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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

 
 
Author: Jack Ciesielski Created: 10/13/2006 2:54 PM
The AAO Weblog is a weblog published by Jack Ciesielski , dealing with accounting issues and news topics related to investment and finance.

I've sent my comments to FASB on their two proposals that will dilute fair value reporting. It will take a while before they actually make it to the FASB comment letter webpage, so I'm presenting both here as two separate blog posts on the off-chance that any readers might feel compelled to peck out a few comments to the FASB themselves - before the end of the comment period, April 1st. And that's no joke. This one relates to the OTTI idea, as you can tell from the title; the following post is my comment letter on the 157 modifications proposed.

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March 31, 2009

 

Mr. Russell Golden

FASB Technical Director

Financial Accounting Standards Board

P.O. Box 5116

Norwalk, CT 06856-5116

 

Re: No. FAS 115-a, FAS 124-a, and EITF 99-20-b, “Recognition and Presentation of Other-Than-Temporary Impairments”

 

Mr. Golden,

 

              I appreciate the opportunity to comment on this proposed Staff Position. As with the Proposed FSP No. FAS 157-e, I believe that this is a flawed proposal resulting from a flawed, though superficially rigorous, process. Though the FASB has met its due process requirements, I do not believe investors will be well-served by a hastily-developed FSP which so clumsily obscures impairment recognition. I repeat my remarks from my comment letter on the FAS 157-e proposal: this FSP will  create difficulties for the FASB’s long-term credibility as an independent standard setter. There is a nearly “Groundhog Day”- like sameness developing in the accounting standard world: at the end of the quarter, politicians acting in the interests of some of their constituents pressure either the IASB or the FASB to “do something” about an unfair standard, and a rapid-response amendment that weakens an existing standard is developed.

 

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director@fasb.orgI've sent my comments to FASB on their two proposals that will dilute fair value reporting. It will take a while before they actually make it to the FASB comment letter webpage, so I'm presenting both here as two separate blog posts on the off-chance that any readers might feel compelled to peck out a few comments to the FASB themselves - before the end of the comment period, April 1st. And that's no joke.

 * * * * * * * * * * * * *

March 31, 2009

 

Mr. Russell Golden

FASB Technical Director

Financial Accounting Standards Board

P.O. Box 5116

Norwalk, CT 06856-5116

 

Read More »

Happens frequently, these days.

On Friday, in reference to the FASB's rapid-response turnaround on the two recent proposed fair value FSPs, I bleated:

"They'll have one day to consider the comment letters they receive. How many other proposals have they floated with that kind of deliberation? I can't think of any."

Quick-witted reader Edith Orenstein of the FEI Financial Reporting Blog reminded me that, yes, there has been another time when the FASB moved this quickly.

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On Wednesday, acting Chief Accountant Jim Kroeker testified before the House Committee on Financial Services with regard to the progress being made by the FASB on "fixing" mark-to-market accounting. Some of the points he made are troubling in that they illustrate just how far - and how fast - the political interference in independent standard setting has gone. For example:

"... the FASB has acted diligently and responsively to use their expertise as an independent standard-setter and expose amendments to the measurement of securities in inactive markets and the recognition of "other-than-temporary" security impairments. Following the FASB due process procedures, the proposed amendments were deliberated fully at an open public meeting of the full Board, were approved by a majority vote, and are now subject to public comment."

They've acted responsively, for sure. But as an independent standard-setter? Hardly. Kroeker emphasized the following of due process in this escapade, but it can only be termed perfunctory at best. They'll have one day to consider the comment letters they receive. How many other proposals have they floated with that kind of deliberation? I can't think of any. Would "an independent standard-setter" conduct its affairs in such a fashion, in the face of a Congressional inquisition? I don't think so.

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After weeks of handing over the microphone to anyone who wants to bash mark-to-market accounting on its op-ed page, the Wall Street Journal decides a little equal time is in order. They handed over the mike to Mr. James Chanos, who provided an excellent analysis of the problems facing investors and the FASB at this pivotal moment in its history. From the editorial:

"The FASB and Securities and Exchange Commission (SEC) must stand firm in their respective efforts to ensure that investors get a true sense of the losses facing banks and investment firms. To be sure, we should work to make MTM accounting more precise, following, for example, the counsel of the President's Working Group on Financial Markets and the SEC's December 2008 recommendations for achieving greater clarity in valuation approaches.

Unfortunately, the FASB proposal on March 16 represents capitulation. It calls for "significant judgment" by banks in determining if a market or an asset is "inactive" and if a transaction is "distressed." This would give banks more discretion to throw out "quotes" and use valuation alternatives, including cash-flow estimates, to determine value in illiquid markets. In other words, it allows banks to substitute their own wishful-thinking judgments of value for market prices."

