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AAO Subscribers: 2013 S&P 500 Untaxed Foreign Earnings Data

2013 S&P 500 Untaxed Foreign Earnings Data (Excel Spreadsheet)

File size 419 K
Date Thu 03/27/2014 @ 10:31
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 23, No. 4: 2013 Untaxed Foreign Earnings In The S&P 500

Costless stock option compensation. Invisible derivatives assets and obligations. Lending to subprime borrowers, because real estate values never go down; besides, loans can always be packaged and securitized. The irrelevance of earnings and cash flow in internet companies because they will always be able to tap capital markets.

Those are just some of the “good ideas” that happened in finance and on Wall Street over the last twenty years or so. They all seemed foolproof and eternal – until they ended badly. Stock options are costless – until accounting standards change. Derivatives are invisible – until a California county bankrupts itself using them and follow-on accounting reforms put them on corporate balance sheets. Subprime lending? Internet 1.0 companies? All of us know how those turned out.

Financiers and their clients seem to be genetically programmed to find brilliant ideas and execute them – and execute them over and over again until they’re dead. In another ten years, maybe the international tax game will be added to the list of good ideas gone bad. Companies have taken their common-sense efforts to lower their tax bills to extremes, arbitraging their taxes by putting low-profit, high cost operations in countries with high tax rates and high-profit, low cost operations in coun-tries with low tax rates. Such strategies are rarely well-explained to either shareholders or the public at large, and public opinion has been inflamed by the loss of jobs to low-tax countries. (Maybe public opinion is inflamed more by jealousy.) Regardless, it’s a game that can’t last forever because governments keep losing revenues while still providing services – and governments can enact reforms and laws to change the dynamics of tax avoidance. In this report, we estimate the significance of untaxed foreign earnings to the earnings and returns of the S&P 500, as a whole and to individual companies within it.


File size 325 K
Date Thu 03/27/2014 @ 10:13
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 23, No 3.: Time To Gear Up For The 2013 10-Ks

In a matter of days, investors will find themselves buried under an avalanche of 10-K filings. (Investors on the East Coast are already familiar with the feeling – from snow, not filings.) The filing season is upon us: the filing clock runs out on March 3 for large accelerated filers having calendar year ends. Information overload ensues.

And the information is just too good for investors to let it go to waste. Investors shouldn’t pass up the chance to see how a firm fared in the last twelve months, and how its managers carried out the duties entrusted to them by long-term shareholders – but sometimes they do. When information overload strikes, some investors will throw up their hands and take refuge in the false hopes offered by the efficient market theory. They’ll tell themselves that “if there was bad news in the 10-K, someone else would have seen it by now and it would be built into the stock price.” Those people are probably the types who whistle past graveyards, too.

Don’t be intimidated by a stack of 10-Ks – you can do this! And you can do it better when you map out what you need to accomplish before you start. In this report, we’ll go over the analyses you should make with some information that’s available only once a year, and review some of the annual report rituals worth repeating each year to help refresh your knowledge of a firm’s inner workings.


File size 281 K
Date Tue 02/25/2014 @ 01:45
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 23, No. 1&2: Accounting Issues: Rewinding 2013, Previewing 2014

Financial reporting evolves continually, as investment bankers tease the DNA of transactions to mutate into something other than their original state. The blurring of lines between debt and equity is a case in point. Another motivating factor in the evolution of financial reporting is that companies can be imaginative in putting on their best face for the capital markets beauty pageant. Standard setters return to the drawing board to improve accounting requirements, tweaking them enough to change the behavior of financial statement preparers. New standards become effective, and then analysts and investors grumble that their models are no longer relevant and need to be adjusted. In short, standard setting is an exercise that disrupts almost everyone in the capital markets arena. Yet it’s also a necessary exercise for capital markets to continue being fair. Though analysts and investors might not relish the prospect of learning about the effects of new standards – and the behavior they might be reining in – they would be even more disgruntled if they believed relevant information was being obscured or simply held out of their view.

All told, the FASB pushed out twelve “Accounting Standards Updates” in 2013; none of them were ground-breaking. Five of them were consensuses of the Emerging Issues Task Force, whose pronouncements rarely carry wide-ranging impact. Still, the FASB’s 2013 output will affect 2014 reporting – and if you study what the FASB has done in 2013, you’ll see how its priorities continue to evolve. Presented here is a summary of the FASB’s 2013 pronouncements and its 2014 plans, along with a look back at the accounting and business news for the year 2013.


File size 334 K
Date Thu 01/16/2014 @ 08:28
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 13: What Keeps The SEC Busy - 2014

The American Institute of Certified Public Accountants held its annual “Current SEC & PCAOB Developments Conference” in Washington, DC last week. Speakers were on hand from all of the major accounting agencies or standard-setters: the SEC, the PCAOB, the FASB, and the IASB. With total attendance in excess of 1,000 accounting types, it’s the December “carnival of accountants.” Festivities ensue.

The conference attendees will be toiling away on annual 10-K filings when the calendar flips – preparers working on them from the inside, and the auditors worming their way inside to give their pass/fail opinion on what investors see on the outside. Accountants and auditors use the conference to learn what pitfalls await them, in terms of what issues most concern the SEC and PCAOB. The conference serves as an early warning system for accountants and auditors alike: learning what the SEC is most interested in will let them reinforce their reporting and auditing efforts where they’re most needed and perhaps allow them to escape some SEC review comments later.

Investors should benefit from this conference, too – if they care about the preparer reporting issues that worry regulators and auditors. Investors are supposed to be a skeptical lot, but you have to know something before you can be skeptical – and some of the topics covered in this conference help build their knowledge base. That’s usually the case – but this year, investors might get the chills from more than the wintry Washington weather. It was easy to get the impression that standard setters and regulators are more concerned with disclosure effectiveness and overload rather than formulating standards and disclosures that will give investors fresh information about a company’s financial status or how it performed. “What keeps the SEC busy” over the next twelve months might be more about lightening corporate workloads than improving investor information.


File size 242 K
Date Thu 12/19/2013 @ 10:10
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 12: Rewriting The Audit Report: The PCAOB Moves Closer

In the summer of 2011, the Public Company Accounting Oversight Board issued a concept release intended to improve the way auditors communicate with investors. It wouldn’t take much to improve it: the current audit report is the text equivalent of a light switch, which is either on or off. The current audit report is either a pass or fail grade: the financial statements conform to generally accepted accounting principles, or they don’t conform. Investors, who foot the bill for the auditor’s fees, have long wanted more benefits from the auditor’s inside view of a firm’s inside workings.

The 2011 concept release was ambitious enough. It proposed the inclusion of an Auditor’s Discussion and Analysis; would have required and expanded the use of “emphasis paragraphs” in the report; proposed auditor assurance on other information outside the financial statements; and would have clarified language in the standard auditor’s report, particularly with regard to auditor responsibilities.

Two years later, the PCAOB has issued a pair of proposed auditing standards – one on the auditor’s report, the other on the auditor’s responsibilities for other information in documents containing the auditor’s report. Neither one completely embodies the concept release’s proposed changes, but some of the 2011 proposal’s DNA shows through in the proposed standards.

The PCAOB doesn’t intend to change the actions of the auditor, only the way they tell investors how they did their work – and in theory, should not cause further cost increases to companies and their shareholders. In practice, auditors are likely to be very cautious about any “new and improved” information they provide to shareholders and will take care to insulate themselves from any additional liability; you can reasonably expect costs to increase. In this report, we take an educated guess at how much costs can increase before investors will notice.


File size 579 K
Date Fri 11/22/2013 @ 08:31
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 11: Non-GAAP Earnings: “Nothing Succeeds Like Excess”

          That quote is attributed to Oscar Wilde, but it could just as well be attributed to Wall Street. Non-GAAP earnings  began as a way for investors to scrape the muck off of inscrutable income statements, and now non-GAAP earnings are presented by many firms as the only performance measure that matters. When a magician tells the audience to watch his hands, they should know they’re about to be deceived by his next actions. Similarly, investors should be more skeptical when firms direct them to look at non-GAAP measures, whether they be earnings before interest, taxes, and depreciation & amortization (EBITDA), adjusted EBITDA or whatever the metric du jour may be. 

            Another quote fits the situation aptly: “the road to hell is paved with good intentions.” The non-GAAP earnings trend began with investors trying to sift some form of truth out of opaque income statement reporting – one set of good intentions. When abuses in company presentations became too much to tolerate, the SEC set down guidelines for non-GAAP earnings presentations – another set of good intentions, but one that may have inadvertently legitimized non-GAAP reporting. By coloring inside the lines drawn by the SEC, companies may feel safer in making presentations of non-GAAP earnings, and less timid about joining their competitors already reporting this way. 

Presented here are the situation’s origins, some examples of current practice in the technology and health care sectors, and some thoughts about when non-GAAP earnings have a place in the investors’ tool kit – and when they should be avoided.



File size 259 K
Date Thu 10/17/2013 @ 03:44
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers: 2012 S&P 500 Info. Tech. - Health Care Non-GAAP Income Data

AAO Subscribers:  2012 S&P 500 Info. Tech. - Health Care Non-GAAP Income Data (Excel spreadsheet)



File size 140 K
Date Thu 10/17/2013 @ 03:41
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers: OPEB Cost Data (Excel)

OPEB Cost Data (Excel Spreadsheet)



File size 1744 K
Date Thu 09/26/2013 @ 10:22
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 10: S&P 500: When Health Care Costs Improve Too Much

          Once feared, now forgotten. That’s the short story of other postemployment benefits obligations and their effects on corporate earnings. These costs were expected to grow to the sky forever when they were first being accounted for over twenty years ago. A funny thing happened on the way to the stratosphere: firms learned how to manage their own health costs, the primary “other postemployment benefits,” once they were forced to measure them.

 

            The size and breadth of health care benefit cuts have long been the stuff of labor force fears. Recent decisions by major companies to shift even more of the administrative and cost burden to employees signal that employers intend to continue shifting responsibility to employees. Yet this is not a new trend. Quietly, as employers have been managing their health care costs over the last couple decades, their obligations have been minimized. Because of the accounting standards for such plans, the cuts in benefits have made for decreasing OPEB costs, as one would expect. At the same time, it’s reached the point where the costs at some firms have actually become negative, becoming a kind of non-cash phantom income. More anomalous, this happens even as the firms continue to pay benefits. It’s a weird situation, for sure, and it’s attributable to the accounting standard in use. Negative costs can be a significant part of earnings, but firms do not always single them out in their earnings presentations, even in “non-GAAP performance measures” – and if investors don’t know the negative costs exist, they won’t search for them.



File size 499 K
Date Thu 09/26/2013 @ 10:12
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 9: 2012 S&P 500 Executive Pay: “I’ll Pour. You Say When.”

          Like a medic pouring a cold drink for a victim of heat stroke, investors continually treat executives to long, tall pay packages that seem to go on forever. While investors are affected by the amount of compensation given – it does come out of their own pocket, after all – they rarely do more than let managers decide when they’ve had enough. “Say-on-pay” votes where the pay is disapproved are rare. So are negative votes on new equity pay plans or pension amendments.

            To really get a handle on the effect management compensation has on shareholder interests, investors need to dig deeply into proxies just to get an idea of what the top five executives are costing them. Even though they comprise only a fraction of the total employees, those executives cost shareholders of 473 S&P 500 companies a whopping $15.6 billion in 2012 – over 10% higher than five years ago in the salad days of pre-crisis 2007.

Investors might be surprised at the size of executive pay packages if they compared them to net income. Moreover, they would probably wonder about the size of compensation they don’t see. The miserable state of human capital cost disclosures ensures that investors stay in the dark.



File size 737 K
Date Thu 08/22/2013 @ 03:57
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers: 2012 S&P 500 Compensation Data (Excel)

2012 S&P 500 Compensation Data (Excel Spreadsheet)



File size 1019 K
Date Thu 08/22/2013 @ 03:48
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 8: A New Lease Accounting Proposal: FASB Stars In “Groundhog Day”

          Twenty years ago, the modern classic “Groundhog Day” told the story of a shallow jerk of a weatherman who was forced to live Groundhog Day over and over until he changed his ways for the better. A few years later, FASB wound up starring in their own version of “Groundhog Day” when they collaborated as part of the G4+1 (a predecessor of the IASB) on a discussion paper regarding a new approach to accounting for leases. The next iteration emerged in 2000, with a discussion paper on implementing the new approach struck in the first paper. In 2006, the FASB and IASB agreed to work on a joint project to develop a new standard, resulting in a new discussion paper in 2008, which lead to a jointly issued exposure draft in 2010. It was uniformly reviled by preparers, and investors weren’t pleased either.

In May, FASB started yet another “Groundhog Day” with the floating of yet another proposal. In all the time that’s passed on the leasing project, the need for improved lease accounting hasn’t diminished. There are still billions of dollars of invisible assets that don’t appear on firms’ balance sheets, producing overstated returns in the income statement. The new proposal aims to make all of those invisible assets visible, and it might succeed. It will, however, be enormously tedious to apply. Strangely, it still results in multiple ways to record leased assets that are not too far off from the lease classifications currently used. If a proposed standard doesn’t result in much-improved information for investors while costing preparers hours and dollars of implementation effort, there’s a good chance another “Groundhog Day” is ahead.

