December 31, 2007

Bob Jensen's New Bookmarks n December 31, 2007
Bob Jensen at Trinity University 

For earlier editions of Tidbits go to http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/.

Bob Jensen's Blogs --- http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm
 

Bob Jensen's past presentations and lectures --- http://www.trinity.edu/rjensen/resume.htm#Presentations   
 

Bob Jensen's various threads --- http://www.trinity.edu/rjensen/threads.htm
       (Also scroll down to the table at http://www.trinity.edu/rjensen/ )

Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm

Click here to search this Website if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/

Bob Jensen's Home Page is at http://www.trinity.edu/rjensen/

CPA Examination --- http://en.wikipedia.org/wiki/Cpa_examination

Wikipedia has a rather nice summary of accounting software at http://en.wikipedia.org/wiki/Accounting_software

Bob Jensen's accounting history summary --- http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Bob Jensen's accounting theory summary --- http://www.trinity.edu/rjensen/Theory.htm

Accountancy Discussion ListServs:

For an elaboration on the reasons you should join a ListServ (usually for free) go to   http://www.trinity.edu/rjensen/ListServRoles.htm

AECM (Educators)  http://pacioli.loyola.edu/aecm/  AECM is an email Listserv list which provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm

CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/  CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.

Yahoo (Practitioners)  http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the activities of the AICPA. This can be anything  from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.

AccountantsWorld  http://accountantsworld.com/forums/default.asp?scope=1  This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.

Business Valuation Group BusValGroup-subscribe@topica.com  This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM]

Recent Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm

2007
September 5       September 10    September 18    September 24  

2007
October 1          October 10        October 17        October 30 

2007
November 8      November 15     November 22    November 29    

2007
December 6      December 11      December 18    December 26  

 

Tidbits Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm

New Bookmarks Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/Bookurl.htm

Bob Jensen's Threads --- http://www.trinity.edu/rjensen/Threads.htm

Humor Between December 1 and December 31, 2007  --- http://www.trinity.edu/rjensen/book07q4.htm#Humor123107  

Humor Between November 1 and November 30, 2007 --- http://www.trinity.edu/rjensen/book07q4.htm#Humor113007 

Humor Between October 1 and October 31, 2007        --- http://www.trinity.edu/rjensen/book07q4.htm#Humor103107  

Humor Between September 1 and September 30, 2007 --- http://www.trinity.edu/rjensen/book07q3.htm#Humor093007 

Links to Documents on Fraud --- http://www.trinity.edu/rjensen/Fraud.htm

Bob Jensen's complete set of Enron Updates are at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates

Bob Jensen's threads on the Enron scandal are at http://www.trinity.edu/rjensen/FraudEnron.htm

Large International Accounting Firm History --- http://en.wikipedia.org/wiki/Big_Four_auditors

Fascinating Statistics --- http://www.trinity.edu/rjensen/FascinatingStatistics/Statistics.htm

It saddens me that Sidney Davidson recently died. He was a good friend and a great accounting professor for many years at the University of Chicago.

His Accounting Hall of Fame module summarizes some of his many accomplishments --- http://snipurl.com/sidneydavidson

It also saddens me that Bob Sprouse also died in 2007. Bob was an accounting professor and a former Board member of the FASB.

Bob's Accounting Hall of Fame module --- Click Here

Integrity is a cornerstone of our culture and we continue to make great progress in our effort to build a model ethics and compliance program. This means fostering awareness, trust, and personal responsibility at every level of the firm. This year, we issued our first ever ethics and compliance progress report and guidebook. This report, Ethics and Compliance Report 2007: It Starts with You, highlights initiatives that we have in place to support our values-based compliance culture, and features real-life stories of some of KPMG's partners and employees who faced ethical challenges and how they handled them. We responded to heightened interest in ethics education and input from your fellow academics and created our KPMG Ethical Compass—A Toolkit for Integrity in Business, a three-module package of classroom materialsto help you present ethics-related topics to your students.
An Open Letter From Tim Flynn, Chairman and CEO, KPMG LLP
This was part of an email message that I assume was sent to the academy of accountants.

Once again the link to the Ethics and Compliance Report 2007 is at http://www.kpmgcampus.com/whoweare/ethics.pdf

Bob Jensen's threads on the triumphs and trials of KPMG are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

A New Type of Intangible Investment (sort of not yet legal in the U.S.) --- Litigation
How should it be booked and carried in financial statements?
I say "sort of" since this intangible asset might be buried (as Purchased Goodwill") in acquisition prices when firms are purchased purchased or merged.

The notion of litigation as a separate asset class is a novel one. It's hard to imagine fund managers one day allotting a bit of their portfolio to third-party lawsuits, alongside shares, bonds, property and hedge funds. But some wealthy investors are starting to dabble in lawsuit investment, bankrolling some or all of the heavy upfront costs in return for a share of the damages in the event of a win. The London-managed hedge fund MKM Longboat last month revealed plans to invest $100million (£50.5million) to finance European lawsuits. Today a new company, Juridica, floats on AIM, having raised £80million to make litigation bets.
"The law is now an asset class," The London Times, December 21, 2007 --- http://business.timesonline.co.uk/tol/business/columnists/article3080766.ece

Jensen Comment
Under U.S. GAAP, intangible assets are generally booked only when purchased and are not conducive to fair value accounting afterwards. Probably the most serious problem in both accounting theory and practice is unbooked value (and in many cases undisclosed) of intangible assets and liabilities. Do the values of human capital and knowledge capital ring a bell? Does the cost retraining the world's workforce to use Office software other than Microsoft Office (Word, Excel, PowerPoint, etc.) ring a bell?

Contingent liabilities (particularly pending lawsuits) are problematic until the amount of the liability is both reasonably measurable and highly probable. Until now, contingent litigation assets were not investment assets. Contingent liabilities were booked as current or past expenses. Now purchased litigation assets having future value? Horrors!

In the past when a company purchased another company, some of the "goodwill" value above and beyond the traceable value to net tangible assets could easily have been the value of future litigation such as when Blackboard acquired WebCT and WebCT's patents on online education software. Patents and Copyrights may have value with respect to fending off future competition.

