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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.

It's crunch time. This week, the House of Representatives will decide on a bill that will give the new systemic risk regulator the power to override the SEC's judgment in its oversight of the Financial Accounting Standards Boards. It would set up a "council" of interested parties to exercise its judgment over the SEC's.

According to Jessica Holzer of Dow Jones Newswires, the American Bankers Association, the Commercial Mortgage Securities Association, the Council of Federal Home Loan Banks, the Financial Services Roundtable, the National Multi Housing Council, the National Apartment Association, the National Association of Home Builders and the Real Estate Roundtable signed onto a letter to House Financial Services Chairman Barney Frank (D.-Mass.) and Rep. Spencer Bachus (R-Ala.) on Monday.

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There are so many things going on in the standard-setting arena, it makes your head spin. And your stomach as well.

At last September's Pittsburgh meeting, the G-20 "call[ed] on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011."

Just last week, FASB chairman went the G-20 one better, vowing to "re-triple" the convergence efforts in an interview with a Bureau of National Affairs reporter. The two Boards went on issue a joint statement by the two boards to the same effect.

Then SEC chairman Mary Schapiro issued a statement supportive of the two boards - an indirect affirmation of the convergence process. About a week earlier, chief accountant Jim Kroeker had told attendees at a CPA conference to expect a revised IFRS-in-the-US roadmap later this fall - adding that fall ends on December 21. So the convergence process is humming along, albeit behind the scenes to some degree. Maybe it will all be clearer by December 21. But a couple things still don't add up.

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... is stock compensation. And it's about to become bigger, as "pay czar" Kenneth Feinberg moved yesterday to restrict pay on managers at bailed-out banks and automakers. As Joe Nocera points out in the New York Times, retention bonuses are out; guaranteed bonuses are out. But pay for performance is going to be "in," at least among those beneficiaries of government aid. It probably won't stay isolated to just those corporate wards of the state, either. There's a lot of copycat behavior present in pay practices; they always seem to infect companies faster than the flu infects kids in an elementary school.

Suddenly, it's 1993 all over again. That was when the tax code was revised to punish companies executives making more than $1 million; tax-deductibility of the

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By now it's old news that SEC Chief Accountant Jim Kroeker mentioned that the Commission plans to review its semi-dormant roadmap for converging US accounting standards to international accounting standards. Yesterday, SEC chairman Mary Schapiro reinforced that statement at an IOSCO technical committee conference: she put accounting at the top of her list of three critical regulatory priorities, saying:

The crisis has highlighted importance of implementing and enforcing high quality and consistent accounting standards around the

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September 14 was the deadline for comments on the IASB's exposure draft in its "classification and measurements phase" of its three-part project for replacing its financial instruments standard, IAS 39. That document will receive a lot of attention at the Pittsburgh G-20 summit, I suspect.

I certainly hope not. I was not a fan of the proposal, as you can see in my comment letter. In short, there was nothing in it that even remotely appeared to be advantageous to investors. The proposal preserved the economic fiction of amortized cost accounting for financial instruments, with all its attendant needs for an impairment model and stilted hedge accounting.

In perhaps the most best example of accounting double-speak, the proposed accounting was positioned as a "simplification move" because it eliminated several categories of financial instrument classifications, leaving only two possible classifications: amortized cost and fair value. Yet by preserving the amortized cost category, or at least giving it in prominent classification home, they've simplified nothing. They concocted a stilted method of determining which financial instruments

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It's come to this: Kanye West has disrespected the AAO Weblog.

It's true. See for yourself at this link.

My, my. The level of public discourse these days... you'd think everything

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If the remarks of Fed Governor Elizabeth A. Duke are any indication, the answer is a flat "No."

At the outset of her remarks at Monday's AICPA banks and savings institutions conference, she gave the traditional disclaimer that her comments reflected her views and do not necessarily reflect those of the Board of Governors or staff. Let's hope they don't.

By the time you get to just the seventh and eighth sentences of her speech, the hair on your neck should be standing at attention:

"Further, the accounting and regulatory changes made now will help shape future business models for financial institutions and thus influence credit availability. It is important to ensure that these changes facilitate, not hinder, the decision-making processes that support financial intermediation and economic activity."

Maybe regulatory changes made now will help shape future business models - you know, like keeping adequate capital on hand - but the accounting changes will shape future business models? Sounds like an ominous reference to the IASB's exposure draft on financial instrument classification and measurement, with its

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In response to the financial crisis, the IASB has speed-balled a proposal to rejigger the accounting for financial instruments. Issued in July, with the comment period ending today, the proposed accounting would give investors a new prism through they can view financial statements. Only two kinds of accounting would exist for financial instruments: amortized cost or fair value. But they can't look at the same financial instruments both ways - a batch of financial instruments would be classed one way or the other. You wouldn't see financial instruments reported at amortized cost, with a fair value for thesame holding reported at fair value.

It's a cloudy prism for investors. And the criteria for determining what gets amortized cost treatment and what gets fair value treatment is a dog's breakfast of rules and management intentions - something prone to require constant guidanceand interpretation in practice, as companies seek to maximize the amount of assets in the amortized cost category.

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Yesterday, the FASB concluded its deliberations on the amendment of Statement 140 (Transfers of Assets) and FIN 46R (Consolidation of Variable Interest Entities). You can see the briefing document here.

The amendment will go into effect at the beginning of fiscal 2010, and it will cover new and existing securitizations and variable interest entities. Heavy securitizers

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I doubt if there have been any more eagerly anticipated earnings in the last ten years than those of the big banks ever since they started their self-destruct process a couple years ago. First, everyone sweated over the loan loss allowances as housing and asset-backed securities slumped; then when firms had to start reporting the kind of fair value estimates employed - the Level 1, 2 and 3 hierarchy - everyone anticipated which bucket would be fullest. Now, the most hotly-anticipated bank figures is tangible common equity, in whatever form you decide to define it. It's kind of like pro forma earnings has always been, only maybe this is a pro forma lifeline measurement.

The concern of those doing instant analysis on 8-K earnings releases: how has TCE been ginned up by the FASB's new rules on fair value and other-than-temporary impairments? Hard to tell because firms don't have to say much about it in their earnings releases. We've done searches of the recent 8-Ks

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