            The Boards hope to complete a final standard in 2014, and require its implementation in 2017. The comment period for the proposal ends in September 2013. Whether or not FASB’s “Groundhog Day” continues will be determined after the comment period. 



File size 244 K
Date Tue 07/30/2013 @ 03:16
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 13, No. 18 Special Edition: Accounting Issues Review: A Brief History

It's hard to believe, but there were actually accounting issues before the disembowelment of Enron. Sure, you might be able to remember Sunbeam and Cendant - but do you recall Fine Host? Vesta Insurance? Centennial Technologies? Philip Services? Thor Industries? Accounting scandals have been around for ages. While it's true that the magnitude of the Enron affair is unrivaled, it might calm you down if you took a look at some of the major events of the past five years. The following is the Accounting Issues Review that's been part of the last Analyst's Accounting Observer of the last five years. Strung together, you might be surprised at how much you've forgotten in the past five years that seemed terrifying then, but was ultimately survivable. It's certainly not required reading in this new Age of Enron - but it can provide a context for current problems. Some of the aspects recounted should also remind us that, as financial statement users, we're not going to get better financial statements and accounting principles than we deserve. If we truly want good accounting and honest managements, it may be high time for institutional investors to start thinking more like owners and demand better reporting through involvement in corporate governance, instead of relying on the status quo..



File size 602 K
Date Wed 06/26/2013 @ 10:27
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers: S&P 500 Pension Data

S&P 500 Pension Data (Excel Spreadsheet)



File size 1804 K
Date Fri 06/07/2013 @ 09:09
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 7: S&P 500 Pension Plans: Reality-Checking Their 2012 Status

          Call them the financial statements within the financial statements. There’s enough information within the pension footnotes to evaluate the health of the pension plans just as if they were a stand-alone company. Defined benefit pension plans are far from dead; firms might not start them these days, but their legacy plans live on. Those plans have ongoing effects on the sponsor firms’ income statement, sometimes in ways that would never be expected. 

Pension cost is a pervasive figure for firms with defined benefit plans. It can show in the income statement, and it can be charged to balance sheet accounts like inventory or self-constructed plant assets – wherever labor might be present. Investors have no way of knowing for sure the degree to which pension costs affect any particular statement, but they can at least observe the economics of the plans from the pension footnotes. They can also adjust for some of the nuances pension accounting standards bring into the earnings statement.

            The pension footnote information also gives investors a decent look at the health of the pension plans. In 2012, indicators showed some encouraging improvement in the health of pension plans and reporting. Nothing would improve them more – or faster – than a 100-basis point increase in long-term interest rates, however.



File size 409 K
Date Thu 06/06/2013 @ 03:54
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 6: Back To The Drawing Board, Again: Classification & Measurement

          When the FASB issued its December 2012 exposure draft on accounting for impairment of financial instruments, it represented only “Part One” of a trilogy. (That’s one trilogy nobody in Hollywood will touch.) Part Two arrived in mid-February, and it really should be considered Part One: it deals with the classification and measurement of financial instruments, something that should precede the determination of financial asset impairments. 

Classification and measurement had already been addressed once before in the FASB’s much maligned 2010 “all financial instruments at fair value” proposal. That proposal would have handled financial instrument classification and measurement in the same standard as the accounting for their impairment. After the rejection of the 2010 proposal, the FASB busied itself with finding an alternative model for both aspects of financial instruments accounting. The result was the impairment proposal, described in the February report “Financial Instruments Accounting: Back To The Drawing Board,” and the classification and measurement proposal described here. 

            The third installment of the trilogy will be a revamp of hedge accounting – but until the foundation for financial instruments accounting has been set, it makes no sense to devote time to hedge accounting. FASB might fare better with this classification and measurement proposal than it did in 2010. If it does, then they can get on with production of the last part of their “financial instruments trilogy.”



File size 241 K
Date Mon 05/13/2013 @ 09:44
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers: 2012 S&P 500 Untaxed Foreign Earnings Data (Excel Spreadsheet)

2012 S&P 500 Untaxed Foreign Earnings Data (Excel Spreadsheet)



File size 337 K
Date Mon 04/08/2013 @ 03:45
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 5: Untaxed Foreign Earnings In 2012: A Look At The S&P 500

         It’s widely known that U.S. multinationals can arbitrage their taxation on a global basis. The essence of the game: park as much of your company’s expenses as possible in the high-tax countries of the world to minimize the income earned in those countries, and maximize your revenues and profits in the low-tax countries. It’s a game that provokes puzzlement for shareholders at times, and outrage on the part of the public and lawmakers.

 

            It’s not hard to see why the public and lawmakers get perturbed. Any taxpayer will always be jealous of someone else - particularly a faceless corporation – who has a lesser tax bill. Lawmakers naturally want to maximize tax revenues. Shareholders face puzzlement though, because the results of the arbitrage game look like they would benefit shareholders, but often, the cash generated by the tax savings remains trapped in the country of its origination. Multinationals are reluctant to bring the cash back to the United States for fear of triggering “repatriation taxes.” Shareholders can be puzzled by the high level of cash on firms’ balance sheets, while managers don’t use it to improve the lot of the shareholders. In this report, we’ll take a look at where foreign untaxed earnings went in the S&P 500 companies in 2012.



File size 403 K
Date Mon 04/08/2013 @ 03:37
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 4: 2012 Annual Reports: A Peek Inside

     A peek inside the annual report is a peek inside the life of a company. With the volume of information contained in the annual report, it’s never “just a peek” – it becomes a catatonic stare if you’re not careful. Investors can’t pass up the chance to get an up-close glimpse of how the firm made its way in the world over the last twelve months – and how its managers allocate the capital entrusted to them by shareholders. Nor can they memorize every paragraph and fact contained in a 300-page 10-K. To get the most value out of each hour spent with the annual reports, investors have to develop a strategy of working on the best information they get only at this time of year.

 

     March 1, 2013 should have been called “National Investors’ Day:” that was the 10-K filing deadline for the largest companies in the United States. It was a Friday, no less: all the 10-Ks you want for free, just in time for the weekend! Celebrate “National Investors’ Day” all month long, right up until Opening Day for baseball. In this report, we’ll go over some of the analyses you should make with some information that’s available only once a year, and review some of the annual report rituals worth repeating each year to help refresh your knowledge of a firm’s inner workings.

 



File size 318 K
Date Thu 03/21/2013 @ 02:22
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, No. 3: Financial Instruments Accounting: Back To The Drawing Board

               In December 2012, the FASB issued an exposure draft on financial instruments accounting – its third one in less than three years. First was the ill-fated “all financial instruments at fair value” proposal in 2010; second, the since-abandoned “three-buckets-of-entropy” model developed jointly with the IASB.  The IASB continues to labor on that particular model. In FASB’s third whack at revamping financial instruments accounting, it tees up a “current expected credit loss” model, one that breaks from current practice by requiring an amortized cost basis for financial instruments to incorporate forward expectations of losses in setting the loan loss allowance. “Forward expectations” have always been off-limits in constructing credit loss allowances.

             Is the third time the charm? The jump from drawing board to final standard just might happen in 2013; even if it does, the new standard might not be effective for several years. It’s not a perfect solution. Here, we’ll take a look at why it might bulk up loan loss allowances – something investors perceive as good behavior – while affording managers increased discretion to manage their firm’s earnings. That’s something investors perceive as bad behavior. A look at fair value disclosures already provided to investors shows how investors can improve their evaluation of balance sheet quality while they wait for the new standard to emerge.



File size 233 K
Date Thu 03/21/2013 @ 02:22
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 22, Nos. 1 & 2: 2012 Reviewed, 2013 Previewed

      Standard setters might not agree, but one could consider the setting of accounting standards to be an exercise in reaction. A company (or their team of investment bankers) finesses the treatment of a particular business transaction so as to present a glammed-up financial picture; opacity ensues, investors lose, and the standard setters return to the drawing board to devise a more glam-proof accounting standard. Those drawing board sessions can take years to complete, and have been prolonged in recent years by the cross-participation of the FASB and the IASB in setting joint standards. While the U.S. standard setting process could make glaciers look like NASCAR racers, investors should give heed to the projects on their agenda: they’re being addressed because investors’ information needs are at stake.

             No major projects made the jump from drawing board to final standard in 2012. That may change in 2013: with the cooling-off of convergence efforts between the FASB and the IASB, some joint projects might finally be finished. One possibility: the revenue recognition standard should be ready for prime time. Without the dead weight added by synchronization efforts, the financial instrument projects might jump the glacier track, too. In 2012, the FASB still managed to squeeze out a few accounting standards updates, some of which will affect 2013 reporting. Presented here is a summation of the FASB’s 2012 pronouncements and its plans for 2013, finished with a look back at the accounting and business news for the year 2012.



File size 334 K
Date Thu 03/21/2013 @ 02:22
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers: 3Q2012 R3000 Financials Fair Value Data

AAO Subscribers:  3Q2012 R3000 Financials Fair Value Data (Excel spreadsheet)



File size 1582 K
Date Thu 03/21/2013 @ 02:21
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 14: What Keeps The SEC Busy - 2013

     The American Institute of Certified Public Accountants held its annual “Current SEC & PCAOB Developments Conference” in Washington, DC in the first week of December. Speakers were on hand from all of the major accounting agencies or standard-setters: the SEC, the PCAOB, the FASB, and the IASB. With about 1,200 attendees in Washington alone, you might call it “the December carnival of accountants.”

      In just a few weeks, the preparers attending the conference will be busily sculpting their firms’ annual 10-K filing – every year’s late Christmas present to shareholders. (Even if they don’t realize it’s a really “practical gift.”) Once they’re finished creating (or perhaps, just “complying?”), in come the auditors to give their pass/fail grade to the financial presentation. To make the whole process as smooth as possible, the preparer accountants and auditors from public accounting firms try to avoid pitfalls at filing time by learning from the SEC and PCAOB speakers at this conference. Forewarned is forearmed: why not try to learn directly from the SEC and PCAOB about the issues that concern them? The earlier you understand the issues, the more time you have to remedy them in the field – and maybe you’ll avoid comments and filing delays later. The conference fills up three days with financial statement intelligence for auditors and preparers to absorb - if they want to.

        Investors can benefit from this conference, too. While they only get a high-level view in shareholder reporting, problems often emerge from transaction levels much deeper in the company – where the auditors work. If the regulators charged with audit quality and fair disclosures have something to say to their constituents, investors should take an interest in the accounting issues that matter to the PCAOB and SEC. Healthy curiosity should be enough to make investors care about “what keeps the SEC busy.”



File size 728 K
Date Thu 03/21/2013 @ 02:19
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 13: Unexplored Obligations: Other Postretirement Benefits, Pt. 2

In our previous report, the weirdly contradictory income statement reporting for other postretirement benefits was reviewed. While firms report declining significance of these costs to their overall performance - in some cases, even reporting negative costs - their cash costs usually far exceed their reported cost. It’s a case study of unintended consequences. Performance measures can be giving investors a false reading on how a firm is really doing, and remedies were presented.

The balance sheet aspects of other postretirement benefits are explored in this report. Management efforts have contained the growth of the other postretirement benefit plans, and their effect on firms’ capital structure is not as awe-inspiring as it once was. Yet while they’ve become tamer, it’s worth examining the underlying assumptions built into the other postretirement benefit obligations. Some of the assumptions built into the accounting model don’t always seem to hold up when you examine them over the long run.



File size 288 K
Date Thu 03/21/2013 @ 02:18
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 12: Unexplored Obligations: Other Postretirement Benefits

Defined benefit pension plans take center stage in the pantheon of investors’ fears when it comes to worrying about liquidity effects or earnings distortions. Yet they rarely consider the cash demands and earnings distortions resulting from other postretirement benefit plans.

Since they’ve been required to measure - and display - a figure expressing the value of the promises made for providing employee health care benefits, managers have dealt vigorously with the obligations. Their growth has been held in check while pension obligations have grown ever higher. Yet even as they’ve become more controlled, other postretirement benefit plans are worth investor attention. As the benefit plans become less fearsome, the accounting principles involved have helped an increasing number of companies recognize phantom earnings - negative benefit costs - even while they’re putting cash into benefit payments under these plans. It’s better to be



File size 1749 K
Date Thu 03/21/2013 @ 02:18
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 11: Other Comprehensive Income: FASB Adds A Touch Of (Re)Class

     At this time last year, accounting observers were hopeful that the FASB and the IASB would reach a state of convergence in their accounting standards. A seemingly easy target: their joint effort on the statement of other comprehensive income (OCI). The two boards decided the statement of OCI should be presented immediately following the income statement, whether on the same page or as a separate statement. It seemed like the simplest thing in the world to agree upon, yet it became a metaphor for the entire convergence experience: nothing is as simple as it seems.