But patents and copyrights may also have value in future litigation regarding past infringements. Now hedge funds might invest in bringing litigation to fruition.

Intangible assets and liabilities are, and will forever remain, the largest problem in accounting theory and practice! In some cases, such as Microsoft Corporation, booked assets are so miniscule relative to unbooked intangible assets that the balance sheets are virtually a bad joke.

An enormous problem, besides the fact that current value of intangibles cannot be counted, current value can change by enormous magnitudes overnight as new discoveries are made and new legislation is passed, to say nothing of court decisions. Tangible asset values can also change, but in general they are not as volatile.

December 25, 2007 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

Bob,

SFAS 141R (available on the FASB web site) substantially changes the accounting for both contingent assets and liabilities in connection with business combinations. In fact, 141R coupled with SFAS 160 on noncontrolling interests makes major changes to both the accounting for business combinations and the accounting for consolidation procedures. While the new rules can't be applied until 2009, anyone teaching advanced accounting or where ever else these topics are covered should throw out their old lesson plans and be prepared to enter into an entirely new world of accounting - not for the better in my humble opinion.

By the way, another interesting thing to read on the FASB web site is the proposal to reduce the size of the FASB and make some other changes to improve the standard-setting process. We celebrated our family Christmas a few days ago because of travel plans and I'm working on my comment letter to the Financial Accounting Foundation today.

Merry Christmas!

Denny

December 25, 2007 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

What I found interesting about 141R is the discussion in the appendices that showed both the FASB and IASB views and how the Boards reached convergence.

141R also added a couple paragraphs to FIN 48 that result in goodwill no longer being adjusted if the contingent tax liability is increased or decreased. Instead the DR is to tax expense, which makes a lot more sense to me. If I read the statement correctly, the purchased assets and liabilities are stated at fair value under a recognition, then measurement principle. Taxes are exempt from those two principles; instead FAS 109/FIN 48 apply. What I couldn't tell is if the purchaser still has up to one year (the maximum measurement period) to get the tax contingent liability right before the DR goes to tax expense. Can anyone help me?

Amy Dunbar
UConn

From the AccountingWeb on December 27, 2007 --- http://www.accountingweb.com/blogs/eva_lang_blog.html

On December 4, 2007, the Financial Accounting Standards Board issued FASB Statements No. 141 (revised 2007), Business Combinations. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. The revision of 141 is part of the FASB's push toward "fair value," or mark-to market accounting.

Financial Week (December 10, 2007) reports that Dennis Beresford, a former FASB chairman now serving on a Securities and Exchange Commission advisory committee that is studying the U.S. financial reporting system says “The rules will be difficult to apply and will require companies and analysts to relearn a lot of things.” The article goes on to say that the revisions to 141 “essentially extend the fair-value requirements to new areas. That will increase the valuation work required of corporate finance departments, and in some cases jack up the volatility of reported earnings as various assets and liabilities are marked to market.”

"FASB Issues FASB Statements No. 141(R), Business Combinations and No. 160, Noncontrolling Interests in Consolidated Financial Statements," SmartPros, December 6, 2007 --- http://accounting.smartpros.com/x60031.xml

Jensen Comment
You can download FAS 141(R) from http://www.fasb.org/st/index.shtml#fas160

December 31, 2007 reply from Gerald Trites [gtrites@ZORBA.CA]

Warren Buffett referred to "mark to market" as "mark to myth", a comment that I think is right on the mark.

Bob Jensen's threads on intangible/contingency asset asset and liability accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#TheoryDisputes 

"Fair Value: Bumpy Road from Theory to Practice American Banker," by Todd Davenport, American Banker, December 28, 2007 --- http://www.americanbanker.com/article.html?id=2007122753FUHMD4
(Link forwarded by Denny Beresford)

To its critics, fair-value accounting is far from fair and has only a casual relationship with value. To its supporters, fair-value accounting is a logical response to innovative and complex financial markets that have outstripped traditional valuation methods.

Though it has long been a passionate topic among accounting practitioners, academics, and corporate financial officers, the larger investing public has thankfully been spared the details of the debate. But that's changing.

Early this year several companies — most of them banks, investment banks, and insurers — adopted the clearest articulation yet of fair value by the Financial Accounting Standards Board. Hopes for an easy transition to the new standard have run hard against some of the worst market conditions in recent memory, turning what might have been a clinical application of the new model into a messy tangle that has undermined the credibility of those struggling to implement it and pushed the debate about accounting methods out of the corporate controller's office and into the marketplace. Even the president of the United States is weighing in on how banking companies should recognize their losses, and the Securities and Exchange Commission has launched an investigation of securities valuation by dealer banks.

Questioning the reliability of banks' financial statements is not novel sport. The industry's accounting for, among other things, mergers, loan losses, derivatives, and off-balance-sheet instruments has fed the skepticism of analysts, investors, and regulators. As a general matter, the larger and more complex the bank, the deeper the questions surrounding the accuracy of the financial statements.

Anyone who isn't convinced of that skepticism is likely ignoring the market's treatment of large banking companies. As 2007 draws to a close, the country's three largest banks — Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co. — all trade at under 10 times their earnings over the past year. That explicit vote of no confidence is as much an expression of concern about banks' asset valuations as it is about their earnings prospects.

Fair-value accounting, which in the best of all possible worlds would have ameliorated those concerns, has only exacerbated them. In the midst of a subprime crisis in which writedowns of illiquid, opaque financial instruments — including collateralized debt obligations and asset-backed securities — by global banking companies now total more than $75 billion, the fundamental question is what happens next.

Cynicism runs deep, and in every direction. Some observers wonder whether the new accounting standards have forced a reckoning that the industry would have papered over in the past. Others wonder whether banks continue to underestimate the true nature of their losses, while still others wonder whether the fair-value method has given banks a new cookie jar from which to feed earnings in the future.

The accounting board "tried to accommodate everybody's movement into these less transparent, less liquid asset classes, and they enabled the mess by letting people do that if they merely assigned values to them — and there is no way to value them," said Chris Whalen, the managing director at Lord, Whalen & Co.'s Institutional Risk Analytics. "The great fallacy that we have all committed is allowing ourselves to get pulled into asset classes that are not liquid, and fair value means nothing in an asset class that is illiquid — it's only a matter of debate."

