FAS 157 fair value accounting revolutions- Will Neo get Mr Smith

I had mentioned this in my earlier blog "FAS 157 results in naked shorts selling ". Now in the latest manifestation of the heavy flak flying around fair value, critics have been emphasizing the great power that the Securities and Exchange Commission will have — to suspend mark-to-market accounting "for any issuer" and to launch probes into its role in the current financial crisis.

The bailout bill debated yesterday in Congress included sections giving the SEC power to suspend mark-to-market accounting "for any issuer" and to launch a probe into the question of whether it contributed to the crisis. Though the bailout plan has been rejected, the bill shows the concerns of the SEC towards this new rule.

Under the securities laws, the SEC would have the authority to "suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer...if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors," according to Section 132 of the bill.

Further, Section 133 of the legislation would empower the SEC to launch a study of the effects of 157 on financial institutions, including depository institutions. The study would mull the effects of the standard on bank balance sheets; the impact of fair-value accounting on this year's bank failures; and how mark-to-market affects the quality of financial information provided to investors.

The FASB reacting to the heat it has to take from the legislators and bankers decided to postpone its webcast on FAS 157 which was scheduled for a 11 AM US time run yesterday. The eagerly awaited FASB was to discuss various issues on the implementation of FAS 157

Well the markets took a tanking yesterday with DOW (n) over 600 points, will the regulators stand up and ban FAS 157.

Naked shorts selling - blame it on FAS 157's fair value accounting

The co-incidence couldn't have been worse for the banking sector, FASB's re-loaded version of fair value accounting FAS 107 in the avtaar of FAS 157, times itself with one of the biggest credit crunches in recent times.

The GAAP's (FAS 157) intent was to provide investors with added transparency by forcing companies to mark to market assets and liabilities. On the contrary, many pundits feel that fair value accounting does the exact opposite. Instead of providing investors with a better picture of economic reality, fair-value accounting distorts market realities by leaving too much room for management's discretion and potential abuse.

So does FAS 157 lead to naked short selling (NSS) on the markets.....

Phase 1 to NSS a booming market- FAS 157 requires companies to mark to market its financial assets at the exit price in an active market. In a booming market with a lot of credit available, valuations of financial instruments head only one way and that is upupup, valuations are better as there are many takers for these instruments ...net result earnings per share & disclosure analysis of companies look and feel better.

Phase 2 to NSS - Hungry Investors and credit rating agencies - traditionally relied on making their own fair value assumptions on Companies, now with data being available freely in the financial statements, these become the new norm of valuations..sideeffects - reckless lending, bad investments,inaccurate credit ratings of securitized debt and off late betting heavily on Credit Default Swaps (ask Lay-man ooops Lehman). Fair value assumes that markets have "good information" culled from financial results and credit-rating reports. But if rating agencies and investors get their data from corporate financials — "which are themselves based on prices inflated by a market bubble, the accounting numbers support the bubble.

Phase 3 - The bubble gets bigger - As accounting numbers support the bubble, markets instead of relying on prudent valuations and controlling management excess, 'fair' values feed the prices back to the market."

Phase 4 - A Sub prime hits you.........Sub prime loans (meant for the lower echelons) hits credit liquidity in the world markets . This hits liquidity in exotic financial instruments meant for the higher echelons of the Corporate world. With lesser liquidity, there are no takers for financial instruments in an active market - as a result fair values suddenly collapse.

Many banks in the US were complaining that they had no takers for US Govt bonds last quarter... many were wondering as what value they had to ascribe to these bonds... well if you were to follow FAS 157 - record these instruments at exit price.. then zilch should have been the value.

Phase 5 - Hungry Investors (this time bears) and credit rating agencies are back at it again....... they value companies on the basis of fair values in the financial statements, bingo ..... the valuations in the financial statements result in lower enterprise value and earnings per share...sideeffects fresh lending and investments gets starved, inaccurate credit ratings are given for healthy companies, securitization pools look bad, and Credit default swap indices go down (ask Lay-man)

Phase 6 - Bad rating chase bad values, this circular chain worsens the credit crisis. Bears step in and start naked short selling in Companies....their stocks, debt programmes, securitzation portfolios, Lay-man oops Lehmans' Credit Default Swaps.

The crux of this issue is marking assets and liabilites to their exit price in active markets, in times of recession, when there are no active markets, FAS 157 forces companies to mark their assets down, though many of these companies have the stomach to hold onto these investments through the recession.