    Subtle differences existed between the two standards where transactions are initially recorded in other comprehensive income, then subsequently recognized in the income statement. In accounting jargon, this is known as recycling.  When it was time to implement the new standard at the end of 2011, companies found some unexpected difficulties in applying the FASB standard as it was written.  To fully comply with the new standard, many additional lines would pollute the income statement for some companies. Those lines wouldn’t always add value for investors, some claimed.

    The FASB has proposed a compromise to the standard that will alleviate clutter that might have arisen from the strict implementation of the original standard. It will show more about recycling transactions, but the amendment also shows the shortcomings in the reporting of postretirement benefits. It will also maintain the differences between U.S. accounting standards and IFRS, actually increasing them somewhat.



File size 167 K
Date Thu 03/21/2013 @ 02:17
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 10: Fair Value Reporting: Surveying Financial Institutions At 1Q2012

    Disclosures of fair values of financial instruments don’t make the front page of quarterly earnings releases. In fact, they don’t even make the back page. Yet they tell a story about asset quality behind those “headline earnings” that drive so many split-second buy or sell decisions. Tucked away in the nooks and crannies of the footnotes to the quarterly financial statements, investors actually have to look for the disclosures, then tease their story out of them. No wonder most investors choose to ignore them - they’re in too much of a hurry.

    All too often, investors make flawed associations when they hear the phrase “fair value of financial instruments.” (Another reason they don’t search for them.) They’ll think of firms booking “gains” from the declining value of their liabilities - even though these are just disclosures, and not liabilities where firms have taken the fair value option and generated weird gains. Some investors jump to the conclusion that capital is somehow being “wiped out” by reporting assets and liabilities at their fair value - secure in their belief that if they don’t acknowledge the fact that assets are in fact impaired, why, then the capital is really just fine. (See also: “whistling past the graveyard.”) You’ll also hear them say the information is unreliable or too hypothetical - from the same people who build their own “sum of the parts” valuations for a company - a standard operating procedure for most value-style investors. Substituting disclosed fair values for historical values, and using the results to test one’s beliefs about the financial condition of a particular company is no different.

    Investors might never warm up to the disclosures in a big way, but that shouldn’t prevent one from using the insights they provide. Here, we take a look at what the disclosures are telling investors in both macro and micro views.



File size 402 K
Date Thu 03/21/2013 @ 02:17
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No 9: SEC’s Last Say On IFRS Work Plan: They’re Not Saying

For the last five years, the SEC has toiled away on the issue of whether or not the United States is ready for the widespread use of International Financial Reporting Standards (IFRS) - and vice-versa. The Commission expected to have a decision ready by 2011, and missed their self-imposed deadline. On Friday, July 13th, the Office of the Chief Accountant (OCA) released its hotly-anticipated "final report" on the work plan for consideration of IFRS in U.S. financial reporting.

It’s not what many observers expected: a recommendation as to whether or not IFRS should be an integral part of U.S. capital markets. That was never what the "final report" was supposed to be, but many observers expected as much - perhaps because of the missed decision in 2011. Nevertheless, the final report positions the big issues that still need to be resolved before the Commission ever makes its determination. For that reason alone, it’s worth digging into the final report - and also to find clues as to just where the whole process may be going.



File size 133 K
Date Thu 03/21/2013 @ 02:16
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 8: S&P 500 Executive Pay: The Bread Keeps Rising

Annual reports theoretically contain the information needed for investors to make economically rational decisions about investment - assuming they’re reading the financial statements, and that they’re rational. Yet annual reports exclude one particular ingredient paid by shareholders to get a return on their investment: management compensation.

To get a handle on management compensation, investors need to dig into the proxy statement, which discloses only a teasing sprinkle of total executive pay information: just the compensation of the top five officers. Never mind that they’re not the only five officers in the employ of shareholders - or that other highly-compensated key employees might not be called "officers." Even in that stingy information, investors are rarely treated to something as helpful as a total compensation figure for the five officers. A booty total remains a do-it-yourself endeavor of perhaps only the most curious investors. In this report, we’ve taken that endeavor to the 500th degree: from the summary compensation tables of the S&P 500 companies, we’ve developed some total information that compares strikingly to other shareholder yardsticks.

Shareholders employ managers to be efficient and shepherd resources - but they shouldn’t expect them to take that attitude with their own pay. It’s a job that shareholders must do for themselves. If shareholders were more aware of just how much managers were paid for their services, there might be more "no on pay" votes every proxy season. Strong earnings performance in 2011 seems to have enabled gains in executive pay. Total compensation for the S&P 500’s executive clusters climbed 7.7% in 2011; CEO pay increased 12.8%. It was indeed a very good year.



File size 769 K
Date Thu 03/21/2013 @ 02:16
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 7: State Of The Pension Promise: The S&P 500 In 2011

   Just like the weather: everybody talks about pensions, but nobody does anything about them. In this report, we’ll take a look at the critical points to inspect in pension plans - then we’ll tackle what to do about them, from an investor’s point of view. Pension disclosures amount to a separate set of financials within the financial statements, making pensions one of the tougher aspects for investors to evaluate - yet they can affect a firm’s capital structure at the margins, and affect managers’ financing and dividend policy decisions. Much as investors may hate to assess pensions, they still merit attention.
    Unfortunately, the low interest rates punished pension plans in 2011, despite modest asset returns. For now, underfunded plans are the unhappy norm.



File size 667 K
Date Thu 03/21/2013 @ 02:15
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 6: Fair Value Reporting: A 4Q2011 Financial Institutions Survey

The quarterly disclosure about the fair values of financial instruments have been available for investors’ use for several years. When observed in the aggregate, they provide a market opinion on the realizability of assets in financial institutions - and a market opinion on the likelihood that those financial institutions will meet their debt repayment obligations. The verdict at the end of 2011: better assets and mostly better creditworthiness than one year ago - a confirmation of the general belief that the financial system continues to heal from the wounds of the financial crisis.

Investors haven’t yet made the fair value information one of their "must-read" disclosures. Ask them why, and you’ll hear concerns about the over-reported "own credit gains"that taint earnings reports - which aren’t even really related to the disclosures, but are associated with them nonetheless. You’ll also hear that they think the information is unreliable or too hypothetical. Maybe that’s what they believe - but many of them will perform their own "sum of the parts" valuations for a company, substituting highly subjective information for reported balances. Nothing wrong with that - it’s a mainstay analysis of many value-style investors. Yet it’s no different than the simple balance sheet substitution of the disclosed fair values, and using the results to test one’s beliefs about the financial condition of a particular company. Looking at the fair value information in broader terms tells more of a story than just which companies show "earnings from rotting credit."



File size 371 K
Date Thu 03/21/2013 @ 02:15
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 5: Growing, Glowing Earnings: S&P 500’s 2011 Untaxed Income

When can earnings be too good? When they’re growing, but glowing like they’re radioactive - and shareholders can’t get their hands on them. That’s what happens when firms "indefinitely reinvest" their earnings in low-tax countries. The earnings in those subsidiaries look wonderful, they can generate cash copiously - but they won’t benefit shareholders directly because diverting those earnings to the United States will trigger tax liabilities. The earnings and generated cash stick in those countries. In other words, they’re radioactive earnings - glowing, but just too hot to handle.

Consolidated financial statements present a unified picture of a firm’s financial status and operating performance. The problem: that unified picture doesn’t tell investors one thing about the degree to which earnings, cash flow and cash itself may be trapped in a foreign country. Often, those countries with a sub-U.S. tax rate also offer other advantages over operating in the United States. They may provide access to lower-cost labor, operate in a less-regulated environment, or simply be geographically closer to a targeted market. In short, there can be plenty of reasons making it desirable for firms to invest outside the U.S. - and aside from taxes, they can accelerate earnings growth beyond those of U.S. operations. Because of the lower taxes and potentially better margins, they can take a company’s overall earnings growth from the ordinary to the excellent. That earnings source for some firms in the S&P 500 may have nearly doubled the entire index’s earnings growth over the last five years from 2.2% to 3.8%. (And it’s not just because of Apple.)



File size 292 K
Date Thu 03/21/2013 @ 02:15
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 4: The 2011 Annual Reports: A Heads-Up For Investors

After fourth quarter earnings releases, it’s that time of year again: that magical month between Valentine’s Day and St. Patrick’s Day when great masses of 10-Ks are filed with the SEC. The biggest of the big firms - the large accelerated filers, with public float exceeding $700 million - will have to file their 10-Ks by February 29, and plain old accelerated filers with float under $700 million and over $75 million have until March 15 to file. The non-accelerated filers - the market’s little guys, with public float less than $75 million - have to file their 10-Ks by March 30.

The filings never get thinner, and every year it gets harder to get through them with any kind of momentum. It’s probably more tempting than ever to skim them: after all, companies haven’t been revealed to be congenital liars like they were only ten years ago. There’s a placidness to financial reporting these days: companies don’t seem to be pushing the limits like they once did. Chalk it up to the effectiveness of the Sarbanes-Oxley Act, and also to a reinvigorated audit function. (At least, reinvigorated in comparison to what it was at the beginning of the century.) It would be foolish, however, to become complacent: no trend lasts forever. Another way to think of it is that all good things must end - and you don’t want to be caught off-guard when they end.

Resist the urge to be complacent by digging into the annual reports. There’s no magic disclosure, no sure-fire ratio that will give you all the assurance you need that you’re making a good investment decision. All you can do is try to be aware of a company’s biggest operational risks while maintaining skepticism about performance. Use all the due diligence you can muster while reading the annual report to gather every nuance available for piecing together the factual mosaics making up the big picture.



File size 266 K
Date Thu 03/21/2013 @ 02:14
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, No. 3: Fair Value Reporting: A 3Q2011 Financial Institutions Survey

As we dive deeper into the fourth quarter reporting season, expect to be hearing more about "own credit adjustments:" the gains or losses that firms book because they exercised their option to report the value of issued debt at fair value. Why would they choose that? Maybe the nine saddest words in the English language strung together: "It seemed like a good idea at the time." Ironically, banks pleaded with FASB to give them the right to do this kind of accounting in the mid-2000’s, when the world was a less volatile place, before the financial crisis and acronyms like TARP and PIGS became part of the banking vernacular - and when worries about their own credit seemed impossible to imagine. The object may have been to create a natural hedge of an asset for which hedge accounting, through derivatives, was not possible.

It seemed like a good idea at the time. Unfortunately, the world has become a more volatile place - and firms taking the fair value option on some of their debt have had to report decreases in the value of that debt, yielding "gains" greeted only with scorn and derision from investors and financial press. While no one takes seriously the gains reported from decreases in creditworthiness, the same observers should consider any "losses" that might arise when the creditworthiness of such issuers improve. Furthermore, the "gains" are too often examined in isolation. There’s much more quarterly fair value information available than just the credit valuation adjustments to debt issuances. Looking at the fair value information in broader terms might tell a more interesting story than just "who’s making funny earnings figures." Here, we use the fair value information in more than just the typical one-dimensional analysis.



File size 355 K
Date Thu 03/21/2013 @ 02:14
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 21, Nos. 1&2: Accounting Issues: 2011 Reviewed, 2012 Previewed

On Wall Street, nothing happens until someone changes their minds. Then, voila! Transactions occur, money changes hands, and the cash register rings. Maybe these days, there’s just a silent e-debit and e-credit to bank accounts. In any case, the first thing that happens is that someone changes their mind: they become energized to buy or sell a securities holding. Managers and investment bankers do what they can to put the best front on the face of the firm: the financial statements, a crucial source of mind-changing data.

Standard setters react to the financial innovations of bankers and managers; if there’s something on the standard setters’ agenda, it’s because investors’ needs are not currently best served. In recent years, however, the FASB has spent much time - its most valuable resource - on converging specific U.S. accounting standards with those of the IASB. This was FASB’s story for most of 2010, and it was similar in 2011. Much time was spent on major projects - financial instruments, revenue recognition and leasing are the biggest projects - but as in 2010, no major projects made the leap from proposal to required standard.

Nevertheless, the FASB managed to eke out a dozen accounting standards updates in the past year. Some will bear an impact on 2012 reporting and beyond, and others, less so. The following is a rundown of the FASB’s issuances in 2011, its plans for 2012, topped off with a look back at the accounting and business news for the year 2011.



File size 289 K
Date Thu 03/21/2013 @ 02:13
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

2012 Bulletin 1: The MAP-21 Pension Angle

The House and the Senate have approved a bill known as the “Moving Ahead for Progress in the 21st Century Act”, or just “MAP-21.” It’s a funding and authorization bill governing federal surface transportation spending, and it will likely be signed by President Obama later this week.

 

Bills are rarely one-dimensional creations. One aspect of this bill that has captured investor interest is its potential effects on pensions – not something you would immediately associate with a transportation spending bill.