The parade of fair-value-related writedowns by global banking companies simultaneously implementing new fair-value standards has led some observers to see something less than a coincidence. Others claim that the accounting hasn't changed much, if at all, and frankly doubt that banks would have been able to hide their subprime-related losses. Truth, like value, is an elusive standard.

Neri Bukspan, the chief accountant at Standard & Poor's, said he believes the adoption of the fair-value standards has influenced the level of writedowns reported by banking companies.

The standards "crystallized the vision around fair value" and "put much greater emphasis on the importance of market attributes and transactions in the market," he said. "I think it created a greater focus on the relevant data points to which you look as a reference for the writedowns."

David Morris, a former controller at JPMorgan Chase and now an accounting consultant, said the fair-value precepts laid out in the accounting literature before the adoption of the new standards are similar enough that he sees little impact from the standards.

"I think the writedowns would have been about the same and probably would have occurred in the same time frames," he said. " I don't think the accounting caused the problem. The problem was in the way the loans were created and underwritten."

And there are those who hew a middle path.

"It may be that we have so much more emphasis on fair value and disclosures that the application of 157 and 159 has led to some differences," said Sydney Garmong, an executive in Crowe, Chizek & Co. LLC's financial institutions group. "But I'm not sure it would be significantly different," and though "the downward adjustments may be somewhat larger because of 157 and 159, I just don't think we're talking night and day."

The accounting board's drive to fair value is underpinned by the belief that what a company once paid for an asset is not nearly as relevant as what the asset is currently worth. By that reasoning, market value trumps book value. Leave aside arguments that potentially undermine that reasoning; the more immediate concern is how to value assets for which there is no ready, liquid market. That nettlesome question is one reason why FASB has not yet implemented a model that would apply fair value to banks' chief assets: loans.

The FASB has required the use of fair value for some instruments in standards and guidance issued over the years, but it had never consolidated a practical method for applying it. To fill that void, it issued Financial Accounting Standard 157, Fair-Value Measurements, in October 2006; the 158-page standard is essentially a reference book that tells companies how to apply fair value, but not where they must apply it.

It issued a companion statement, FAS 159, Fair Value Option for Financial Assets and Financial Liabilities, in February 2007, that has been seen by many observers as an enticement to get companies to apply fair value to a wider swath of assets. Under 159, companies have the latitude to use fair value only for the financial instruments of their choosing. The discretion is so complete that companies can make separate designations for similar securities in the same portfolio.

Though the standards are only now in effect — companies following generally accepted accounting principles must use them in preparing financial statements for periods beginning after Nov. 15 — the board allowed for early adoption in the first quarter of 2007. The catch: Companies that wanted to use the option standard, 159, also had to adopt the new measurement standard, 157, for every instrument on the balance sheet required to be measured at fair value.

The banking industry did not have a unified response to either standard, and that is because the "banking industry" is not nearly as monolithic as it sounds. The fair-value model works for some business lines better than it does for others.

Continued in article

"Fair Value: Simple Idea, Complex Path,"  by Todd Davenport, American Banker, December 31, 2007 ---
http://www.americanbanker.com/article.html?id=20071228XOYSLOCX

It's fair to say that there is more than a little hostility to the concept of fair value, and the hostility intensifies depending on the instruments under discussion.

For some bankers, accounting standard-setters' ongoing search to define "fair value" for traditional loans is almost heretical. But there are fewer grounds for objecting to the application of fair value to securities, which, after all, are created primarily to make illiquid assets liquid.

Companies have used fair value for years. The Financial Accounting Standards Board's decision to adopt a new standard on fair value, issued in October of last year, was intended merely to clarify its use and identify methods for valuing increasingly complex securities that have poured into the market.

The seizure of markets once presumed to be liquid has complicated what was to be a no-hassle transition to the new standard, FAS 157.

"Companies and their auditors are really nervous about changing values, and they are nervous about whether they could be second-guessed" on securities valuations, said Dennis Beresford, a former FASB chairman and now a professor of accounting at the University of Georgia and the director who chairs Fannie Mae's audit committee. "It's awfully hard for some people to believe that markets could have changed so quickly."

The organizing principle of FAS 157 is a three-level liquidity hierarchy for financial instruments. Valuation is simple enough for Level 1 securities, which are traded actively in liquid markets with regular, quoted prices. For these securities, fair value is market value, and the math is straightforward.

Common equities and highly liquid U.S. Treasuries generally are considered Level 1 securities. For those securities quoted by bid and ask prices, companies can choose either the midpoint or the point between them that is "most representative" of fair value.

But the association between fair value and market value starts to break down with Level 2 securities, which are not quoted directly or traded actively but have "observable inputs" — market prices of similar securities, for instance — that can be thrown into models.

Common interest rate swaps, options, and other derivatives frequently fall in this bucket, as do licensing arrangements and even buildings. Agency mortgage-backeds, corporate debt, and some collateralized debt obligations fall into this category, as well.

Level 3 of the fair-value inferno is reserved for instruments that have "no observable inputs." The value of these instruments is almost entirely model-driven. They are worth what the company says, provided it can get its auditor to bless the calculated value.

This bucket, by and large, is the home of mortgage servicing rights, asset-backed commercial paper, and structured products like synthetic CDOs.

"The fair-value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability," the standard reads. "Therefore, unobservable inputs shall reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk)."

That's a lot of assumptions. Even granting the standard's comprehensible internal logic, figuring out which securities qualify as what is not always clear. Companies can reach different conclusions about the level and value of securities that seem similar. Value depends on the models, which can vary from company to company and produce wildly varying results, depending on the inputs.

"These values for Level 2 and particularly Level 3 are not as precise as the financial statements might imply," Prof. Beresford said. "But what they don't tell you, and probably couldn't very accurately, is tell you what kind of range we're talking about."

It is, of course, the Level 3 instruments that have gotten the most attention since markets dried up, given that their value is based largely on internal — if audited — assumptions. Investors have taken a dim view of these assets; the larger the portion of these assets, the larger the perceived black hole in the balance sheet.