Well i heard certain punters hedging /betting on what will be the next set of fair values, accountants will disclose for their Companies in the coming quarter ...now that's a new derivative under FAS 133 isnt it...wonder ISDA already has it updated

GEoogle - to energize we wed

GE and Google entered into a enviro-matrimony in the US today. Business reasons can create strange matrimonies and bedmates. The two monoliths who have not worked in the past, have different work cultures, business rules and revenue models, this new partnership could just about change the way we deal with energy in the future.

This partnership comes on the wake of GE's shares plunging to their 5 year lows with investors perception of GE as a financing company. Jeff's Immelts (GE's CEO) move may just change that perception back to GE's image as a strong Old Economy Colossus with a PHD in world technology.

The deal combines each company's strengths: GE will make the hardware -- from wind turbines to metering switches, and Google will make the software -- applying network technologies to the grid.

Schmidt at the press release (Google's CEO) used plug-in hybrids to illustrate the needs to improve U.S. electric resources. More electric cars will require more capacity, which GE will provide, and the intelligence needed by the grid to tap charged car batteries when they're parked at night would come from Google.

Scmidt and Immelt are expected to announce joint efforts to promote and develop what insiders are calling the "21st Century Grid" - technology that will computerize electricity transmission in the US so users and generators can optimize energy use.

On substance, the world might just get to see a merger of Google's infinite BOTS traversing through seas of electric atoms in GE's turbines. This matrimony is exciting, as it can show how GE with a track record of paying dividends for over a hundred years is willing and eager for a technology-tie up with Google which is less than 2 decades old.

So will the honeymoon be called Geoogle.........

Excel over form

Widgets on your excel

Have you heard of pop-up photos

Every time you inserted a comment on your excel, a dull yellow sticky note popped out. Here’s how you can add a picture to your comment.
(The below pic is an excel snapshot)


Wondering how to do it....
Right click on the cell, and select edit comments --> select the border of the dull sticky note, -->hold the border and right click on the border, --->, on the drop down select Format comment --> go to colours and lines tab, select fill colour --> Under the fill colour drop down, select fill effects and go to picture tab, and voila select picture and upload it to your comment.

Xanga Haiku websites

Websites which you will are truly substance over form

Know the Deal
http://www.mystockoptions.com/ Register at this Smart Stop for free articles, a global tax guide and a glossary of investment terms on how to avoid common stock option mistakes or information on restricted stock for estate, financial and retirement planning. Members can use calculators to figure out restricted stock and SAR take-home amounts after taxes, for example.

IFRS updates
http://www.iasplus.com/ Deloitte’s IAS Plus is fully searchable and offers detailed summaries and analyses of all standards and interpretations, comparisons of IFRS and more than a dozen local GAAPs, and links to hundreds of IFRS-related Web sites.

Create and share your homepage on bookmarks
http://www.zeeado.com/ Want a personal homepage for searching, bookmarking and sharing websites with friends. The site is designed for anyone who wants a simple, customizable page that they can access with one click from anywhere in the world. The site is from New Zealand and the website has a great UI and is totally uncluttered.

Share your ppt.s and pitches
Wanted to share PowerPoint presentations over the Web, converting uploaded presentations to Flash slideshows, while at the same time retaining all graphics, animation and sounds from the original files, click on http://www.authorstream.com/. Once uploaded, you can send the file’s unique URL in an e-mail or embed the file in any intranet page, blog or Web site.

Range bound losses – Zero in on them

This issue of substance over form (SOF) deals with how we account for contingencies when they are range bound.

Typically all GAAP’s on contingencies zero in on two conditions to accrue estimated losses on contingent events
a) information available prior to the issuance of financial statements indicate that it is probable that an asset has been impaired and a liability has been incurred.
b) the amount of loss can be reasonably estimated

Assuming criteria (a) is met, and criteria (b) too, but the loss which is to be estimated lies within a range, instead of single loss estimation. For example, you have been handed over the list of legal cases pending against the Company by your legal team at quarter close. For a particular litigation, the legal team feels that loss is not determinable, but offer you a range. They say that the loss estimate on the basis of the current situation could be anywhere within Rs. 10 crores to Rs. 50 crores.

So what do you do, consult your auditor, nah…. you are afraid that he will say accrue Rs. 50 crores. Average the loss and settle to accrue at 30 crores, or do you just ignore it and disclose the entire amount in the notes to accounts.