File size 162 K
Date Thu 03/21/2013 @ 02:12
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers_2011 S&P 500 & R1000 Untaxed Foreign Earnings Data

AAO Subscribers_ 2011 S&P 500 & R1000 Untaxed Foreign Earnings Data Spreadsheet (Excel)



File size 270 K
Date Thu 03/21/2013 @ 02:11
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers_2011 S&P 500 Pension Data

AAO Subscribers_2011 S&P 500 Pension Data (Excel Spreadsheet)



File size 2530 K
Date Thu 03/21/2013 @ 02:10
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers_2011 S&P 500 Compensation & Audit Fee Data

AAO Subscribers_S&P 500 Compensation & Audit Fee Data (Excel Spreadsheet)



File size 946 K
Date Thu 03/21/2013 @ 02:09
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers: 2Q2012 R3000 Financials Fair Value Data

AAO Subscribers:  2Q2012 R3000 Financials Fair Value Data (Excel Spreadsheet)



File size 1397 K
Date Thu 03/21/2013 @ 02:08
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

AAO Subscribers: 2011 OPEB Data

AAO Subscribers:  2011 OPEB Data (Excel Spreadsheet)



File size 1666 K
Date Thu 03/21/2013 @ 02:07
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 14: What Keeps The SEC Busy - 2012

The American Institute of Certified Public Accountants held its annual "Current SEC & PCAOB Developments Conference" in Washington, DC last week, featuring speakers from all of the accounting bodies that matter: the SEC, the FASB, the IASB and the PCAOB. It may well be the world’s biggest Christmas party for accountants, who come from all over the country to hear what the representatives of these regulators and standard-setters have on their minds about financial reporting in the current environment.

Just after 2012 begins, the preparer types at the conference will be putting together their firms’ annual 10-K filing - the thickest, juiciest shareholder communications package of the year. (Most often, it ends up being an annual exercise in compliance.) On their heels will come the auditors, paying attention to the way financial information has been compiled and presented. Both preparer-type accountants and auditors from public accounting firms invest their precious time in this conference to avoid wasting time later. If the SEC and PCAOB tell accountants of all stripes of the reporting problems they’re seeing, why ignore them? Forewarned is forearmed; understand the regulators’ concerns now, and maybe you’ll avoid comments and hung-up filings later when it’s crunch time. The conference fills up three days with financial statement intelligence for auditors and preparers to absorb - if they want to.

Investors can garner insights from this conference, too. Financial reporting problems originate inside of companies and at much lower depths of transaction detail than at the 30,000 foot level view that investors get in the financial statements. The PCAOB is charged with ensuring auditors do their job at a professional level for the benefit of investors; their overseer, the SEC, is charged with ensuring that investors receive fair disclosures. Skeptical investors should be curious about what accounting issues matter to an agency whose reason for being is simply, the investing public. It’s enough of a reason for investors to care about "what keeps the SEC busy."



File size 145 K
Date Thu 03/21/2013 @ 02:05
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 13: Draft-A-Palooza: Standard Setters Open The Spigot Wide

Over the last couple of years, there have been precious few new proposals issued by the Financial Accounting Standards Board. The SEC’s promotion of IFRS convergence has led the FASB to devote most of its gunpowder on projects leading to standards that are more synchronized with IASB reporting standards. The results of those effort so far: a few proposals that would modify large swaths of financial reporting, like lease accounting, financial instruments and revenue recognition - all of which are in various stages of revision. There just haven’t been many other major proposals pushed out by the two-headed standard-setting beast that is the FASB and the IASB. (Call it FIASB?) That is, there haven’t been very many until the last month. The FASB has issued exposure drafts that, if enacted, would have major effects on the accounting for investment properties, investment companies, and consolidations of variable interest entities (VIEs). For good measure, the twin boards released the rewritten revenue recognition proposal last week.

The PCAOB’s standard-setting efforts primarily affect auditors, but their recent proposals should interest the investing public at large - if they care at all about the quality of the financial reporting that they consume. Last summer’s proposal on putting more information in the audit report was but one example. Now the PCAOB is proposing disclosure of the names of audit engagement partners in SEC filings, and is also floating the idea of mandatory auditor rotation, in order to bring fresh views to the audit. This report summarizes the fresh batch of proposals from the FASB and the PCAOB, and examines their relevance to investors.



File size 156 K
Date Thu 03/21/2013 @ 02:04
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 12: Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s "Operation Twist" add up to "Operation Agony" for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting might forego that decision: it could just be too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were even bigger than pension obligations at the end of 2010, and promise to be even bigger yet in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.



File size 247 K
Date Thu 03/21/2013 @ 02:04
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 11: Fair Value Reporting: A Financial Institutions Survey

A year ago, the FASB’s proposal for revamping financial instrument accounting was the burning accounting issue of the day. In the end, the FASB got singed by the fire. In the face of staunch opposition to the proposal from just about every quarter -preparers, regulators, and even investors - the FASB pulled in its horns and moved to a more IFRS-like stance, one that perpetuates amortized cost as the fundamental measure for financial instruments.

There’s a good chance that the FASB’s new-yet- old-fashioned approach may be re-exposed for comment: it’s much different than the May 2010 financial instruments proposal. One thing that’s unlikely to change are the quarterly fair value disclosures for financial instruments. In fact, they might be staked out parenthetically in the balance sheet - a much more investor-friendly treatment than their current burial in the footnotes.

Whether they’re on the face of the balance sheet or tucked into the footnotes, there’s still information in them for investors to consider. What follows here is a survey of the differences between amortized cost and fair value for the 453 non-REIT financial institutions contained in the Russell 3000.



File size 358 K
Date Thu 03/21/2013 @ 02:03
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 10: Midyear Inventory: Accounting Issues In The Second Half

The debt ceiling drama is temporarily behind us, replaced by the current “Rome is burning” excitement (along with“the rest of Italy, and Greece, and Portugal, and the United States is burning” drama.) The macro view of the stock market hasn’t provided participants this kind of dizzying, fear-fueled adrenaline rush since the last economic crisis.

    In complete contrast, the accounting discipline has been downright dull. No drama over restatements of financials, options backdating, adroit revenue recognition, pension plan assumptions or funding, or off-balance sheet subsidiaries - not even SEC investigations of mere muffed lease accounting. In short, the investment world now views the accounting world as it always has: a dull, occasionally necessary, discipline that’s not much fun to observe in comparison to the market - unless it’s affecting the markets.

       That’s a bit short-sighted. Accounting hasn’t been page one news for a long time: companies haven’t blown themselves up via accounting high jinks ever since Sarbanes-Oxley put more stiffness in auditors’ spines. Yet like the serene duck swimming on a pond’s surface, there’s a lot of furious paddling underneath. Now that the first half’s earnings releases are out of the way, it’s time to take a look at what the accounting ducks have been working on - and what investors will be quacking about in the second half of 2011.



File size 272 K
Date Thu 03/21/2013 @ 02:03
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 9: A PCAOB Proposal: Not Your Father’s Audit Opinion

     The auditor’s opinion on the financial statements have only slightly more information content than the nutrition label on a bag of potato chips. The typical “clean” opinion identifies the financial statements examined by the auditor, the auditing standards followed, and states whether or not the financials are presented fairly in conformity with accounting standards. It’s often called a “pass/fail” model: the auditor’s opinion states the financials are fairly presented (pass) or not (fail).

    For the thousands of man-hours and millions of dollars invested in the typical annual audit, that’s a pretty unsatisfying snack for investors to digest. After all, the auditing firm is inside the firm owned by the shareholders - and is privy to more facts than expressed by the standard audit opinion. The auditor is working for the shareholders - and the audit report should reflect more of the intelligence gleaned from the audit than the simple pass/fail opinion suggests has been learned.

       Think of it this way: when was the last time you actually read an audit opinion? Perhaps never, because you didn’t expect it to contain any information. The PCAOB wants to change that: after gathering opinions from its own advisory boards and conducting broad-ranging interviews, the Board has put together a proposal that could radically increase the information built into the auditor’s report. Expect resistance from both auditors and companies - and if it becomes a reality, expect higher audit fees, too.



File size 344 K
Date Thu 03/21/2013 @ 02:02
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 8: Is The IFRS “Condorsement” Coming? Maybe

It’s been four years since the Securities & Exchange Commission first floated the idea of permitting U.S. companies to use international financial reporting standards (IFRS) for their filings. In between 2007 and now, a two-year financial crisis distracted the SEC, the Financial Accounting Standards Board, and the International Accounting Standards Board, hobbling any plans for a quick changeover to a one-world set of standards.

    That “one-world set of standards” may have always been more ambitious than it first sounded.  Some countries have chosen to carve out parts of IFRS that they don’t see fit to adopt. Some adopting IFRS have done so with significant strings attached: for instance, reserving the right to not adopt a new IASB pronouncement if it doesn’t seem particularly relevant to that country’s constituents. While the international convergence movement has taken on a life of its own, some of the developing adoptions are more like mutations of IFRS rather than a uniformly-created single set of standards.

    Whether homogenized standards are a good idea or not, or whether countries go the full convergence route or merely adopt some form of convergence to look like they’re in the game, the SEC has committed itself to figuring out the United States’ position on adopting IFRS. The Commission’s latest effort is a staff paper explaining “condorsement” - a possible way of incorporating IFRS into the American reporting system. As you might expect from the name, it’s not a pure adoption approach to implementing IFRS.



File size 238 K
Date Thu 03/21/2013 @ 02:02
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 7 (R): S&P 500 Executive Pay: Bigger Than ... Whatever You Think It Is - (Originally Issued May 23, 2011)

It’s the time of year for proxy deliveries and shareholder meetings - and plenty of rhetoric about CEO pay. This  year, the“say on pay” proxy vote, and the separate vote on the frequency of future say on pay votes, have added something to the mix for pay-watchers. Shareholder choices alone won’t bring any direct action on pay, however. If directors fail to heed shareholder displeasure through their say on compensation, the directors themselves might become liable through the courts. While that could certainly bring about change, it’s a process that could take years to produce any real differences in the size of executive compensation awards.
    Shareholders might say “no” on pay awards more often, if they stopped focusing on only the CEO and studied all of the executive pay information available to them. The proxy statement discloses the compensation of the top five officers; even though that’s only a smattering of the total executive pay, it’s uncommon for investors to look at that cost in its totality. The top five officers are part of a CEO’s cadre of trusted executives; they’re at least a part of the total management team that breathes life into the shareholders’ collective assets. Consider them to be a major input into the production of shareholder returns, with a real cost, just like raw materials or any other purchased services. One difference: managers try to keep other production costs low - but for their own costs, they’ll employ swarms of consultants to justify higher pay.
    If investors thought more about the price tag on their managers - especially in comparison to the cost of other inputs of production - they might vote “nay on pay” every chance they get. In 2010, executive pay for just the top officers recovered strongly as the financial crisis faded into the rear view mirror. Here, some perspectives on just how big the total executive pay package has become in relation to other costs that produce income and shareholder returns.



File size 561 K
Date Thu 03/21/2013 @ 02:02
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 6: State Of The Pension Promise: The S&P 500 In 2010

In the annual report tour, one of the usual stops made by investors is the pension plan footnote. Through various FASB edicts, the pension footnote is now so swollen in size that it’s turned into the engorged tick of the financial statement package - and causing investors to perhaps spend less time with it than they should. This report tours the most critical aspects of the pension plans of the S&P 500 companies. Pensions are like a company within the company, and affect managements’ marginal investing and financing decisions. Investors should pay attention to the pension status every year.

    Markets were quite strong for 2010. How did the pension plans fare? The short answer: so-so. There’s a slight  improvement in overall funding status, and a few firms contributed mightily to their pile of pension assets. Still, there remains a yawning gap between assets and benefit obligations for most firms.



File size 454 K
Date Thu 03/21/2013 @ 02:01
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No.5: Over There: Where U.S. Earnings Rise

Over here, however, is where they are reported. The basic consolidated financial statements present an American corporation’s results on a homogenous basis: investors see one number for say, net income or cash, and assume that all dollars of net income or cash are alike. Not so. There could be constraints on those amounts depending on where in the world they originated. While GAAP requires disclosures about foreign operations in terms of assets, revenues and to a lesser degree, pretax income, it doesn’t provide a feast of information for hungry investors.

The still-fresh 10-K packages don’t say much about overseas profits - but if you know where to look, they whisper about it. There’s crude information about the untaxed earnings of foreign subsidiaries in the tax footnote. Spend a little time with those figures and you can get some insight into how confusing consolidated financial statements may be, why managers dream of repatriation tax holidays, and just how dependent domestic companies may be on their foreign operations to drive earnings growth.



File size 188 K
Date Thu 03/21/2013 @ 02:01
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 4: An Investor’s Guide To The 2010 Annual Reports

March 1, 2011: that’s the SEC’s 10-K deadline for “large accelerated filers” having December year ends, and it’s just days away. Ordinary“accelerated filers” - those with a public float of less than $700 million - have slightly longer to electronically heave their 10-K  filings over the SEC’s doorstep: March 16, 2011. The smallest fry of the public markets, those with public floats under $75 million, can wait until the last day of March to file their 10-Ks.