As of Sept. 30, Citigroup Inc. held $135 billion of Level 3 assets, JPMorgan Chase & Co. held $55 billion, and Bank of America Corp. held $28 billion. Spokesmen for the companies would not make executives available to discuss their use of fair-value accounting.

"Level 3 raises a reasonable question: If an asset is hard to value, should you be buying it at all?" asked Donald van Deventer, the CEO of Kamakura Corp., which helps companies and investors value securities. "The answer is probably no, unless you are really good at the analytics."

Banking companies could argue reasonably that they are good at the analytics, and that as financial intermediaries, they must be expected to hold a variety of instruments, including those not easy to value. But then the companies must live with the questions that arise from holding them.

"If an investor, in deciding whether to buy shares of a particular bank, sees a huge fraction of its assets are Level 3, the investor may wonder if the assets are worth as much as the bank says they are," said Darrell Duffie, a professor of finance at Stanford University's Graduate School of Business. "That's a discipline on the bank. It's helpful information for the investor making that decision, and banks will be forewarned not to load up on Level 3 assets if they want to sell at high multiples in the market."

Most accountants are quick to remind that the three-level hierarchy was a rough element in the accounting literature even before the FASB delineated it clearly in FAS 157. Fair value is a central element of FAS 115, a 1993 standard. Under that standard, securities held in the trading portfolio — the portfolio in which the largest U.S. banking companies keep most of their securities — are marked at fair value, with the aggregate change running through the income statement.

Banking companies that do not have substantial investment-banking businesses — from large regional ones to community ones — are more likely to keep their securities in the available-for-sale portfolio, which also is marked at fair value. Though the unrealized gains and losses in that portfolio are reflected in GAAP capital (regulatory capital calculations do not include unrealized gains or losses), they do not hit the income statement as long as they are relatively insignificant and reasonably likely to be recovered in future periods.

(Companies lose that safe harbor if losses are serious enough that recovery becomes unlikely. Zions Bancorp. reported one of the most recent instances of other-than-temporary impairment. In a securities filing Dec. 20, the Salt Lake City company, which has not adopted FAS 157, disclosed a $94 million impairment of CDOs in its available-for-sale portfolio and said it would record the entire amount as a charge to fourth-quarter earnings.)

Continued in article

"Fair Value: Trust Is Wild Card in Debate,"  by Todd Davenport, American Banker, January 2, 2008 ---
http://www.americanbanker.com/article.html?id=200712318ZWKJCBM 

The market meltdown in the second half of last year gave investors plenty of reasons to doubt the accuracy of banks' asset valuations, and the way the situation has unfolded is telling.

What was seen initially as a liquidity crisis soon was revealed as a crisis of confidence. There was money to transact, but investors did not trust what they were being told about the value of the securities that banks were originating, packaging, and trading. Representations of value derived by models are only as good as the models themselves, and investors have learned the hard way that dealers' incentives are quite different from those of their clients.

"For a long time people looking for values were relying on quotes from Wall Street with no transactions associated with them," said Donald van Deventer, the chief executive officer of Kamakura & Co., which helps companies and investors value securities. "If you take the business cycle and macroeconomic factors into account to drive default probabilities up and down, you get dramatically different answers than you get using the popular method that Wall Street and the rating agencies have encouraged people to use."

Mr. van Deventer, a former investment banker, said he has a pretty clear idea why the dealer banks encouraged clients and internal auditors to use the valuation techniques of their choosing.

"Because it makes more money if you do," he said. "Anybody who doesn't understand that is just hopelessly naive, and there are a lot of investors who by self-admission have fallen into that category."

And again, he sees a change under the Financial Accounting Standards Board's new standard.

"The combination of [FAS] 157 and the current crisis has meant that unless there is a real trade, the quote has no credibility, because the quoter has a vested interest in your perception of value," Mr. van Deventer said.

Cynicism about bankers' valuations is embedded so deeply that some observers who say banks are being forced only now to recognize the true value of their illiquid securities also suspect that the companies could undervalue the securities they once overvalued.

Loan-loss provisions spike so consistently in the fourth quarter that it is known as the "kitchen sink" quarter. Taking the losses at the end of the year makes comparisons with next year's earnings easier, and a plump fourth-quarter provision can lead to smaller bites from the bottom line in future quarters.

Some skeptics say writedowns afford the same opportunity; once the big dealer banks realized their writedowns would be substantial, they arguably had as much incentive to overstate as to understate. A sophisticated financial institution knows its stock may get pummeled if it reports a $4 billion writedown; would the market reaction be any more violent if the writedown was, say, $5 billion, or $6 billion, or $8 billion? Preserving capital ratios is the primary limitation on the magnitude of writedowns.

The freedom of FAS 159, a companion statement to FAS 157, would give banks the tools to follow an earnings-management strategy that would not violate accounting rules. (Principles are another matter, but that's a debate for another day.)

"A bank can choose which financial instruments it wants to report at market value," said Darrell Duffie, a professor of finance at Stanford University's Graduate School of Business. "A bank that wanted to report lower earnings now and bank any embedded gains later could mark to market anything that had embedded loss and leave at book value anything that has an embedded gain to be marked later."

The advantage of fair-value accounting is that it allows companies to take market gains back through the income statement as quickly as they incurred the losses. Should models lead them to conclude that marked-down securities had recovered value, the difference would be reflected as income.

"Companies, of course, aren't supposed to use the new standard as a way to manage earnings — they're only supposed to use it to get a closer approximation of fair value," Prof. Duffie said. "But accountants will sometimes be led to do what management of a bank wants them to do."

Nevertheless, he said he supports fair-value accounting, because the potential for earnings management dissipates the longer a company has reported under the regime.

In current market conditions, there is one more strange, almost perverse, effect of the new standard: Companies stand to profit when the value of their own debt falls. Bank debt, of course, tends to tumble when the credit cycle worsens, as it is doing now.

Corporate debt is a liability, and companies apply fair or market value, if available, to that debt. Never mind the principal value — as the liability's market value falls, it is marked as a pickup in earnings on the company's income statement. This unusual development, known as the "own-creditworthiness" doctrine, already has been recognized by some companies.