Since there is no illustration of the same under Indian GAAP, SOF got the answer in a pronouncement issued way back in 1976 – FIN 14 under USGAAP. The pronouncement requires you to accrue for the lower amount of the range and disclose the balance under contingencies. So in the above example, we will accrue Rs. 10 crores and disclose Rs. 40 crores in the notes together with a brief explanation to the case and its treatment in the financial statements.

So now that you have figured the treatment, do you think it will pass by your auditors. Surprisingly, when I checked this with my auditor (BIG 4) , he gave a sheepish smile and said, our auditing methodology (replicated from the US) has a leeway and conforms to your understanding. Well I am sure he didn’t know the pronouncement, but was willing to use his audit methodology which had built in this pronouncement…. Thank GOD the BIG 4 rely on US audit methodologies…. for their audits in India.... hopefully they remain the same, once they shift to IFRS……

PCOAB chairman outburst against IFRS

With the SEC showing the intent and FASB frevently working on the convergence of the United States to the IFRS. PCOAB chairman Charles Niemeier objected to the convergence. Niemeir is one of the key people who was instrumental in laying out guidelines on SOX, and feels that SOX have had a key role in improving the quality of the financial statements in a big way.

In a statement which was delivered to the press he said; The proposed switch could squander comparability among U.S. financial statements, and hurt the ability of regulators and auditors to do their jobs.

'IFRS has the potential to de-link us from our regulatory model. "All research shows that the U.S. is unique in its regulation. No [country] is as effective . . . . We have the lowest cost of capital in the world. Do we really want to give that up?"

He further expressed that moving into IFRS could unwind all the good work done on the US markets post ENRON and send US many light years away.

Niemeier said the idea that IFRS will solve problems with the current U.S. financial reporting system is also a myth, and that those problems exist primarily because the United States has stopped dealing with them. "We are not addressing the problems by moving to IFRS." To deal with accounting problems, he said, "we need to face them head on. Moving to IFRS is an exit strategy, but it's not taking us where we need to go.

In a similar vein, Niemeier challenged the assertion that IFRS will be good for investors. "It's a great selling point if you are marketing something to say that IFRS is good for investors," said Niemeier, but that in fact, it might undermine the regulatory protections that U.S. investors currently enjoy.

Well on a personal note, I do agree with the US regulator, as USGAAP has undergone many evolutions stemming from experiences of frauds, investor relations, complex financial instruments, something which the London based IFRS is yet to evolve into. Maybe, the FASB should strive to rework its accounting pronouncements to make them simpler and more objective, this would definitely help in saving the legacy , knowledge and the huge learning’s of USGAAP, which otherwise will become a chapter in history books.

Fannie, Freddie and FASB - 3F's to a securitization end

FASB today issued a media advisory that it expects to issue three separate exposure drafts by end of next week relating to FAS 140, FIN 46 and disclosures on the above two pronouncements.

The exposure draft on FAS 140 which deals with Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, aims to eliminate the Q entity or rather the Qualifying Special Purpose Entity, thus making the securitization process as a single step transaction. While the industry acknowledges that the Q entity had a hand in Enron and of late the sub-prime mortgage crisis, the Big 2 F's have reasons to worry as it can inflate their balance sheets by rewriting a lot of the portfolio back into their books. This could potentially alter a lot of financial ratios, the most important being the capital adequacy ratio.

Analysts have suggested as close to as $5 trillion could come back into the books of various financial institutions if the changes are bought into effect by the end of this year.

The FASB's last attempt to rewrite FAS 140 met with a lot of resistance with close to 50+ objection letters coming from various industry forums.

The exposure drafts would be available in the forthcoming documents soon to be released by the FASB.

IFRS training by ICAI

The Institute of Chartered Accountants of India (ICAI) will organize a two-day National Conference on International Financial Reporting Standards (IFRS) on September 5.
Members can attend the two day workshop by taking a cheque of Rs. 2250 and by confirming their registration by email at cpeifrs@icai.org.in or by telex by contacting Mr. Rawat at 9810931635. The training will be held at Crown Plaza, NF Colony New Delhi.

It will be spread over eight technical sessions and will be addressed by the experts in the field of IFRS.

The conference will focus on challenges in adoption of IFRS, first time adoption of IFRS and the issues related to change over to IFRS, besides other facets of accounting standards.

Considering the fact that a lot of challenges are faced during the first time implementation, a special session was dedicated to sharing implementation experiences by various consultants and users both large and small. (ANI)