    You’re bound to be busy reading these tomes over the coming weeks, and you’d be right to wonder which ones are works of fiction, instead of presentations of facts. Only thinking critically while digesting them is going to do that for you, and the sheer size of your 10-K stack will ensure that sooner or later, you’ll be “skimming” those reports. Resist that urge as long as you can: you won’t have another chance to learn as much about a company for another year. Focus on the disclosures that are most important to you. No single magic disclosure or ratio in the annual report will always give you the most brilliant insight. The one thing the annual report offers investors is more context than usual, and a better than usual opportunity for the investor to piece together the factual mosaic tiles that describe a company and its business better than any other time of year. It’s up to the investor to make that picture come together by exercising due diligence in reading the annual reports.



File size 199 K
Date Thu 03/21/2013 @ 02:00
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 3: The New Attention On Pensions

Hardly a year goes by without one aspect or another of pension accounting being questioned by investors.  Some years it’s just the sheer poverty of the funds that attracts attention; other years, it’s the construction of the benefit obligations that jangles investors’ nerves.

    This year, it’s something entirely different.  Several companies have recently decided to improve their accounting for pensions and they’re taking a very conservative approach - and it’s unusual to hear “conservative” mentioned in the same breath as pension accounting.  These firms are writing off great chunks of their past losses that have been hanging around for years.  While they’re to be commended for taking the high road, their timing is splendid.  The most painful part of the change is pushed back in time to three years ago during the depths of the financial crisis -a time when they wouldn’t have dreamed of recognizing investment losses.  It also happens to set up a very pleasant earnings trend, something sure to please unquestioning investors.



File size 151 K
Date Thu 03/21/2013 @ 02:00
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 20, No. 1 & 2: Accounting Issues: 2010 Reviewed, 2011 Previewed

Because of the dynamic nature of business and financial innovation, financial reporting changes constantly. The 2010 financial statements you’ll read in a few weeks won’t look quite the same - or have exactly the same meaning - as the financial statements you’ll read in another year or two. To get a handle on where financial reporting is going - mostly due to financial innovations and sketchy reporting already occurring - it’s wise to annually take stock of the FASB’s agenda. An accounting issue appearing on their agenda is somehow deficient in serving the FASB’s constituents, and needs repair.

    The Board probably worked more frantically than in years past, but had no monolithic standards to show for it. It issued many refinements of existing standards, but they were not the reason for the Board’s activity. What consumed the FASB in 2010: its focus on converging major standards with the International Accounting Standards Board by mid- 2011. The two boards worked furiously on those projects; for the FASB, the due process on the financial instruments at fair value project consumed a great deal of their time and resources during the year.

    Notwithstanding its engrossment with international convergence and fair value reporting, the FASB managed to issue 29 accounting  standards updates in 2010 - some with significant impacts in 2011 and beyond, others with less impact. The following is a rundown of the FASB’s major accomplishments for 2010, and a look back at the accounting news for the year 2010.



File size 203 K
Date Thu 03/21/2013 @ 01:59
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

2011 Bulletin 3: Cleaning Up Accounting For Troubled Debt Restructurings (Maybe)

The third quarter is looming, and a new FASB Accounting Standards Update will go into effect right from the start. It’s ASU 2011-2, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” It applies to all receivable holders, but it might give fits to mostly the financial sector firms in the second half of the year. (It doesn’t apply to changes in lease contracts, employment contracts, trade accounts receivable, or certain pooled loans.)

The ASU clarifies when a lender should apply the accounting for troubled debt restructurings, which can lead to remeasurements and recognized losses – naturally, something lenders of all stripes want to avoid. The criteria added in this standards update are judgmental and may involve probability calls about future events, but the ASU should nudge lenders towards reporting of more troubled debt restructurings (TDRs).



File size 370 K
Date Thu 03/21/2013 @ 01:59
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

2011 Bulletin 2: FASB & IASB To Supersize Megabanks Further?

That might not be a bad thing. Existing accounting standards give firms the ability to offset, or to “net”, certain financial assets and financial liabilities against each other. This leaves only a net asset or liability reported on the firm’s balance sheet – and only a hint of the firm’s total exposure. For example, a firm may have a $900 billion asset owed from a derivative asset position, and it may also owe an $880 billion derivative liability to the same party. Offsetting the two amounts on the balance sheet yields a $20 billion net liability, saying little about the size of the benefits to be enjoyed or the risks taken by the firm.  

 The two accounting standard-setters have proposed a change in netting that would frequently reverse the above scenario: instead of presenting net amounts, firms would be showing their assets and liabilities on a “grossed-up” basis. This would affect U.S. banks more than any other industry group: they’ve extensively practiced the netting of derivative assets and liabilities, in contrast to banks reporting under IFRS, where netting is not the norm.



File size 155 K
Date Thu 03/21/2013 @ 01:58
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

2011 Bulletin 1: FASB’s Fair Value Flip-Flop

On Tuesday, the Financial Accounting Standards Board made a key decision in revising the accounting for financial instruments: it abandoned the most controversial feature of last May’s proposal for the expansion of fair value reporting for long-term receivables, like bank loans. 

The board’s decision does not eliminate the pier value categories devised in the proposal.  Those categories- fair value changes reported through net income(FV-NI), and fair value reported through other comprehensive income (FV-OCI)- will remain in the new accounting model.  Those two categories will be augmented by a third, sure to please the banking industry: amortized cost



File size 152 K
Date Thu 03/21/2013 @ 01:58
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 14: What Keeps The SEC Busy - 2011

The American Institute of Certified Public Accountants held its annual “Current SEC & PCAOB Developments Conference” in Washington, DC last week, including speakers from the SEC, the FASB, the IASB and the PCAOB. Call it “Accountant-palooza:” accountants from all parts of the country stage a homecoming of sorts to listen to what the SEC has to say about accounting issues. In a frail economy, the conference attendance exceeded 1,300; including remote locations, more than 2,300 were tuned into the SEC’s show. That’s quite a draw, especially at this time of year.

    In a matter of weeks, the accountants attending the conference will be assembling their firms’ 10-K filing - the annual exercise in communications with shareholders. (Most often, it ends up being an annual exercise in compliance.) Shortly afterwards, the auditors attending the conference will be scrutinizing the accounting records. Accountants and auditors invest their time in this conference so they don’t waste it by stepping onto land mines already mapped out by the SEC. Time is always precious, and nobody - auditors or preparers - want to waste time negotiating with SEC staff over accounting treatments covered by the Commission staff during this conference. The conference fills up three full days with “heads-ups” for auditors and preparers. Forewarned is forearmed.

    What’s in it for investors? Insight. Financial reporting problems don’t originate after financial statements are filed; they originate inside the companies and at much lower depths of transaction detail than the highly distilled levels that investors see in the finished product - the financial statements. The Commission is charged with ensuring that investors receive fair disclosures; cautious, skeptical investors should be curious about what accounting issues matter to an agency whose reason for being is - investors. That should be enough of a reason for investors to care about “what keeps the SEC busy.”



File size 156 K
Date Thu 03/21/2013 @ 01:57
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 13: A Pause That Refreshes? Sizing Up Standard-Setting Efforts

In the ensuing years since the SEC first proposed the use of International Financial Reporting Standards (IFRS) by U.S. registrants in mid-2007, there’s been no shortage of economic drama. Both the pricking of the real estate bubble and the Great Recession struck within a year; amid the financial mayhem, the international convergence of accounting standards didn’t carry quite the same urgency it did originally.

    Once relative calm was restored to the markets, however, the convergence efforts picked up steam once again. In the past twelve months, the International Accounting Standards Board and the Financial Accounting Standards Board have been issuing proposals at a blistering pace - proposals that, if they become actual standards, could have serious repercussions for the issuers of financial statements. Investors and other users would also have to deal with perhaps surprising amounts of changes. It’s reached the point where the FASB issued a discussion paper in late October for the sole purpose of taking stock of its various constituents’ views on how the Board should go about requiring the implementation of these potential standards. For instance: should they be phased in separately, or all implemented at one time? Should firms be allowed to adopt them early? How long of a grace period will be necessary?

    In an interesting coincidence of timing, the SEC also issued an update on the progress made by the Office of the Chief Accountant in deciding whether or not to permit the use of IFRS for U.S. registrants. As it stands, the Commission expects to make a decision on that in 2011. (The Commission could conceivably decide to decide later.)

    This report looks at the highlights of the two documents. For the moment, the two chief influencers on U.S accounting principles seem to be taking a breather - but they’re not finished the race, by any stretch of the imagination.



File size 55 K
Date Thu 03/21/2013 @ 01:57
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 12: The Curious Case Of Postretirement Benefits Accounting

In the hit movie “The Curious Case of Benjamin Button,” the hero starts out life with the appearance and physical condition of a very aged man. As he becomes older, he becomes younger in appearance, meeting his sweetheart at a tender age for her and reuniting with her for a blissful period when they’re both in their prime. Of course, nothing that good could last forever; they continue their inverse aging paths, missing each other as they live out their days.

    Investors have been treated to a similar movie playing out over the last two decades, a movie about weirdly aging postretirement benefits obligations. These accounting creations first appeared on corporate balance sheets in 1992 among much fear and trepidation about the subsequent costs to be recognized through accrual accounting for postretirement benefits. In the time since, however, instead of becoming more detrimental to earnings, postretirement benefits costs have actually become less detrimental to earnings than ever - going from aged beasts to smooth-skinned youths. The last few years might even be a “sweetheart period,” where many firms have experienced declining postretirement benefits costs - and some firms are actually seeing negative costs.

    That sweetheart period, just as in the movie, may be coming to a close. Firms will be remeasuring their postretirement benefits obligations at year end, and it would be surprising if the Patient Protection and Affordable Care Act of 2010 didn’t start affecting those obligations. Those effects can’t be anticipated - but before they show up, investors should wonder why the existing accounting doesn’t do enough to illustrate the economics of corporate postretirement benefits plans, which cover mostly medical benefits.



File size 300 K
Date Thu 03/21/2013 @ 01:56
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 11: Lease Accounting Gets A New Lease On Life

The convergence movement between the FASB and the IASB has been stumbling recently over the treatment of financial instruments: the FASB pushes for more fair value reporting of financial instruments, while the IASB opts for more traditional amortized cost treatments. When it comes to other convergence projects, however, they’re moving full speed ahead, and in total lockstep. Revenue recognition is one example. Another is their joint project on lease accounting. An exposure draft released in mid-August paves the way for lease accounting that will be similar under the two standard-setters’ rules.

    The accounting won’t be too similar to what’s been in existence in the U.S. since 1976, however. Operating leases won’t operate any longer; lessee balance sheets will show assets and obligations that had always existed in an “off-balance sheet” state. That shouldn’t surprise anyone who’s familiar with the 2009 discussion paper on lessee accounting: it proposed the demise of operating leases. What really is new, however, is that this exposure draft also contains freshened accounting for lessors. Much will change for both lessees and lessors, and it will change with a big bang: there’s no gradual grandfathering transition approach contained in the exposure draft. When the standard goes into effect, there will be a catch-up that puts all firms on the same footing at the same time.



File size 131 K
Date Thu 03/21/2013 @ 01:56
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 10: It’s Déjà Vu All Over Again: The Fair Value Accounting Wars

The tune changes, but the song remains the same.  You may have expected that news clip came from last week’s Wall Street Journal - but it dates back to July 16, 1992, when bankers were alleging that valuing securities at fair value would bring about the end of the economy as we know it, because banks would be too scared and too broke to lend.

    They’re singing that same song again. This time, the chorus is about the FASB proposal to put all assets and liabilities at fair value as well as simultaneously presenting corresponding amortized cost amounts. The same outcome - “we’ll bring this economy to its knees, when it can least afford it” - is being positioned by the proposal’s opponents. Their rallying cry: “Hell no, we won’t lend!”
    Don’t fall for it. Lending is a bankers’ reflex, triggered by the size of an interest rate spread. In this report, we’ll look at the S&P 500 to determine just how “bad” things could be if the proposal is implemented, and take a look at some of the canards floating around regarding the proposal.



File size 179 K
Date Thu 03/21/2013 @ 01:56
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 9: Convergence Collaboration: Revising Revenue Recognition

The “revenues” line holds the single biggest number in the income statement. (Except for the occasional goodwill writedown in excess of revenues.) It’s one of the most crucial financial measures investors will ponder, and it’s often the focus of management mischief: think of the accounting chicanery to which investors have been subjected in the last decade.“Round-tripping” of contracts, done to bloat them and add to investor appeal.“Buy-and-hold” transactions where early customer purchases were not really sales at all. “Principal vs. agent” transactions where transactions were reported on a gross basis for say, a ticket price, when the real revenue earned only amounted to a commission on that gross price. And those are just a few examples.