On Dec. 21, SunTrust Banks Inc. reported a series of writedowns and a huge increase in its loan-loss provision. "Market valuation declines are expected to result in an estimated fourth quarter 2007 pretax writedown of $125 million to $150 million, net of a positive mark on the company's debt carried at fair value," the Atlanta company said in a filing with the Securities and Exchange Commission.

Own-creditworthiness does have an internal logic, but some of its potential consequences raise serious questions. It makes sense to value liabilities the way the market is valuing them, but the possibility of recording income from a loss of investor credibility seems perverse.

It is only one reason the debate over fair value is not likely to be resolved soon. Bankers may save their biggest fight for when the FASB articulates a standard that applies fair value to bread-and-butter loans.

Christopher Whalen, the managing director at Lord, Whalen LLC's Institutional Risk Analytics, dismisses the notion that fair value is a step forward for accounting.

"In between when you buy something and when you sell something, valuing it may be an interesting exercise, but it may not be one that is practical," he said. "The only time you can value something dynamically is if it is traded — if you have a visible, public price. Otherwise, who wants to know?"

Legions of bankers agreed with that expression of contempt. They cite this summer's events as evidence that markets are not always rational and occasionally may put values on securities that do not match what they believe are the securities' economic or intrinsic value. And wildly moving markets mean income statements will move with them.

To which fair-value adherents say: Tough.

Continued in article

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

"The Finer Points of Fair Value," by Thomas A. Ratcliffe, Journal of Accountancy, December 2007 --- http://www.aicpa.org/pubs/jofa/dec2007/fair_value.htm

EXECUTIVE SUMMARY

To adopt FASB Statement no. 159, companies must comply with the requirements of Statement no. 157, Fair Value Measurements. Companies and their auditors must consider whether the use of fair value option accounting reflects a “substance over form” decision by management rather than an effort to gain an accounting result. FASB has raised the bar for disclosure required when the fair value option is in play so that financial statement users will be able to clearly understand the extent to which the option is utilized and how changes in fair values are being reflected in the financial statements. Companies are encouraged but not required to present the fair value option disclosures in combination with the fair value disclosures required in other accounting literature. The guidance must be implemented on an instrument-by-instrument basis and is irrevocable.

 

From the FASB:  PROPOSED FASB STAFF POSITION No. FAS 157-a
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions" --- http://www.fasb.org/fasb_staff_positions/prop_fsp_fas157-a.pdf

Objective

1. This FASB Staff Position (FSP) amends FASB Statement No. 157, Fair Value Measurements, to exclude FASB Statement No. 13, Accounting for Leases, and its related interpretive accounting pronouncements that address leasing transactions.

Background

2. The Exposure Draft preceding Statement 157 proposed a scope exception for Statement 13 and other accounting pronouncements that require fair value measurements for leasing transactions. At that time, the Board was concerned that applying the fair value measurement objective in the Exposure Draft to leasing transactions could have unintended consequences, requiring reconsideration of aspects of lease accounting that were beyond the scope of the Exposure Draft.

3. However, respondents to the Exposure Draft indicated that the fair value measurement objective for leasing transactions was generally consistent with the fair value measurement objective proposed by the Exposure Draft. Others in the leasing industry subsequently affirmed that view. Based on that input, the Board decided to include lease accounting pronouncements in the scope of Statement 157.

4. Subsequent to the issuance of Statement 157, which changed in some respects from the Exposure Draft, constituents have raised issues stemming from the interaction

Proposed FSP on Statement 157 (FSP FAS 157-a) 1 FSP FAS 157-a between the fair value measurement objective in Statement 13 and the fair value measurement objective in Statement 157.

5. Constituents have noted that paragraph 5(c)(ii) of Statement 13 provides an example of the determination of fair value (an exit price) through the use of a transaction price (an entry price). Constituents also have raised issues about the application of the fair value measurement objective in Statement 157 to estimated residual values of leased property. These issues, as well as other issues related to the interaction between Statement 13 and Statement 157, would result in a change in lease accounting that requires considerations of lease classification criteria and measurements in leasing transactions that are beyond the scope of Statement 157 (for example, a change in lease classification for leases that would otherwise be accounted for as direct financing leases).

6. The Board acknowledges that the term fair value will be left in Statement 13 although it is defined differently than in Statement 157; however, the Board believes that lease accounting provisions and the longstanding valuation practices common within the leasing industry should not be changed by Statement 157 without a comprehensive reconsideration of the accounting for leasing transactions. The Board has on its agenda a project to comprehensively reconsider the guidance in Statement 13 together with its subsequent amendments and interpretations.

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

"Common blunders: Personal finance resolutions for 2008," by Carrie Schwab Pomerantz, Town Hall, January 1, 2008 --- Click Here

Bob Jensen's personal finance helpers are at http://www.trinity.edu/rjensen/Bookbob1.htm

Forensic Accounting
There’s a rather nice module on Forensic Accounting at http://en.wikipedia.org/wiki/Forensic_Accounting
This includes links to a journal and career opportunities.

The link to the following article was forwarded by Charles Wankel [wankelc@VERIZON.NET]

"Account for more than hill of beans," The Bay City Times Via The Saginaw News, December 16, 2007 --- Click Here

When Kojo Quartey went to college to learn accounting 25 years ago, many considered the job a steady, unexciting career.

But financial scandals in recent years at Enron, WorldCom and other companies have transformed the field, says Quartey, dean of Davenport University's Donald W. Maine School of Business.

''When I was an accounting student, we were all number crunchers. In this day and age, it's a much more exciting field,'' he said.

Many accountants today are seeking specialized training to work as detectives who can sniff out financial fraud. They call themselves forensic accountants.

Davenport, a Grand Rapids-based university with branches at 5300 Bay in Kochville Township and at 3930 Traxler Court in Bay County's Monitor Township, has two online offerings in the growing field. One is a new bachelor's degree in business administration in accounting fraud investigation and the other is a forensic accounting examiner certificate available to postgraduates.

Forensic accountants undergo training to mind the books while keeping an eye out for crime.

Demand for accountants who have such training is skyrocketing, Quartey told a group of Bay and Arenac county high school counselors.

In addition to traditional accounting, forensic accountants may learn from law enforcement experts about how to detect fraud, and from psychologists about how to interview people to detect lying, Quartey said.