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Yesterday the FASB released two exposure drafts that tinker with the edges of fair value reporting. While the Board had planned several fair value improvements projects that encompassed one of them (guidance on determining whether a market for a security is active), the timing of these two projects is in direct response to the Congressional pressure brought to bear on the FASB last week when Congressman Kanjorski held an investigative hearing into mark-to-market accounting.

Talk about misplaced investigations: what needs to be investigated is why Congress listens so well to bankers and their lobby. Consider the bill sponsored by Representative Ed Perlmutter of Colorado - the "Federal Accounting Oversight Board Act of 2009." It fairly bristles with the kind of rewards the banking industry would love: better than bonuses, it could give them the kind of regulation they want. The bill would transfer the SEC's oversight of the FASB to the new "Federal Accounting Oversight Board." Look at its mission - it's a banker's dream come true:

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I tuned in the "mark-to-market" hearing this morning. Your tax dollars at work: Congressman Kanjorski threatened FASB chairman Bob Herz with fixing mark-to-market accounting in three weeks - or else.

Prepare for assimilation. Resistance is futile. The anti-MTM Borg are everywhere.

While all members of Congress present washed their hands of "wanting to interfere with accounting standard setting," they still blamed fair value reporting for making their constituents' houses worth less, and causing job losses and human suffering - therefore, it's up to the standard setters to "do something" about it. And they insisted on a specific date, because, well, a house on fire can't burn for months, you know. And a house on fire is what this is causing.

(I may have my metaphors mixed up. It was like watching a metaphor-tossing contest.)

After the inquiry turned into a "when are you going to fix it?" nagfest, Kanjorski asked Herz how long it would take to "fix" it. Herz replied that the FASB is preparing some examples of valuation and it could take four weeks for it to be completed - and that due process is necessary. Kanjorski invoked the legislative threat, basically stating: there are going to be acts passed in three weeks and we can fix this ourselves in one of them, Mr. Herz.

Herz promised that the Board would have the examples done - but not that it would necessarily "fix" the problem which is well beyond what accounting can fix. Expect more turbo-exposure drafts soon...

Someone's got to take the fall the markets falling out of bed and the economic turmoil. No managers of financial institutions have been brave enough to step forward and acknowledge that it was their fault. No regulators have been bold enough to say, well, they weren't bold enough as regulators.

So there's only one thing left to do: blame the accountants. There's an angry mob forming, and it looks like they brought a rope. They're converging at the Rayburn House Office Building in Washington, DC on Thursday, March 12, when Congressman Paul Kanjorski holds a hearing to "address problems facing mark-to-market accounting."

The press is having a field day with this: it's been a long time since an accounting standard was in the news so much. Ben Stein threw a tantrum in the Sunday New York Times, calling for someone, anyone, to "immediately end the near-universal applicability of the accounting rule formally known as FAS 157." Ben: get a grip. Statement 157 is universal, all right - it applies to any balance sheet account that had been given fair value treatment before the issuance of Statement 157. The most pervasive and confidence-destroying myth about Statement 157 is that it's somehow requiring fair value reporting for the first time in places where it hadn't ever been used before.

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It's been a while since I blogged anything - many projects for the day job keep me away from it. Before February slides into the past however, I'd like to share with you a "Tale of Two Cows." It's a fable about suspending mark-to-market accounting... from "Clusterstock," a site I'd never heard of before someone sent me the link.

I will not touch the name of that site.

But I will reproduce the fable here, full attribution to John Carney. Prepare to laugh. Or cry.

Talking about accounting rules is famously obscure, my-eyes-glaze over stuff. But much of what happens inside of investment banks--including all those writedowns you've heard so much about--turns on accounting rules.

Now there are reports that the SEC is planning to give banks "flexibility" on mark-to-market accounting rules. It may even suspend mark to market rules. What on earth could that mean?

Let's go to the cows.

You have two cows.

You write down on a piece of paper that the cows are worth $100 each.

You notice the cows are on fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fire.

Your cows are dead from fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the dead cows.

You notice that you aren't getting as much milk as expected, so you adjust the model and mark the cows down to $98.

You are confident, however, that the dislocated stream of milk revenue will quickly revert to expectations.

You need to borrow some money so you ask investors for a loan against the cows. The investors tell you the cows are
dead, and you already owe them $200 dollars you borrowed to buy them in the first place. You show them the paper that says the cows are worth $98 each.

They light your paper on fire.

You ask the government to buy the dead cows at $98 each.

The government holds meetings all weekend and finally comes up with a plan to inject $45 dollars into your cattle ranch. In exchange, the government gets a right to milk generated from the cows at some point in the future. It expects you'll buy a new cow with the $45.

You have two dead cows, $45 and $200 in debt to your investors. You have no plans to buy new cows.

The question Monday was "Will the SEC extend the comment period on the IFRS Roadmap proposal?"

The answer today: yes. In this release, the SEC extends the comment period until April 20.