    Maybe because it’s the single most important number in the income statement - after all, nothing happens until someone sells something - or maybe because rascally revenue recognition erupts every few years, the U.S. accounting standards dealing with revenue recognition have multiplied like rabbits. The section of the U.S. accounting standards codification covering revenue recognition is composed from more than 140 pronouncements issued over the years. Some of it is very specific to certain kinds of transactions; some of it is very specific to certain industries. Oddly, none of it contains general guidance on revenue recognition for services. Revenue recognition issues have been frequent agenda items for the FASB’s Emerging Issues Task Force, indicating that the current standards are substandard, themselves: if the accounting principles were effective, they wouldn’t need such frequent interpretation. How frequently? Two of those EITF consensuses became effective within just the last month, though their genesis began several years ago.

    Since 2002, the FASB has worked with the IASB on a joint project to improve revenue recognition standards. On the FASB side, the greatest improvement would be a comprehensive set of revenue recognition principles that don’t require constant repair and maintenance. On the IASB side, the greatest improvement would be more consistent principles that could be applied in more specific situations. For example, there’s little guidance on revenue accounting for arrangements containing multiple elements. Both sides have something to gain from this project, and developing a joint standard is a meaningful standards convergence step. Here’s how the joint proposal will work, in its current form - and how it could affect current revenue recognition practices in various industries.



File size 67 K
Date Thu 03/21/2013 @ 01:55
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 8: Fair Value & Financial Instruments: FASB’s Better Idea

    The accounting standards governing financial instruments are a rickety stack of piecemeal fixes for problems arising at different times in the history of financial reporting. What the FASB has done with a pair of proposals covering reporting of financial instruments and other comprehensive income is novel: they’ve come up with a sweeping overhaul that’s better than what it replaces, and better than the approach taken by its standard-setting counterpart, the International Accounting Standards Board.

    The financial instruments accounting proposal is the more dramatic of the two. It eliminates thefamiliar classification of financial instruments as held-to-maturity, available-for-sale, and trading, replacing them with just two: fair value and amortized cost. Both classifications earn a place on the balance sheet, and both will affect income statement presentation. Depending on the business model of the firm using them, some financial instruments may be reported on a fair value basis with changes in fair value reflected in earnings. Some financial instruments may be reported on a fair value basis, with cost basis-figured interest income (and impairments, where necessary) reported in net income. The fair value changes for such instruments would be reflected in other comprehensive income. That’s where the second FASB proposal comes into play. To give the effects of all fair value reporting equal prominence, the proposal requires that firms present a “continuous statement” of comprehensive income. No longer can firms bury the statement of comprehensive income in a stockholders’ equity schedule. Now, comprehensive income gets its due - on the same page as net income.

    The proposals provide a smorgasbord of accounting presentations: there’s something for every appetite. Regulators can tuck into the amortized cost information in setting capital requirements; cautious investors can savor fair value basis presentations; and companies can pridefully cook up their earnings presentations on an old-fashioned, net income basis - with their favorite adjustment seasonings, to boot. The presence of more information should make investors think more critically. So far, however, there’s been little support for the proposal from any quarter. Financial institutions have roundly criticized it: their financial statements would bear the most striking changes.



File size 173 K
Date Thu 03/21/2013 @ 01:55
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 7: Executive Pay As Production Input: Surveying The S&P 500 In 2009

Consider the modern corporation to be a collection of individual minds, intangible assets, financial capital and physical resources. Without another element of production -  management - a corporation is a mere collection of disparate production inputs that don’t do anything on their own. Management essentially breathes life into those assets: acting in the interests of shareholders, it makes those various assets produce profits for shareholders’ benefit.

    Markets for production inputs are competitive and open. Utilizing the best physical and intangible resources at the lowest price and finding the cheapest capital are basic managerial tasks in bringing returns to shareholders. Managers are paid to push hard for seeking cost-effective production inputs. Naturally, they’re not of the same cost-containment mindset when it comes to the price of their own compensation - another production input.  The market for the price of management services can hardly be termed “open.” It’s as fair as a Soviet election: annually, shareholders get to approve or disapprove a compensation plan developed by consultants and approved by the board’s compensation committee, a plan built on comparisons to the pay packages of other firms. The only thing shareholders can do is vote against a proposed  plan, but they usually don’t. Occasionally, a “say on pay” vote is allowed, but they’re non-binding and thus, toothless.

    If investors thought about the cost of managerial inputs compared to the cost of other production inputs, they might nix proposals on executive compensation plans more often. While investors will concern themselves with the effect of other  costs on profitability, they don’t usually analyze the cost of managers relative to other production inputs. In this report, relevant comparisons are demonstrated. The results show that management compensation is out of proportion compared to other costs that produce shareholder benefits.



File size 199 K
Date Thu 03/21/2013 @ 01:54
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 6: Still NSFW? The State Of Pensions, 2009

Pensions have a way of making things not safe in the workplace, on a couple levels. If you’re an employee who’s hoping for a retirement someday, they’re a wonderful thing - until the day you find out that your firm is freezing them or cutting benefits to keep the whole plan going. And in the investor workplace, pensions bring a lot of performance noise into the financials that relates more to accounting prowess rather than managerial ability. Parsing them out can be workplace pain for investors.

    Overall, pensions improved greatly in 2009 in terms of funding. 2008’s scary markets directly impacted the funded status of pensions, and 2009’s rebound did wonders for defined benefit pension plans - even if they’re not out of the woods. There’s still quite a gap from them being fully funded. One thing that’s different in 2009: the new disclosures about asset classes and fair value hierarchy provide investors with more warnings about funding adequacy than ever before.    



File size 177 K
Date Thu 03/21/2013 @ 01:54
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 5: The 2009 Annual Reports: An Investors' Guide

10-K season is in full swing. The deadline is already past for the large accelerated filers, and by month’s end, all stock market inhabitants should have their annual filings deposited in the SEC’s EDGAR archive.

    You might be overwhelmed by the sheer volume of reading you’ve got ahead of you. Before you start “skimming” way too much in an effort to get through the stacks, take a deep breath and pull back. Take time to figure out what’s really important. After all, the level of disclosure is not going to be higher any other time of the year. While there isn’t any single magic disclosure or ratio that will always save your investment - and your neck - one thing the annual report and 10-K offers investors is more context than usual. There’s a better chance than usual for the investor to separate the trees from the forest. The process: form expectations; look for support or contradiction; reconcile findings to expectations; repeat



File size 97 K
Date Thu 03/21/2013 @ 01:53
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 4: Rock ’n Roll Revenue Recognition: How Growth Will Thrive

Revenue recognition (“rev rec,” in accounting-speak) is ratcheting up and arriving earlier for some companies. Firms making their living by engaging in multiple-deliverable arrangements (contracts for a plethora of services or goods to be delivered at various times, with one price tag for all) have long hated the accounting for such deals. They’re required to parse such arrangements into identifiable pieces and recognize the revenue from each piece as it’s completed. That’s not the problem for them: it’s the accounting requirements for evidence of each piece’s selling price frequently making the disaggregation goal impossible. If disaggregation can’t be achieved, the revenue is deferred, with recognition taking place after all contract elements are delivered. Sometimes, recognition may occur ratably over the contract term.

    That retards revenue growth, making the accounting standards a target of wrath for many technology and consulting CFOs. Recently, the FASB’s Emerging Issues Task Force (EITF)greatly liberalized the requirements for objective evidence of each component’s selling price, making it much easier to achieve “componentized”revenue recognition for multiple-deliverable arrangements - and to recognize revenue faster than under the more restrictive fall-back deferral approach. The EITF also freed tangible products containing software from being accounted for under restrictive software revenue accounting methods, in many cases. The change to this new accounting was part of the reason for Apple’s recent revenue growth.



File size 67 K
Date Thu 03/21/2013 @ 01:53
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 3: A Currency Affair: Venezuelan Vagaries

Venezuela isn’t famous just for its oil exports and flamboyant leaders. It’s also been a self-contained producer of inflation, with consequent unpleasant effects on its populace. It’s also going to have unpleasant effects on the financial statements of U.S. multinational firms doing business in Venezuela. Starting in 2010, the consolidated financial statements of the parents will have to take into account the highly inflationary economy of Venezuela. That means a change in accounting methodology that will result in the recognition of remeasurement gains or losses directly in earnings. Previously, translation gains or losses were not visible in earnings: they were tucked away in stockholders’ equity. Now they’ll be more visible.

    The results of the change in accounting are not always straightforward; investors will find non-comparability exists in the years before and after the change. Further hampering intercompany comparability for investors: there are several different exchange rates that may be used in remeasuring financial statements, and any single rate is not always the right one for all companies doing business in Venezuela. Estimating changes in the reporting of foreign operations is not a “do it yourself” exercise that investors can prepare for themselves, leaving them at the mercy of the firms making disclosures about their Venezuelan exposure. There are no rigorous, paint-by-numbers disclosure requirements that ensure all relevant information will be released; investors’ best chances for receiving relevant information come from the SEC’s open-ended requirements for MD&A.



File size 79 K
Date Thu 03/21/2013 @ 01:53
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 19, No. 1&2: Accounting Issues: 2009 Reviewed, 2010 Previewed

     If you want to know where funky financial reporting exists in America, consider paying a visit to the agenda of the Financial Accounting Standards Board. The charge of that particular standard setter is “to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.” If there’s an accounting principle or standard on their agenda, then it must be an aspect of financial reporting that is somehow not getting the job done for the FASB’s constituents - perhaps due to abusive application, the innovations of cunning investment bankers, or a combination of both. Sometimes investor information needs reform because reformulated transactions find a loophole in existing standards and disclosures; sometimes standards need repair because the existing ones were flawed on the date of issuance. (The constantly revised standards on securitization accounting are one good example.)

    Accounting, the “language of business,” was severely tortured in 2009 - at least in the tongue of fair value. Both the Financial Accounting Standards Board and the International Accounting Standards Board devoted much effort to reforming fair value reporting standards - not so much because the investors of the world wanted them to fix something, but because political pressure made it impossible for the standard setters to leave fair value reporting untouched.

    Despite the preoccupation with fair value reporting standards and defending themselves from political interference, the FASB issued many new standards in 2009 - some with major significance to investors, others less so. The FASB and the IASB also ramped up their convergence ambitions during the year, and set lofty new targets to meet in 2010 and beyond. The following is a rundown of the FASB’s major accomplishments for 2009, and a look at the accounting news for the year.



File size 136 K
Date Thu 03/21/2013 @ 01:52
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 9: Repairing Repo Accounting

Until the fall of Lehman Brothers, nobody gave much thought to repurchase agreements - or the accounting for them. As so often is the case, once they blow up, they’re on everyone’s mind. And they’re on every available media page, too. A Google search on the phrase “Repo 105” shows three news stories in the whole calendar year before the bankruptcy examiner’s report was issued on March 11, 2010. So far in 2010, the same search yields 436 news story hits. “Repos” became interesting when Lehman blew up - and so did the accounting.



File size 135 K
Date Thu 03/21/2013 @ 01:52
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 8: A Pair Of Pension Issues

Towards the end of the year, investors start wondering about the effects of pension obligations on next year’s cash flows and capital structures. Estimated asset returns for the S&P 500 pensions is about 1% - while estimated projected benefit obligations ballooned more than 12%, fueled by current ultra-low interest rates. That unhappy confluence of returns means that underfunding for the S&P 500 plans might increase another $167 billion, or 65%. There will also be more pension fodder for investors to consider this year: the FASB has proposed disclosures that will throw light on the murky corners of multiemployer pension plans.



File size 176 K
Date Thu 03/21/2013 @ 01:52
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 7: GAAP & IFRS: Convergence Or Divergence Ahead?

In late June, the IASB and the FASB announced a change in their strategy for joint accounting standards projects. The previous strategy/timeline was a virtual accounting moon shot: a series of standards revisions that would command a never-before-experienced level of cooperation and like-mindedness between the two standard-setters. The revised strategy is only slightly less demanding.



File size 134 K
Date Thu 03/21/2013 @ 01:51
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 6: Faster Revenue Recognition: Who May Benefit

In February, we  reported on the upcoming changes in revenue recognition for firms with multiple-deliverable arrangements (Volume 19, No. 4: “Rock ’n Roll Revenue Recognition: How Growth Will Thrive.”) A re-read is recommended, but here’s the bottom line: because of two EITF consensuses effective in years beginning after 6/15/10, certain firms will find it easier to recognize revenue linked to each component of a multiple-deliverable arrangement as it’s delivered or completed, instead of recognizing revenue gradually. Some firms are going to have revenue recognition growth spurts. Adoption methods allow a choice of retrospective or prospective treatment; don’t expect consistency among companies. Prospective adopters may report juiced revenue growth rates: they’ll recognize revenue faster than before, but compare them to previous years’ revenues that reflected slower revenue recognition. Bolder comparisons result.



File size 187 K
Date Thu 03/21/2013 @ 01:51
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 5: 1Q10 Health Care Tax Charges: Behind The Hype

On March 23, President Obama signed the reconciliation bill that made the Patient Protection and Affordable Care Act a working law. One part of it immediately affected corporate financial reporting: it changed the value of deferred tax assets related to a corporate Medicare subsidy. Whenever a law is enacted that changes the value of a tax asset or liability, the change in that tax asset is recognized immediately in the period of the law’s enactment. 

