sadly, financial crimes rarely do. It appears our friends at FASB never got that memo.
Bank of America Names an Outsider as CFO [WSJ]
Charles Noski will be the new Bank of America CFO, effective May 11th. He most recently was the CFO at Northrup Grumman, which he left in 2005 and prior to that held the same position at AT&T. He has also served as a advisor to Blackstone Group and is currently a director at Morgan Stanley and Microsoft. It is reported that he will give up his director seat at competitor Morgan Stanley. Noski began his career at Haskins & Sells (now Deloitte) for seventeen years and was a partner.
This ends BofA’s quest to land a CFO after former finance bigwig Joe Price moved into a new role under new CEO Brain Moynihan back in January.
IASB says “no guarantee” of full US accounting convergence [Accountancy Age]
The FASB and IASB, try as they might, have announced that they simply cannot guarantee that they will pull off 100% unadulterated convergence. The two boards have struggled to get their cerebral minds together on a number of “important technical issues” and are holding out for the possibility that they may not resolve any of their remaining differences.
The two boards issued a statement which warned, “Although our recent experiences with joint meetings show that we have been able to resolve differences on several projects, there is no guarantee we will be able to resolve all, or any, of our differences on this project.” The two cite “different imperatives that pushed our development timetables out of alignment,” in the struggle for converging the two sets of rules. While the FASB and IASB are warning that accounting rule convergence may be impossible, the statement indicates that the two still aim to finalize their work by the mid-2011 deadline.
Medical pot users to pay sales tax [Bangor Daily News via Tax Policy Blog]
The Pine Tree State will taxing its medical green that is sold at state-sanctioned dispensaries. The Maine Revenue Service had argued that since marijuana is currently issued for medicinal purposes, that the it should be treated as a prescription drug and thus, not taxed. However, since a prescription isn’t necessary to obtain medical marijuana, Maine lawmakers disagreed and ultimately decided to administer a levy on the sale of state-issued grass.
• ‘Big four audit firms bending laws in India’ [Times of India]
A committee of the Institute of Chartered Accountants in India that is investigating the Satyam fraud is claiming that the Big 4 is “circumventing laws while providing auditing services in the country.” According to the Times of India, the committee has claimed that the firms have been granted permission to provide consulting services but not “taxation services, auditing, accounting and book keeping services and legal services.” The firms are able to provide these services through affiliate firms like Price Waterhouse Bangalore vis-à-vis Lovelock & Lewes who were responsible for the Satyam audit.
The committee states that “Indian firms and [multi-national accounting firms] are defacto the same entities providing the assurance, management and related services and as such their operations are designed to circumvent the provisions of the Chartered Accountants Act, 1949,” and that information sought from some local firms has not been provided to determine if they have partnered with the Big 4.
• Debunking the FIN 48 Conspiracy Theory [CFO Blog]
When the IRS proposed its latest rule for disclosing uncertain tax provisions it debunked a theory concocted by some that the FASB was in cahoots with the Service to provide treasure maps for companies that take aggressive tax positions. It was thought that when the FASB was developing FIN 48 (aka Topic 740) in 2006 that they were siding with the IRS in requesting companies to report specific information about those positions.
Not the most interesting conspiracy theory we’ve ever heard but a conspiracy theory nonetheless. Anyhoo, FIN 48 requires less detail about the uncertain positions than the new IRS proposal, thus, debunking the conspiracy, at least in former FASB member Edward Trott, “I think FIN 48 accomplished exactly what was intended…The IRS’s proposed rule makes it clear that [FASB] was able to provide information to investors without providing a gold mine of information to the IRS.” You can go back to your illuminati theories now.
• More Americans Give Up Citizenship As IRS Gets Aggressive Overseas [Dow Jones via TaxProf Blog]
Just over 500 people renounced their citizenship or permanent status in the fourth quarter of 2009. The report, citing public records, states the figure is more than all of 2007 and double of 2008. Mostly people are creeped out by future tax increases and more regulation, including the requirements to report details of foreign bank accounts.