Irene Bembenista teaches classes at Davenport required for the forensic examiner certificate.

''It's not just how to do an audit, but what are some of the clues that would indicate something more is going on? And ideas about where to further investigate,'' said Bembenista, Davenport's associate business school dean.

Bembenista said 10 years ago, people did not generally recognize forensic accounting as a college career path.

A federal law enacted in 2002 to reform accounting has brought the investigation field into its own. It's also created job opportunities because it requires accountants at public entities to maintain a separation of duties, Bembenista said.

''Accountants aren't allowed to do double duties, like taxes and audit the company at the same time,'' she said.

''And businesses are very interested in accountants with a fraud (detection) background, because they are looking out for the well-being of the organization.''

The starting salary for an accounting fraud investigator is $48,000 to $60,000 a year, and certified forensic examiners can earn more than $100,000 a year, Davenport says compensation studies indicate.

Davenport has about two dozen students enrolled in the forensic accounting certificate curriculum, Quartey said. The next term begins in January, and more information is available on the Internet at www.davenport.edu

Bob Jensen's threads on forensic accounting are at http://www.trinity.edu/rjensen/fraud.htm

Bob Jensen's threads on accountancy careers are at http://www.trinity.edu/rjensen/fraud.htm

What's Your Fraud IQ? --- http://www.aicpa.org/pubs/jofa/dec2007/fraud_iq.htm

1. According to ACFE’s 2006 Report to the Nation on Occupational Fraud and Abuse, the typical organization loses what percentage of its annual revenue to fraud? a. 1% b. 5% c. 10% d. 20% 2. The most common method of concealing inventory theft is: a. Misstating inventory counts b. Padding the physical inventory c. Falsifying journal entries d. Altering shipping and receiving documentation 3. To prevent the forged endorsement of a check, which of the following is MOST critical? a. The check preparer should not be able to modify the vendor addresses b. Signed checks should not be returned to the preparer c. The duties of receiving and delivering signed checks should rotate 4. The most basic and important control for detecting cash larceny from a deposit is to: a. Monitor the deposit slip receipt for alterations b. Compare monthly bank statements to the organization’s end-of-the-month report c. Reconcile the receipt copy of the daily deposit slip with the organization’s daily receipts d. None of the above 5. All of the following are methods of preventing overstated expense reimbursements EXCEPT: a. Reviewing expense reimbursements per employee looking for individuals whose travel and entertainment expenses appear to be out of line b. Spot-checking expense reports with vendors c. Prohibiting the reimbursement of any expenses supported by a photocopied receipt without first verifying that the expense is legitimate d. Reimbursing air travel expenses based only on itineraries supplied by travel agencies 6. Which of the following schemes might be used to increase a company’s income in the current year? a. Understating liabilities b. Capitalizing expenses c. Improperly recording returns and allowances d. All of the above 7. Which of the following scenarios would represent a departure from the prescribed method of obtaining a confirmation during a financial statement audit? a. The auditor prepares the confirmation letter and allows the client to inspect the letter before the client mails it b. The client mails the confirmation letter and a return envelope addressed to the auditor c. Both a and b d. Neither represents a departure from the prescribed procedure 8. A fictitious accounts receivable scheme almost always involves which of the following? a. Fictitious inventory b. Fictitious sales c. Fictitious credit memos d. Both b and c 9. Company XYZ has a controlling relationship over Firm C. This relationship must be disclosed in the notes to non-consolidated financial statements even if no transactions have occurred between the two companies. a. True b. False 10. A key indicator of fictitious revenues can be found through a comparison of the increase in sales to the change in which of the following accounts? a. Cost of goods sold b. Advertising expense c. Shipping expense d. Both a and c

Answers --- http://www.aicpa.org/pubs/jofa/dec2007/fraud_iq.htm

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

"Distance learning: The world of online training for accountants," AccountingWeb, December 2007 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=103948

Bob Jensen's threads on online training and education are at http://www.trinity.edu/rjensen/Crossborder.htm

Also see the bookmarks at http://www.trinity.edu/rjensen/Bookbob1.htm#010304OnlineAccountingCPEandTraining

From The Wall Street Journal Accounting Weekly Review on November 30, 2007

Global Accounting Effort Gains a Step by David Reilly and Kara Scannell The Wall Street Journal Nov 16, 2007 Page: A4 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB119515473521294535.html?mod=djem_jiewr_ac   TOPICS: Accounting, Financial Accounting, Financial Reporting, GAAP, International Accounting Standards, SEC SUMMARY: The SEC voted 4-0 to drop a requirement that foreign companies with U.S. listings reconcile their results to U.S. accounting rules. Regulators are hoping to eventually create a single, global set of accounting rules that could potentially benefit investors and companies world-wide. One concern is that a uniform set of global accounting rules could be undermined by differing views over who those rules are supposed to serve: investors, companies, or governments. CLASSROOM APPLICATION: This article notes that GAAP is not a set of international accounting standards, but that it applies to U.S. companies and those foreign companies who list in the U.S. Also discussed are some of the issues surrounding a possible movement towards uniform international accounting standards. QUESTIONS:  1.) What is the SEC? What is it area of enforcement? 2.) What rule has the SEC recently changed? Why do you think the SEC made the change? 3.) What is GAAP? What companies must follow GAAP? Why is it important to have GAAP, and for companies to utilize it? 4.) What are the benefits for having standard international accounting standards? What are the problems associated with having one uniform set of accounting standards for all companies in the world? 5.) What parties want foreign companies to reconcile financial statements with U.S. standards? What are their concerns? Do you agree with their concerns? 6.) What are the various constituents served by financial reporting around the world? Which countries cater to each of these groups of constituents? How does each particular focus affect the financial statements? 7.) Is a single, global accounting system possible? Why or why not? What is hindering it? What could be done to make it work?   Reviewed By: Linda Christiansen, Indiana University Southeast

 

Overhaul Proposed in Accounting Standards Board
The Financial Accounting Foundation, the body that decides who will set accounting rules in the United States, plans on Tuesday to propose an overhaul aimed at enabling the Financial Accounting Standards Board to act faster while increasing the power of its chairman, Robert H. Herz. The proposals being put out for comment Tuesday would reduce the size of the FASB to five members from seven, and give the chairman the power to decide whether to place issues on the board’s agenda.
Floyd Norris, The New York Times, December 18, 2007 --- http://www.nytimes.com/2007/12/18/business/18audit.html?_r=1&ref=business&oref=slogin

Bob Jensen's threads on accounting standards setting are at http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Question
What are CDOs?
Should they be booked?