The elimination of tax deductibility for the retiree drug subsidy is what’s behind the hailstorm of announced first quarter deferred tax asset writedowns. In tax years beginning after December 31, 2010, employers can be reimbursed for 28% of their retiree prescription benefits costs, provided they’re supplying benefits that are the actuarial equivalent Medicare Part D benefits. Right from the start, their pretax prescription benefit cost is 72% of what it would be without the subsidy. On top of that, they get a tax deduction for the full 100% of the benefit cost - no exclusion for the subsidy. At a 35% tax rate, the tax benefit would be 35 cents for every dollar spent. After subsidy and tax benefits, an employer’s cash cost could be just 37 cents on the dollar - for just those prescription benefits. The subsidy gives rise to a deferred tax asset because the cash tax benefits are based on the full expenditure amount.

The “double-dip” sweetener in the above scenario - deducting 100 cents of the expenditure without reducing it for the subsidy - is what gets eliminated in the law in tax years beginning after December 31, 2012. Firms will no longer earn a deduction for the portion of benefits covered by the Part D subsidy - and that means deferred tax assets attributable to those deductions have to be written down.



File size 213 K
Date Thu 03/21/2013 @ 01:51
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 4: What To Look For In 2009 Annual Reports: Level 3 Exposure

In our Investor’s Guide to 2009 Annual Reports (Volume 19, No. 5), we familiarized investors with new accounting issues and reminded them of ways to use accounting information to add color to their views on a particular company. Here’s an additional suggestion to consider in reviewing annual (and quarterly) reports: consider Level 3 exposure as a routine matter. When the fair value hierarchy first appeared in financial reporting in 2008, investors paid plenty of attention to Level 3 assets - mostly because they were associated with floundering financial institutions that held securities classified as Level 3. Yet Level 3 asset valuations aren’t inherently wrong; it’s just that they’re inherently pliable, depending on management intentions. What’s indisputable: because they come into play when there are no values available from active markets, the assets are inherently illiquid - and anyone  concerned with a firm’s liquidity should take into account the degree to which Level 3 securities are a part of a firm’s balance sheet.



File size 160 K
Date Thu 03/21/2013 @ 01:50
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 3 - IFRS In The US: The SEC Decides To Decide Later

Last week, the SEC released a statement supporting convergence of US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). While it definitely showed a commitment to the convergence process, it fell well short of a vow to require US adoption of IFRS. The Commission plans to make a decision on that in 2011, a date that’s significant for two reasons. One: at the September summit in Pittsburgh, the Group of Twenty nations requested accounting bodies to achieve convergence in accounting standards by June 2011. Two: that’s exactly what the IASB and the FASB have been doing at fever pitch ever since then, putting their efforts behind joint standards on major projects with near-Olympian vigor. If the Commission is satisfied in 2011 that IFRS adoption is a good idea, they expect that it could be implemented in 2015 or 2016. Consistent with the non-committal tone of the statement, the door remained open that early adoption might be permitted in the event of national IFRS adoption.



File size 172 K
Date Thu 03/21/2013 @ 01:50
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 2: The Disclosures You Need This Year - Arriving Next Year

Last month, the FASB updated its Accounting Standards Codification, requiring firms to furnish incremental, enhanced disclosures about fair value measurements.  (Official title: Accounting Standards Update 2010-06. It updates the codification Subtopic 820-10, Fair Value Measurements and Disclosures, or what used to be called Statement 157, “Fair Value Measurements.” It was called other names as well.) The good news: the new disclosures will shed even more light on the nature of the valuations of financial instruments. The bad news: they won’t show up in 2009 annual reports; some key disclosures won’t arrive in 2010 annual reports.



File size 167 K
Date Thu 03/21/2013 @ 01:50
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Bulletin No. 1 - Statement 167: What You Won’t See In 2010

Statement 167, Amendments to FASB Interpretation No. 46(R), was issued in June 2009, along with the related SFAS No. 166, Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140. Statement 167 was issued to allay  concerns that FIN 46(R) permitted firms to block consolidation of assets and liabilities related to variable interest entities through manipulation of quantitative assumptions. Statement 167 forced firms to use a more judgment-based analysis, on an ongoing basis, to determine whether they are the primary beneficiary of a variable interest entity; if so, a firm must consolidate the entity. Statement 166 sweeps securitization entities into Statement 167’s purview, causing them to be newly considered for consolidation.



File size 170 K
Date Thu 03/21/2013 @ 01:50
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 15: What Keeps The SEC Busy - 2010

The American Institute of Certified Public Accountants held its annual “Current SEC & PCAOB Developments Conference” in Washington, DC last week, including speakers from the SEC, the FASB and the PCAOB. Accountants from all parts of America and the economy gather each year to grab year-end financial reporting advice from the SEC’s staff. Despite a still-shaky economy, the conference attendance was still well over 2,000. That’s a lot of accountants and auditors.

    Those auditors will soon be combing through client accounting records as gatekeepers in the whole financial reporting process. Time is always precious, but more so when there are reporting deadlines to be met. Auditors don’t want to waste their time - or their client’s time - arguing over a questionable accounting treatment if the SEC has already addressed it sometime during this conference. That’s one reason this conference is so well-attended. (It doesn’t hurt that it provides a huge dollop of required continuing professional education, either.) The conference provides three days’ worth of reminders for smart auditors who incorporate them into their audit plans.

    Why should investors care? Forewarned is forearmed. Investors would do well to understand issues covered at this conference as well because the SEC staff sees financial statements during their review process well before investors read annual reports. What curious investor wouldn’t want to know the SEC staff’s gripes with current reporting? The comments of these staff persons don’t predict accounting meltdowns in the making, but their comments should remind investors that firms don’t always apply generally accepted accounting principles correctly - unintentionally or not. If there’s a later revision to issued financial statements, that might be enough of a reason for investors to care about “what kept the SEC busy.”



File size 81 K
Date Thu 03/21/2013 @ 01:49
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 14: (R) Looking For Truth About High Executive Pay: An S&P 500 Survey

There’s no shortage of emotional reactions on the subject of executive compensation. With the events of the past couple years fresh in the memories of investors and the general populace, executive paychecks and bonuses have been popular outlets for their rage. The focus of attention is usually on absolute pay levels, which seem absurdly high - especially in the financial sector. It’s hard to justify bonuses denominated in millions of dollars for executives whose minions came perilously close to blowing up the entire financial system, making themselves obvious targets for politicians currying favor with an angry electorate. Examined in absolute terms, executives will always appear overpaid: their paychecks are bound to be bigger than the ones of those doing the examining, so the envy factor will color judgment. Yet it may also be correct. The picture of compensation is seriously incomplete: proxy statements report the total compensation of only the top five officers, while the financial statements provide information about only the stock compensation provided to the entire employee population. Even within those constraints, investors can get a tighter grip on the fairness of executive compensation. Comparison of executive compensation to the kinds of investment spending that produces shareholder returns provides even more insight into pay fairness.



File size 149 K
Date Thu 03/21/2013 @ 01:49
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 13: Surveying The S&P 500 Financials: 2Q09 Fair Value Effects

    The trio of FASB’s April turbo-standards related to fair value reporting have now been adopted by all publicly-traded companies. In brief, those standards made the recognition of other-than-temporary impairments less painful to report because firms could direct parts of the charges to other comprehensive income; made it easier for firms to employ “Level 3” reporting of asset or liability valuations; and increased the frequency of supplemental fair value reporting.

    Because they deal most directly with financial instruments, those three amendments have the greatest impact on financial institutions. In this report, the magnitude of those effects are presented for the 79 firms composing S&P 500’s financial sector.  Some findings: banks saved more than a $1 billion in regulatory capital, thanks to the sweetened other-than-temporary impairment rules; the entire S&P 500’s earnings benefitted by nearly $5 billion and over 4%; and fair value disclosures showed a surprising lack of confidence in the credit markets for the insurance industry.



File size 107 K
Date Thu 03/21/2013 @ 01:48
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 12: Fair Value, IFRS & The US: Where It’s All Going

Like it or not, financial accounting affects the way investors do their homework in making investment decisions - and in turn, the standard setters who generate accounting rules affect financial accounting. Investors concerned about the way accounting standards and standard setters will affect their work should be on the edge of their seats this month. While this September may not be showing its characteristic market volatility, things are rocking in accounting-land.

    Investors are suffering accounting fatigue from the ongoing (un)holy war over fair value reporting, yet they’re perpetually curious about whether U.S. accounting standards will go the way of the dodo bird if International Financial Reporting Standards become the American measure. Financial instruments proposals from the IASB and the FASB will  be a topic at this week’s Pittsburgh G-20 summit, and the discussion could define the role that fair value accounting will play in future financial  reporting - and the fate of independent U.S. accounting standards.



File size 202 K
Date Thu 03/21/2013 @ 01:48
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 11: S&P 500 Stock Compensation: Running Out Of Options

Executive compensation is a perennial sore spot for investors. Compensation packages designed to knit together shareholder interests and those of the managers working for them were subverted over the years by substandard accounting standards that let compensation tied to option rewards go unreported.  By the time the faulty accounting was repaired in the mid-2000’s, the damage was probably irreparable: super-size compensation packages continued to be the norm in American companies. Even though there’s complete expense recognition given to pay denominated in options, and even though there’s now a compensation effect on earnings - equity instruments for pay continue to be dispensed like water from a fire hose.

    Instead of focusing simply on the compensation of a handful of executives, investors should focus on the relationship between “incentive” compensation and other forms of deferred compensation - like pensions. Investors worry about being on the hook for contributions to sinking pension funds - but fail to consider how management stock comp largesse compares to pension funding. Investors also fail to compare firm-wide stock comp largesse to factors affecting corporate returns - factors like research and development or capital expenditures. Finally, investors fail to look at how their ownership interests are crowded out by stock comp plans. These overlooked relationships are examined for the S&P 500 in this report.



File size 282 K
Date Thu 03/21/2013 @ 01:48
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 10: Please Re-Lease Me: New Accounting For Lessees

Since 1976, lease accounting by lessees has been fairly consistent - which is to say, there hasn’t been much accounting for the assets used by lessees in their operations beyond the recognition of rental expense in the income statement. That’s because FASB Statement 13, “Accounting for Leases,” divided lease reporting into capital and operating leases. The capital lease treatment results in leased assets being reported on balance sheets and depreciated, along with a related lease obligation; the operating lease treatment showed no assets or liabilities on the balance sheet, but reported lease payments as rental expense. Being a “bright line” kind of standard - one whose application depended on meeting explicit criteria - Statement 13 resulted in minimal lessee recognition of leased assets and obligations.

IFRS lease accounting standard IAS 17 is less prescriptive than its U.S. counterpart, but produced similar results: a surfeit of operating leases, and a dearth of capital (or finance, in IFRS parlance) leases. In 2006, the FASB and the IASB started work on a joint project to remedy lessor and lessee accounting; to speed the process along, they decided in July 2008 to focus only on lessee accounting as a first phase. A “discussion paper” was issued in March 2009. If the provisions of the discussion paper become a final standard, balance sheets around the world will no longer be spared from showing the assets and obligations involved in producing returns - regardless of whether assets are leased or purchased.



File size 94 K
Date Thu 03/21/2013 @ 01:47
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 9: Don’t Worry, Be Happy: Effects Of New Fair Value FSPs

In April, the FASB squeezed out a trio of amendments to various fair value reporting standards, in response to Congressional coercion to “do something” about the financial crisis. The Congressional threat: if you don’t do something, we’ll legislate relief from your standards.  Those three amendments - FASB Staff Positions, or FSPs for short - become effective in the second quarter. Firms were permitted to adopt them early, in certain combinations of the standards. Because one of the FSPs blunted the reported earnings effect of writedowns of impaired securities holdings, an incentive exists for firms with shaky capital to adopt early. At least 94 firms adopted the trio of standards early; 20 of them were members of the S&P 500 financial sector. Early adoption of the FSPs spared them pain: without deploying them, the S&P 500’s financial sector would have reported half as much in earnings for 2009’s first quarter.



File size 112 K
Date Thu 03/21/2013 @ 01:47
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 8: International Taxes: Follow The Money

The Obama administration is now moving its attention away from ending the economic crisis, and is focusing on ways to fund the cure - and fund the rest of the nation’s spending, too. The administration has released its fiscal year 2010 revenue proposals, and there are some bold, ambitious plans in it for changing the way multinational firms figure their U.S. taxes. One part of the plan: reduce or eliminate foreign tax benefits that corporations have long enjoyed.

It’s still early in the horse-trading game. Companies may have to live with some dire consequences to their business models that have developed over the years, but they also might get something in return: maybe a lower marginal tax rate or increased tax benefits for new hires or investment. While foreign earnings remain the tax target of choice, however, it’s wise to figure which companies are at risk of having the biggest changes in their multinational way of life - and what consequences their investors might face aside from just higher income taxes. There are plenty of clues firms give about their foreign operations, but they’re veiled and rarely cohesive. This is a great time to get familiar with them, and in this report, we show you how to find them and evaluate them.



