Accountants: A question.

[Tim]

The market is doing well today, reportedly due to the choice to relax the standards by which companies can value their assets. Here's one article that I read:

http://www.economicnews.ca/cepnews/wire/article/275829

My question: Is this a permanent change? If my understanding is correct, many of these standards were put in place after the Enron fiasco. Do you think we are safer this time around if this is indeed a permanent change? What are your thoughts in general?

[Indy Coug]

I'm no accountant, but I think they need to eventually find some middle ground, but given the urgent circumstances of the global-scale capital crunch, what they have done is the right thing for now.

Hopefully they can come up with an equitable long-term solution in the near future that affords "downside" and "upside" protection. The bottom line is that the rules governing asset valuation and the considerable fallout effect that has on capital requirements is forcing banks, insurance companies, et al to overcapitalize.

[beelzebabette]

The market is doing well today, reportedly due to the choice to relax the standards by which companies can value their assets. Here's one article that I read:

http://www.economicnews.ca/cepnews/wire/article/275829

My question: Is this a permanent change? If my understanding is correct, many of these standards were put in place after the Enron fiasco. Do you think we are safer this time around if this is indeed a permanent change? What are your thoughts in general?

My favorite article on the topic: http://www.journalofaccountancy.com/...tyinAccounting It has background explaining how the "standard" came to be and arguments for and against it. I tend to agree with the GM guy giving the con position given my background.

[Pheidippides]

The market is doing well today, reportedly due to the choice to relax the standards by which companies can value their assets. Here's one article that I read:

http://www.economicnews.ca/cepnews/wire/article/275829

My question: Is this a permanent change? If my understanding is correct, many of these standards were put in place after the Enron fiasco. Do you think we are safer this time around if this is indeed a permanent change? What are your thoughts in general?

I'll make a comment - I'm not an accountant, but I play one on TV. I know professionals who think that mark-to-market rules have been as great a cause of this financial problem as anything. I certainly think they have contributed - mortgage backed securities, in my view, are even now undervalued to some degree (i.e., if 20% of your mortgages default, you still have value because 80% are paying, even if you can't readily sell the securities on a market). This in turn has made the liquidity crisis - the reason why banks aren't lending (and why TARP money may just sit there) is because the banks need to hold that money in reserve to meet federal guidelines due to the suddenly undervalued assets. Even though if you come to me and say, hey, I got this security that I paid a buck for, and now it looks like 20% of the underlying stuff is crap, so would you buy it for 50 cents, I do it in a heartbeat (assuming diligence checks out).

It's not the first time I've seen mark-to-market cause major problems (a hedging program for a mining operation jumps to mind). However, there is movement now towards an international standard of accounting (I can't remember the acronym) in lieu of GAAP - and the international standard supposedly has even stricter mark-to-market requirements. So I would answer that the FASB move is temporary in the long term unless something else changes too.

That's from the point of view from a finance attorney who pretends to know more about accounting than is healthy. My personal view is that we really did hit a perfect shitstorm (don't get me started on the credit default swap issues and such). Real accountants may disagree or be able to explain better.

[TripletDaddy]

The market is doing well today, reportedly due to the choice to relax the standards by which companies can value their assets. Here's one article that I read:

http://www.economicnews.ca/cepnews/wire/article/275829

My question: Is this a permanent change? If my understanding is correct, many of these standards were put in place after the Enron fiasco. Do you think we are safer this time around if this is indeed a permanent change? What are your thoughts in general?

A few brief thoughts on this (although I am not an accountant, either)...

It is important to note that mark-to-market accounting methods have been around for ages, way before Enron. FASB hasn't really done anything new, but rather simply laxed standards that already existed. And I think the real post-Enron change was not MTM doctrines, but rather in the establishment of SarbOx and greater need for independence.

Also, technically, mark-to-market is not a license for all companies to re-value their assets. It is a method change with primary applicability in financial sectors. So we should not expect mass retailers, automotive, etc to be benefiting much from FASB's announcement.

This cannot be a perm change because the only thing FASB is really saying is, "go ahead and do what you need to do to appear healthy, thereby ultimately improving consumer confidence." Ultimately, as Indy pointed out, there will need to be a clamping back down and a restriction of standards.

Somewhat related to this is the trend for global companies to ditch FIN48 and migrate to IFRS when preparing Ks and Qs. IFRS has more wiggle room when it comes to prepping financials than FIN48. It is amazing how misleading corporate financials can be, even when they have met audit approval and SEC standards.

[Pheidippides]

A few brief thoughts on this (although I am not an accountant, either)...

It is important to note that mark-to-market accounting methods have been around for ages, way before Enron. FASB hasn't really done anything new, but rather simply laxed standards that already existed. And I think the real post-Enron change was not MTM doctrines, but rather in the establishment of SarbOx and greater need for independence.

Also, technically, mark-to-market is not a license for all companies to re-value their assets. It is a method change with primary applicability in financial sectors. So we should not expect mass retailers, automotive, etc to be benefiting much from FASB's announcement.

This cannot be a perm change because the only thing FASB is really saying is, "go ahead and do what you need to do to appear healthy, thereby ultimately improving consumer confidence." Ultimately, as Indy pointed out, there will need to be a clamping back down and a restriction of standards.

Somewhat related to this is the trend for global companies to ditch FIN48 and migrate to IFRS when preparing Ks and Qs. IFRS has more wiggle room when it comes to prepping financials than FIN48. It is amazing how misleading corporate financials can be, even when they have met audit approval and SEC standards.

IFRS was what I was thinking of. But my understanding is that IFRS is more strict on the MTM stuff than GAAP - is that not the case? I do agree on how misleading financials can be - and I've been formally trained on how to interpret them.

[TripletDaddy]

IFRS was what I was thinking of. But my understanding is that IFRS is more strict on the MTM stuff than GAAP - is that not the case? I do agree on how misleading financials can be - and I've been formally trained on how to interpret them.

I have only had cursory exposure to IFRS as it pertains to MTM, so can't say whether it is more restrictive. Logically, it would make sense to me that other countries would be more restrictive on domestic MTM (transfer pricing issues come to mind, for one thing).

I know firsthand that right now, MTM method changes are a hot product in the tax world. Lots of financial companies are looking to revalue their assets and generate some cash refunds before filing their next return. They are only a simple 3115 away from quick cash.