CDO --- Click Here

From The Wall Street Journal Accounting Weekly Review on November 30, 2007

Citi's $41 Billion Issue: Should It Put CDOs On the Balance Sheet? by David Reilly The Wall Street Journal Nov 26, 2007 Page: C1 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB119604238679603556.html?mod=djem_jiewr_ac   TOPICS: Accounting, CDO, Collateralized Debt Obligations, Consolidated Financial Statements, Consolidations, Financial Accounting, Reconsideration Events SUMMARY: Does Citigroup need to bring $41 billion in potentially shaky securities onto its balance sheet? Opinions are divided, reflecting a wider debate over how to interpret accounting rules on off-balance-sheet treatment for some financing vehicles. CLASSROOM APPLICATION: This article offers a good basis for discussion of CDOs, possible consolidation of CDOs, and the balance sheet presentation of CDOs based on the rules related to "reconsideration events." QUESTIONS:  1.) What are CDOs? What are the recent problems connected with CDOs? What is the cause of these problems? In general, why are they especially a concern for Citigroup? 2.) What is the specific issue facing Citigroup, as detailed in the article? 3.) What are the accounting rules regarding consolidation of CDOs? How do banks avoid having to consolidate? 4.) Why is there controversy over the how the losses should be booked by the bank? What is the potentially vague part of the rules? 5.) What position does Citigroup take? What position are some accounting experts taking? Is either side getting support from other parties? If so, from whom? 6.) With what position do you agree? How did you reach this conclusion? Please offer support from your answer.   Reviewed By: Linda Christiansen, Indiana University Southeast   RELATED ARTICLES:  Why Citi Struggles to Tally Losses by Carrick Mollenkamp and David Reilly Nov 05, 2007 Page: C1 The Nine Lives of CDOs by Nov 26, 2007 Page: C10 Goldman Says Citigroup Faces $15 Billion CDO Write-Downs by Kimberly A. Vlach Nov 20, 2007 Online Exclusive

"Citi's $41 Billion Issue: Should It Put CDOs On the Balance Sheet?" by David Reilly, The Wall Street Journal, November 26, 2007; Page C1 --- http://online.wsj.com/article/SB119604238679603556.html?mod=djem_jiewr_ac

A $41 billion question mark is hanging over Citigroup Inc.

That is the amount, in a worst-case scenario, of potentially shaky securities the bank would need to bring onto its balance sheet. Citi has already taken billions of dollars of such securities onto its balance sheet and expects to take big write-downs on those holdings.

The fate of the $41 billion rests on the outcome of a debate going on in accounting circles over what constitutes a "reconsideration event." Those who say Citi needs to put these securities, known as collateralized debt obligations, onto its balance sheet argue that because Citi acted over the summer to backstop some of them, its relationship with them changed, prompting a reconsideration event.

At the moment, it seems unlikely Citigroup will be forced to bring the assets onto its books. The bank doesn't believe such a reconsideration event is in order. A spokeswoman says Citigroup is confident its "financial statements fully comply with all applicable rules and regulations."

But the division of opinion reflects debate within accounting circles over just how to interpret rules that govern off-balance-sheet treatment for some financing vehicles. That, in turn, underscores what many consider to be a failure of these rules to ensure that investors in the companies that create these vehicles are adequately informed of the risks posed by them.

In recent months, investors have been shocked to learn that many banks were exposed to big losses because of their involvement with vehicles that issued commercial paper and purchased risky assets such as mortgage securities. The troubles facing one kind of off-balance-sheet entity, known as structured investment vehicles, have even prompted Citigroup and other major banks to organize a rescue fund.

But CDO vehicles created by Citigroup have proved to be a more immediate threat. The bank's announcement this month that it expects to take $8 billion to $11 billion in write-downs in the fourth quarter largely stems from its exposure to CDO assets. Citigroup was one of the biggest arrangers of CDOs -- products that pool debt, often mortgage securities, and then sell slices with varying degrees of risk.

If Citigroup had to include an additional $41 billion in CDO assets on its books, that could potentially spur a further $8 billion in write-downs, above and beyond those already signaled, according to a report earlier this month by Howard Mason, an analyst at Sanford C. Bernstein. Such losses could further weaken Citigroup's capital position, threatening its dividend or forcing the bank to raise money.

The issue for Citigroup is when, and if, it has to reconsider consolidation of the CDO vehicles it sponsors.

Like other banks, Citigroup structured these vehicles so they wouldn't be included on its books. The vehicles are created as corporate zombies that ostensibly aren't owned or controlled by anyone. In that case, accounting rules say consolidation of such vehicles is determined by who holds the majority of risks and rewards connected to them.

To deal with that, banks sell off the riskiest pieces of the vehicles. This ensures they don't shoulder a majority of the risk and so don't have to consolidate the vehicles. The assessment of who absorbs the majority of losses is made when the vehicles are created.

Over time, though, rising losses within a vehicle can lead a sponsor to shoulder more risk, or even a majority of it. That can also happen if a sponsor takes on additional interests in the vehicle by buying up the short-term IOUs it issues.

That is what happened to Citigroup. Over the summer, the bank was forced to buy $25 billion in commercial paper issued by its CDO vehicles because investors were no longer interested in the paper. Citigroup already had an $18 billion exposure to these vehicles through other funding it had provided.

This combined $43 billion exposure means that if CDO losses climb high enough, the bank could be exposed to more than half the losses, according to Bernstein's Mr. Mason. That would seem to argue for Citigroup's consolidating all $84 billion of its CDO assets originally held in off-balance-sheet vehicles.

But the accounting rules don't say that sponsors of these vehicles have to reassess on any regular basis the question of who bears the majority of risk of loss. Such "reconsideration events" occur when there is a change in the "governing documents or contractual arrangements" related to these vehicles, the rules say.