File size 158 K
Date Thu 03/21/2013 @ 01:47
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 7: Benefit Plans Without Bounty: The S&P 500 In 2008

Financial institutions - and investors in general - weren’t the only ones who bore the brunt of 2008’s market misery. Companies who had long ago locked themselves into generous benefit plan arrangements saw their balance sheets suffer as their once well-funded benefit plans withered, along with the fortunes of their retirees and employees. 
 
Whether firms entered such employee benefit arrangements to find labor peace or just trying to remain competitive in the market for labor, many are saddled with more leverage than they ever wanted - and they’ll have to make strides in2009 in reducing that leverage through higher pension plan cash contributions. In this report, we look at the capital and cash flow effects of benefit plan funding, as well as the earnings quality effects.


File size 728 K
Date Thu 03/21/2013 @ 01:46
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 6 (R/T): Double Mint: Gumming Up Fair Value Reporting

The pressure brought to bear on FASB to “fix mark-to-market accounting in three weeks or else” - Representative Paul Kanjorski’s message during March 12 hearings - resulted in the release of twin proposed FASB Staff Positions on St. Patrick’s Day, with a comment period ending on April Fool’s Day. For investors, there’s nothing to celebrate in these proposals; for a bank, their passage will be like owning the keys to the U.S. mint. In preparer/auditor debates over impairment, these changes will give the upper hand to preparers in valuing assets and postponing impairment recognition.



File size 55 K
Date Thu 03/21/2013 @ 01:46
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 5: Look Sharp! What’s Hot In This Year’s Annual Reports

If bad news is best delivered first and in the greatest detail, then this must be 10-K season. There’s bad news aplenty out there in the market, and now an up-close-and -micro version of it is landing on your desk and seeping into your e-mail box. Yes, it’s that time of year again.

    This is the twelfth Accounting Observer heads-up on what to seek in the current batch of annual reports. Easy prediction: this year’s annual reports are going to be thicker than ever. Preparers and auditors ought to be erring on the side of caution and putting out more disclosure than ever, as reporting risks are magnified by the credit crisis. The exercise for investors remains the same: you get out of it what you put into it. There’s no single magic disclosure or ratio that’s going to save you the kind of investment agony experienced in 2008 (and so far in 2009, too.) Reading the annual reports well enough to understand the risks involved might scare the dickens out of you - but it might also lead you to the right kind of investment decisions.

    Get the most out of the annual reports: have a plan. Don’t just expect“something important” to smack you in the face if you blaze through them - figure out what’s most important first, then search for it as you read the whole thing. Be aware of how the current environment affects the company; and look for information in the accounting that either supports or contradicts what you expect. Fire up a pot of coffee, and let’s get going.



File size 111 K
Date Thu 03/21/2013 @ 01:44
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 4: The SEC’s IFRS Roadmap: Best Not Followed?

In late November, the SEC released its long-anticipated “roadmap” proposal for bringing the United States financial reporting under the umbrella of International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. If you accept the premise that IFRS is the financial reporting road the whole world is traveling upon, then old-fashioned U.S. GAAP is the road less traveled.

Maybe Frost had it right. Investors are better off taking the road less traveled; it could make all the difference in the world to them, if this current proposal is the only alternative. That’s not because the standards embodied in the IFRS are inherently unsound. It’s simply because the proposed plan for conversion to IFRS from GAAP is an idea that is ahead of its time. When the milestones outlined in the proposal have been completely achieved, then the conversion might really benefit investors. The proposed timetable is hardly credible, however.

Billed as a single proposal, the “Roadmap document” really contains two proposals: one allowing firms to convert to IFRS early, and a second proposal describing how the transition will take place assuming all the milestones have been accomplished. Investors who don’t plan on retiring in the next five years - and there aren’t many these days - and who also plan on using financial statements should pay attention to this proposal’s implications for them.



File size 117 K
Date Thu 03/21/2013 @ 01:44
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, Nos. 02 & 03: Accounting Issues: 2008 Reviewed, 2009 Previewed

Want to know where financial reporting is at its worst? Check the docket of the Financial Accounting Standards Board. Investors and analysts wanting a laundry list of accounting standards needing repair - due to abuse, clever investment bankers’ innovations, or a little of both - can find one in the FASB’s "to do" list. There’s something new added each quarter. Sometimes investor information needs repair because new kinds of deals "end-run" existing standards and disclosures; sometimes standards need repair because the existing ones were poor from the start.

It’s often said that accounting is the language of business and investing - and if that’s so, an issue worthy of a place on the standard-setters’ agenda, ought to be worthy of investor note. It means that the "language of business" is in trouble, with flawed information being provided to investors.

Another reason for watching the FASB agenda: accounting proposals that become actual standards often result in changed corporate behavior. Investors should understand changes to accounting standards themselves, so they can evaluate managers’ resulting actions. Investors choosing to ignore what’s hot in accounting do so at the risk of missing new meanings in "the language of business."



File size 117 K
Date Thu 03/21/2013 @ 01:44
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 18, No. 1: What Keeps The SEC Busy - 2009

The American Institute of Certified Public Accountants held its annual "Current SEC & PCAOB Developments Conference" in Washington, DC last month, with speakers from the SEC, the FASB and the PCAOB. Swarms of accountants from all parts of America gather each year to capture year-end audit advice from the SEC’s staff. Even though the economy has belted accountants as well as investment bankers, the attendance was still around 2,500.

Soon, those same auditors will be poring over client’s accounting records, playing a gatekeeper role in the financial reporting process. From the auditor’s point of view: why let a client waste their time - and yours - pursuing a shaky accounting treatment if the SEC has already described its views on it during this conference? Forewarned is forearmed; that’s one reason this conference is so well-attended. The conference is three days’ worth of warnings and reminders to wake up auditors. The smart auditors take advantage of the accounting intelligence gathered by the SEC during the year, and imparted to the audience; the not-so-smart ones skipping the conference learn things the hard way by making the mistakes brought to light by the SEC’s staff. Three days spent at this conference can pay off handsomely in terms of time saved.

What’s in it for investors? They should understand issues covered at this conference as well. The SEC staff sees financial statements in the review process long before investors read annual reports; what curious investor wouldn’t want to know what the SEC has found objectionable in their reviews? While the SEC staff comments won’t predict accounting meltdowns in the making, their comments should remind investors that some firms may either misunderstand or misapply generally accepted accounting principles. When the correction or revision arrives, the ensuing market confusion can be enough of a reason for investors to care about "what keeps the SEC busy."



File size 73 K
Date Thu 03/21/2013 @ 01:44
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 17, No. 13: Fair Value: What Will The SEC Say?

The full effects of the Emergency Economic Stabilization Act of 2008 won’t be known for years. No other piece of legislation has ever had such an impact on the relationship between business and government - or between capital and ownership of capital. The line between shareholders and state has become quite blurry.

It might have an impact on the way that companies report their results to shareholders, too - and it won’t take years to find out. The EESA charged the SEC with conducting a study on "market-to-market accounting standards as provided in Statement Number 157 of the Financial Accounting Standards Board, as such standards are applicable to financial institutions, including depository institutions." The singling-out of the oft-demonized "Statement Number 157" gives hope to the banking lobby seeking to overturn fair value reporting.

Will the SEC act in the interests of shareholders and avoid any "reform" of fair value reporting? Or will it cave in to the demands of bankers who couldn’t resist their primal lending and investing urges? Politics is never a sure thing - but it’s possible to take a close look at the SEC’s responsibility under the Act and see what facts they might find as they execute their duty. How they will interpret those facts - and then act upon them - is very much an open question until January 2, when the SEC report of its findings and determinations is required to be submitted to Congress.



File size 138 K
Date Thu 03/21/2013 @ 01:08
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 17, No. 12: A Pension Deficit Disorder: End Of Year Issues

If 2008 ended today, there would be no tears shed on Wall Street to mourn its passing. (Except for the shorts who made the right calls on financial institutions.)

2008’s effects on the financial condition of companies in 2009 are starting to be puzzled out by Wall Street, however. When 2008 finally does end, the funded status of defined benefit pension plans on that day will have ongoing effects in 2009. Unless there’s a sudden updraft in world markets, pensions will likely be seriously underfunded. That will have consequences for 2008 balance sheets - and 2009 reported earnings and cash outflows.

Precise estimates of how funding status will affect current balance sheets and future earnings and cash flows are not possible, but investors can at least develop ranges of outcomes to help them consider exposures. Offered here: reminders on pension reporting mechanics to help one better evaluate a firm’s pension prospects.



File size 93 K
Date Thu 03/21/2013 @ 01:08
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 17, No. 11: 3Q2008: 20 Questions To Ask On Conference Calls

Financial tsunami, unprecedented volatility, history-making intervention - the financial press has already exhausted its supply of clichés, and we may be in just the early innings of the game. (There’s another one for you.)

No matter what happens next, analysts and investors still have to parse the financials - and they always start parsing the minute the earnings are released. The earnings call is where, for better or worse, many snap judgments get made by investors based on scanty information. What’s left unasked in the conference calls might be the nugget or two that provides a springboard for more management discussion leading to profitable insights.

Miss your chance to ask relevant questions in the earnings calls, and you might not get another chance. In a Regulation FD world, it’s not as easy to get a straight answer to a tough question; CFOs and investor relation managers fear giving information in a way that might be deemed "selective." After a quarter like this one, the third quarter earnings calls will be more crucial than usual - and you don’t want to wait for the 10-Qs to show up. They might not even contain the information you want. Offered here: 20 questions to ask (or listen for) in third quarter earnings calls which might expose risks or reveal operating nuances that help you better understand a firm’s performance or financial status.



File size 87 K
Date Thu 03/21/2013 @ 01:08
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 17, No. 10: Statement 160: Getting Your (Minority) Interests In Line

Last month, the sweeping changes in acquisition accounting, Statement 141 (Revised), were reviewed. One aspect of the new acquisition accounting: firms will have to change the way they account for what’s long been called "minority interests" that result from the firm taking only a partial investment in another firm. Statement 141 (R) will make firms report existing minority interests at their current fair value when there’s a change in ownership stake, as in a step acquisition.

Changes in minority interest accounting didn’t stop there. Rather than lard up the acquisition standard with new accounting for minority interests, the FASB issued a separate standard for the second-level effects of acquisition accounting. Statement 160, "Noncontrolling Interests in Consolidated Financial Statements" changes many facets of these financial statement ghosts, resulting in a treatment more comparable to international financial reporting standards. While investors don’t often pay much attention to minority interest amounts, either on the balance sheet or the income statement, the new standard will make subtle changes affecting basic calculations in return on equity, leverage ratios, and profit margins.



File size 74 K
Date Thu 03/21/2013 @ 01:07
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 17, No. 9: Statement 141(R) Begins - With A Big Broom

"Sweeping" is perhaps the best word that describes the changes in acquisition accounting coming up in a few short months. Around the turn of the century, the original Statement 141, "Business Combinations," tossed out the opaque pooling-of-interests accounting choice for merger accounting. In tandem with Statement 142, "Goodwill and Other Intangible Assets," which ended the amortization of goodwill, the last revision of acquisition accounting seemed revolutionary.

As far-reaching as those changes were, there was plenty of room for improvement in accounting for acquisitions. Four years after the 2001 standards went into effect, the FASB and the IASB jointly considered revising their respective business combination standards. The completed FASB standard, Statement 141(R), goes into effect in years beginning after December 15, 2008. Naturally, it will only affect those firms making acquisitions - so there won’t be any broad-based effects to notice immediately. Over time, however, practically all companies acquire others - and the increased transparency created by Statement 141(R) around deals will show much more about the economics of deal-making and the after-effects. The overarching theme of the new standard: more fair value reporting, at the time of an acquisition and in reporting afterwards.



File size 90 K
Date Thu 03/21/2013 @ 01:07
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

Volume 17, No. 8: S&P 500 Stock Compensation: Who Needs Options?

It’s not the addiction it used to be. Issuing stock options as a way of rewarding employees is not as prevalent as it once was, and restricted stock compensation has moved to the forefront. When stock option issuance was at its most popular, financial reporting was seriously incomplete because the faulty accounting for stock options did not show investors all the costs of production - and at the companies where options usage was heaviest, costs were the most understated.

The required application of Statement 123(R) in 2006 changed that: it put options on the same level accounting playing field as cash and restricted stock awards. No more "stealth compensation." While many pundits expected investors to be turned off by sudden recognition of stock option compensation, the S&P index advanced almost 14% in 2006 - and the earnings of the S&P increased over 21%, despite new recognized costs. The sky didn’t fall in 2006.

The sky did fall in 2007 - but it wasn’t because of stock option accounting. Though companies now have to account for all manner of compensation, they still don’t always seem to take shareholders into consideration. This report examines trends in stock compensation for both restricted stock and options in the S&P 500.



File size 609 K
Date Thu 03/21/2013 @ 01:06
Author Jack Ciesielski
EMail jciesielski@accountingobserver.com

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