If you are a registered user please log in to see more postings.
 

The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

Subscriptions to full posts available for $500 annually.
Simpler Accounting Standards? They're Not The Only Thing That Would Have To Change
Location: BlogsAAO Weblog (Public)    
Posted by: Jack Ciesielski 1/25/2005 9:52 AM
As reported by Business Week Online, SEC Chief Accountant Don Nicolaisen outlined his hopes for simplification of accounting standards at a New York Society of CPAs conference yesterday. (No link to the speech from the SEC's website is available yet; to be added when available.)

Nicolaisen touched on the use of XBRL, a technology that might revolutionize the way investors access and use the SEC's EDGAR database; support for more “principles-based” accounting standards; and he mentioned the Commission is looking at simplifying accounting such as “by segregating operating income from companies' other income streams”, and is looking at ways to simplify some revenue recognition issues and accounting for derivatives.

He also hinted that more breaks might come the way of smaller companies who have been complaining that Sarbanes-Oxley has caused them undue pain.

(Not my favorite idea. I think that one reason companies have had so much trouble dealing with the internal control reviews required by Sarbanes-Oxley is that they've become ossified in the way they do things, and shaking them up in a re-examination of how their accounting processes might be improved is naturally going to be painful, disruptive and costly. It's probably especially painful because companies traditionally view the accounting and finance function as cost centers incapable of producing something other than compliance with SEC and tax reporting, and therefore, they're functions that are something to be minimized. Anyway - give young companies too much “relief” from having to comply with Sarbanes-Oxley strictures, and you just might get companies that grow up with underinvested accounting systems and controls. Again.)

One point the article mentioned, and I excerpt it here:

“How do you transform today's accounting regulations (with 800 pages devoted to derivatives accounting alone) into a code as simply functional as an alarm clock?”

Just wanted to weigh in on that “800 pages devoted to derivatives” comment. Statement 133 is the whipping boy for accounting standard complexity, and it's not hard to see why: 800 pages is a lot of meat. Or fat, depending on your point of view. But if anyone wants simpler standards, look at Statement 133 for lessons on how to simplify.

That's right - simplify. As much as it's vilified for its complexity and length, it's that way because of the exceptions allowed to the basic premise of the standard, which was that derivatives must be reported on the balance sheet at their fair value. The standard itself is only 50 pages long - not exactly a comic book, but about half of that is devoted to the principles of “hedge accounting” - which are accounting treatments that companies are allowed to use for dampening the effects of reporting derivatives at fair value. Most of the rest of the standard is devoted to “implementation issues” for which companies petitioned the FASB.

So, the next time you hear the “800 pages devoted to derivatives” cliche, think of what it could be - maybe only a fraction of that - if companies weren't so dead set on avoiding the reporting of volatility. (See also: Fannie Mae, filed in the “Smooth Earnings Zone.”)
Permalink |  Trackback