While that does drive some people out of the US of A, the IRS claims that there has been a push to get some out who have already surrendered their passports, “The IRS says some of the swelling of numbers of expatriations towards the end of 2009 occurred because the agency made a push to notify people that had already surrendered their passport, but had not completed the process by submitting the IRS form. Until that form is received by the IRS, these people are still subject to U.S. tax.” Or in other words, “GTFO and stay out.”
We’ll be posting on a lighter schedule today. Hopefully many of you are enjoying a long weekend.
• Dell says several former staff may face SEC action [Reuters]
Some former Dell employees are facing possible SEC actions related to the company’s accounting. The Commission started its inquiry back in 2005 and Dell disclosed that the U.S. Attorney for the Southern District of New York had subpoenaed documents shortly after in 2006. This all led to the Accounting Code of Conduct that the Company implemented last fall. The company stated that it believes ‘monetary penalties’ will be part of the settlement but otherwise they’re keeping a lid on it.
• FASB Chairman Robert H. Herz and IASB Chairman Sir David Tweedie to Discuss Global Accounting Issues at The George Washington University [FASB]
Herz and Tweeds will be at G Dubs on Wednesday, April 7th kicking around global accounting issues. “Greater Global Transparency in Financial Reporting: Lighting the Path for Investors” starts at 6 pm and is free and open to the public, so you best get there early before the groupies overrun the joint.
• NASBA Takes Back (Some) Passing CPA Exam Scores for March [JDA]
In what could amount to the worst April Fool’s joke in history, Adrienne is reporting over at JDA that NASBA is taking back some of the scores for March after extending the test dates in the third month:
[F]rom a reliable source within the Big 87654 that test-takers outside of the blizzard-affected areas have actually gotten their scores taken away and thrown out. Yes, that means all of you who put it off until the very last minute and rescheduled for the March extension are pretty much screwed unless you also got snowed in on top of it. Yes, those of you who paid for and passed the exam in March.
Huh. We’re checking into this. We’ll get back to you if we learn more.
God forbid I go so far as to say this whole convergence thing is a conspiracy but it’s starting to reek like a bad Saturday morning cartoon plot. First the evil leaders start scamming for world domination, then they form shady alliances in darkened lairs and eventually the population gets sold into slavery until the hero comes and drops the villains in a vat of acid. Or something like that. If global financial “reform” were a Saturday morning cartoon, we’d be horribly overrun with villains and in desperate need of a hero.
Since it’s real life, all we can do is watch.
A spokesman for IASB said the two boards are expected to issue their first joint quarterly progress report very soon. A spokesman for FASB said the various project updates posted by the two boards demonstrates “quite a bit of progress” in recent months.
“We remain committed to working with IASB,” said spokesman Chris Klimek. “(We) appreciate the SEC’s leadership and additional guidance on this important matter, and like everyone, we will be studying the work plan carefully in the days ahead and discussing what it means for us.”
It’s cool! There’s a plan for convergence and here it goes: the SEC waits around for the FASB and IASB to figure out how to convert GAAP statement to IFRS without costing American companies billions ($35 million/year x companies converting = well you get it). Eventually, they might just figure this out. In the meantime, kick back and don’t get too worked up over it, the two bodies are still battling it out because of the same cultural barriers that have always stood in the way of a true marriage of FASB/IASB positions.
As Number Insights pointed out in 2007 (see how long we’ve been trying to do this? And what do we have to show for it?), a single set of principles might not be the bad part of this entire plan. GAAP is notoriously constrictive but principles-based accounting requires qualified accountants and I’m not sure our accountants are quite ready either, ignoring the costs associated. And a world without FASB? I can’t imagine it.
It doesn’t look like I’ll have to any time soon.
AS PREDICTED. And It was unanimous. Sure, it wasn’t the boldest call we’ve ever made here at GC but we thought it was worth pointing out that the SEC really didn’t have much of a choice.
The good news is that the Commission doesn’t need to sweat this for now. They’re just letting everyone know that they’re tepidly re-re-committing to International Financial Reporting Standards but ONLY if the IASB and FASB can pull off meaningful convergence and the IASB stops being a bunch of lily-livered bean counters and tells the pols to BTFO.
Web CPA reports, “In the commission’s vote Wednesday, the SEC reiterated its cautious support for IFRS, contingent upon reaching a number of milestones, including convergence of U.S. GAAP with IFRS and improved governance of the International Accounting Standards Board.”
And even if that happens, the SEC staff has to check everything out so that everyone knows exactly what will result from the U.S. adopting IFRS (probably the rapture). Once that’s settled then we can talk about how this will get done.
Mary Schapiro’s words:
“In 2011, upon conclusion of the fact-gathering and analysis set forth in the work plan – and assuming completion of the convergence projects – the commission will then be in a position to determine whether to incorporate IFRS into the financial reporting system for U.S. public companies. Until that time, we will expect staff to provide periodic written public reports to the commission on the progress of its efforts.”
Back to work everybody. There are future meetings to be planned.
Not exactly shocking news but one of the mysteries of the financial crisis is how it came to be that banks ended up with r transferred to investors.
Sure, it’s well known that the assets banks removed from their balance sheets did not shift much risk to investors after all, thanks to liquidity guarantees they supplied to investors. But that even took former Citigroup vice chairman and Treasury secretary Robert Rubin by surprise, as Rubin said he didn’t know such guarantees existed until after the bank was forced to increase its capital reserves because it had to make good on them.
Now research that came out a year ago but was revised late last month helps clarify what went awry.
It turns out that a conflict between the Financial Accounting Standards Board and federal bank regulators was even more critical than I thought it was when I reported it in 2004. The conflict arose after FASB voted to require commercial banks to consolidate such vehicles after such financing arrangements caused energy trading firm Enron Corp. to fail.
I was aware that the regulators asked the FASB to delay the new accounting rule and that the board eventually provided an exemption for so-called “qualified” special purpose entities, which provided a loophole from consolidation so long as they vehicles weren’t actively managed.
But the full significance of that escaped me until I saw the research, which shows that securitization along the lines of Enron’s — guarantees that limited or even eliminated investor risk — exploded after bank regulators codified the exemption in their capital requirements. Indeed, the exemption essentially paved the way for banks to use more off-balance-sheet financing vehicles that masked their true risk.
How exactly? In late 2004, the Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of Thrift Supervision decided that asset-backed commercial paper put into special purpose vehicles known as conduits would not have to be consolidated for purposes of calculating capital requirements. And the regulators decided that banks need only reserve against 10 percent of the amounts put into conduits even when they guaranteed that investors would be repaid if there were a run on the conduits. Previously, securitizations typically put investors on the hook for that risk.
The research, originally published in May 2009 but revised in late January and entitled “Securitization without Risk Transfer,” found that the amount of subprime assets securitized through such vehicles soared in the wake of the exemption, even though the liquidity guarantees extended to investors meant that little or no risk had been transferred to them.
“Regulation should either treat off-balance-sheet activities with recourse as on-balance sheet for capital requirement and accounting disclosure purposes, or, require that off-balance sheet activities do not have recourse to bank balance sheets,” the authors, Viral V. Acharya and Philipp Schnabl of New York University and Gustavo Suarez of the Federal Reserve, conclude. “The current treatment appears to be a recipe for disaster, from the standpoint of transparency as well as capital adequacy of the financial intermediation sector as a whole.”
A tipster pointed us to Apple’s transcript from last night’s earnings call, noting that the company has indicated that they will no longer be providing non-GAAP measures. This is a result of the solid that the FASB did for Apple back in September:
We are very pleased by the FASB’s ratification of the new accounting principles as we believe they will better enable us to reflect the underlying economics and performance of our business and therefore we will no longer be providing non-GAAP financial measures.
Our tipster noted that since using non-GAAP measures are a commonly used by companies and analysts, Apple’s declaration that they would not be “providing non-GAAP financial measures,” could potentially change things. It’s one thing if say, Koss were to say they’re not going to provide non-GAAP numbers, but this is Apple.
The company enjoys a top of the mind position, so other companies may embrace this method of engaging with analysts and other users. And since Apple isn’t shy about controlling the information they provide (e.g. Steve Jobs’ pancreas) this seems to be another way for them to dictate the information they are providing.
It’s not a stretch to say that many companies try to emulate Apple; whether or not they will emulate Apple’s financial reporting methods remains to be seen. Strange, because we figured they were just innovative on the gadget front.
The Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision released their long-awaited final word on new rules for securitized assets, specifically for bank balance sheets:
The federal banking and thrift regulatory agencies today announced the final risk-based capital rule related to the Financial Accounting Standards Board’s adoption of Statements of Financial Accounting Standards Nos. 166 and 167. These new accounting standards make substantive changes to how banking organizations account for many items, including securitized assets, that had been previously excluded from these organizations’ balance sheets.
What does this mean for banks? In simple terms, they’re no longer going to be allowed to hide massive amounts of SPEs and derivative exposure off their balance sheets. Hit the deck!
Banking organizations affected by the new accounting standards generally will be subject to higher risk-based regulatory capital requirements. The rule better aligns risk-based capital requirements with the actual risks of certain exposures. It also provides an optional phase-in for four quarters of the impact on risk-weighted assets and tier 2 capital resulting from a banking organization’s implementation of the new accounting standards.
In case your ass has been under a rock for the last year, FASB came after banks’ asses over the summer. Miraculously, the Fed encouraged this switch, leading me to believe they’re just trying to cover their tracks.
Quadruple Whammy: Regulatory Agencies’ Final Rule on FAS 166/167 [JDA]
FASB Changes, Toxic Asset Shuffle
Despite your best efforts to resist the new FASB codification as the source for all things GAAP, the FASB is not disheartened. Herz and Co. are cognizant of the desire of many accountants to have reference books on shelves in their offices in order to maintain their double-entry wonk image. In order to feed this natural inclination, the FASB is now offering the codification in a four volume set for the low, low price of $195.
Call us skeptical but this particular attempt by the FASB to get more people on board with the whole codification thing is doomed. DOOMED, we tell you. If they really want to get accountants to buy this stuff it will require a marketing campaign the likes of which Ronco and the Shamwow guy have never seen.
FASB Offers Codification in Four-Volume Set [Compliance Week]
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]
For the love of everything that is good and holy, would someone like to be the FASB Chairman? Or the Chief Accountant of the SEC?
We realize that they’re both thankless jobs but we need people in there that are going to make some things happen.
After Jim Kroeker said this:
“[T]he boards have agreed that the projects that they’re working on are areas that need improvement, not just under U.S. GAAP but under IFRS, then I think convergence efforts should continue or would continue without an SEC finalization of the roadmap,”
Bob Herz is now saying this:
“[T]he ball is mostly with the [SEC] at this point” … Herz noted the SEC has yet to rule on the “roadmap” for U.S. compliance with IFRS it proposed a year ago.
So, let’s get this straight: JK is said, “You go first.” Now Bob Herz is saying, “No, you go first.” Does anyone want to introduce these two clowns? Are they waiting for knighthood before they move on this?
We suggest that somebody toss Mary Schapiro in there to A) complete the trilogy of stooges and B) so she can bonk their heads together. That might get them motivated.
Herz: U.S. Convergence Ball Is in SEC’s Court [CFO]
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.
Sir David Tweedie and his fellow non-knighted wonks have released IFRS 9, Financial Instruments today to much anticipation. For those companies that were chomping at the bit, you can adopt pronto but nothing is mandatory until the end of 2012.
You got to hand it to Tweeds. The BSD at the G20 demanded that the IASB take another look (read: change) at this fair value thing ASAP and he delivered, AS PROMISED:
We have delivered on our commitment to the G20 and stakeholders internationally to provide an improved financial instrument standard for the classification and measurement of financial assets for use in 2009. Benefiting from unprecedented levels of consultation with stakeholders around the world, the IASB has made significant changes in its initial proposals to improve the standard, provide enhanced transparency and respond to stakeholder concerns.
Very impressive, so the ball is your court, Norwalk. You better get off your asses and come up with something good because none of you have knighthood and we haven’t seen much evidence of your re-quadrupled efforts. We already know that you’re talking Plan B but give us something, anything. You’re worried about Congress, sure but the Europeans are making you look bad. Is there any American knight-ish equivalent that Bob Herz could get that would help give him a boost in confidence?
If you’ve got suggestions, leave them in the comments. We’re at a total loss.
IASB completes first phase of financial instruments accounting reform [IASB Press Release]
New fair value standard rushed out by IASB [Accountancy Age]