Citigroup believes that because it hasn't changed the documents or contracts related to the vehicles, it shouldn't have to reconsider its relationship to them, according to people familiar with the bank's thinking.

But some accounting experts point out that the rule also says a reconsideration event occurs when an institution acquires additional interests in the vehicle. "If a bank is being forced to step in and be a bigger holder of the commercial paper, to me that's pretty black and white that it's a reconsideration event," says Ed Trott, a retired member of the Financial Accounting Standards Board, the body that wrote the accounting rule.

An influential accounting-industry group, the Center for Audit Quality, also seems to lean toward this view. In a paper issued last month, the center said the purchase of commercial paper is an example of a change in the contractual arrangements governing these vehicles. This "may also result in a reconsideration event," the paper said.

But Citigroup believes its purchase of the CDO vehicles' commercial paper is different, because it had taken on the obligation to provide such assistance when the vehicles were created. This means the bank was acting within the contractual arrangements governing the vehicles, not changing them, according to the people familiar with Citigroup's thinking.

Some accounting experts agree. "If all that's happening is one set of [paper holders] is going out and another is coming in, that's not a reconsideration event," says Stephen Ryan, an accounting professor at New York University. "I don't think you reconsider moment by moment; an event is not just bad luck happening."

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/Theory01.htm

Leading Democrats Do Not Seem to Agree on Corporate Tax Rates
If you watch the constant stream of political advertisements in New Hampshire these days, all Democratic Party presidential candidates want to tax corporations harder but old Charlie, who really wields the power, thinks otherwise.

From The Wall Street Journal Accounting Weekly Review on December 6, 2007

Review & Outlook: Corporate Tax War The Awll Street Journal by WSJ Opinion Page Editors Dec 04, 2007 Page: A20 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB119673397691112663.html?mod=djem_jiewr_ac   TOPICS: Accounting, Personal Taxation, Tax Laws, Taxation SUMMARY: This Fall, House Democrat Charlie Rangel proposed "...to cut the U.S. corporate income tax] rate to 30.5% from 35%." This WSJ opinion page article argues that, " As a new study makes clear, such a reduction would give a lift to the U.S. economy when it really needs it...[and concludes that] if America is going to remain the developed world's leading job creator and economic engine, corporate tax rates are going to have to fall -- and by more than even Mr. Rangel has suggested." CLASSROOM APPLICATION: Use this article to integrate political and economic issues into tax policy discussion. QUESTIONS:  1.) What entity prepared this report assessing the association between corporate income tax rates and economic performance? Why does this entity undertake such analyses? 2.) What measures were used to identify the relationships between corporate tax rates and economic health? In your answer, be sure to define statutory income tax rates and effective income rates and to identify specific measures of economic health. 3.) Summarize the main points of the discussion. With what political party typical supports this viewpoint? 4.) Is it surprising to you that a Democrat proposes to cut the corporate income tax rate? Explain your answer. 5.) How do personal income taxes also contribute to the issues discussed in this article? 6.) This opinion page piece clearly presents just one side of the debate on raising or lowering income tax rates. Identify one counter-argument to those presented in the piece.   Reviewed By: Judy Beckman, University of Rhode Island   RELATED ARTICLES:  Democrats' Tax Measure Could Delay Energy Bill by John J. Fialka Dec 05, 2007 Page: A5

"Corporate Tax War," The Wall Street Journal, December 4, 2007; Page A20

Word is that the Bush Administration will soon propose a cut in the U.S. corporate income tax, following House Democrat Charlie Rangel's proposal this fall to cut the rate to 30.5% from 35%. As a new study makes clear, such a reduction would give a lift to the U.S. economy when it really needs it.

The study, from the National Bureau of Economic Research, looked at corporate taxes in 85 countries from 1996 to 2005. Economists from the World Bank and Harvard University calculated the effective business tax rate for each country, because some nations have so many tax loopholes that the rate paid by companies can be one-half to one-third the statutory tax rate. The study found that corporate taxes have a statistically significant negative effect on economic performance.

High business taxes were found to reduce a nation's domestic capital investment, the amount of foreign investment into that country, and its overall growth in GDP. The authors conclude that "corporate taxation reduces the return on capital and thus discourages investment" and "reduces the cash flow of the firm" in such a way as to reduce the after-tax capital available for reinvestment.

The researchers also found that high corporate levies reduce entrepreneurship, which drives new industries and job growth. In many nations the corporate tax rate is paid both by large corporations and small businesses. In the U.S., small businesses are often organized under Subchapter S of the tax code and thus pay the personal income tax rate. However the tax is imposed, the study found, "a 10 percentage point rise in a nation's effective corporate tax rate causes a decline in the number of firms by 1.8 per 100 people (the average is 5 per 100 population)."

The clear implication is that raising the U.S. personal income tax rates would also stunt small business entrepreneurship. Yet this is precisely what all of the Democratic Presidential candidates, and even Mr. Rangel, propose. In Mr. Rangel's case, the benefits of his cut in the corporate tax for big business to 30% would be offset by the damage he'd do by raising the top marginal tax rate on individuals and small businesses to as high as 44%. The NBER research suggests this could discourage hundreds of thousands of small businesses from being formed in the next few years.

This study supports research earlier this year by economist Kevin Hassett of the American Enterprise Institute, which found that high business taxes also result in lower wages for workers. The higher rate means less capital investment in making workers productive, which translates into smaller pay checks.

What American CEOs understand, but most in the media and political class so far refuse to acknowledge, is that the U.S. is far behind the rest of the world in reducing corporate tax rates. The U.S. corporate income tax rate is the world's second highest after Japan's among developed nations. Even Mr. Rangel's proposed reduction would leave the U.S. well above the OECD average of 25%. In recent years, Germany, France, the United Kingdom, Vietnam, Poland and Singapore, among many other nations, have either cut or proposed to cut their business tax rates. These lower rates are attracting more investment and capital, and they pose a threat to America's economic competitiveness if Washington fails to act.

The NBER study is a reminder of how out-of-touch America's current political debate is with global economic trends. American politicians are proposing new barriers to trade, as well as new obstacles to capital formation, even as the rest of the world is welcoming more of both. The study is also a reminder that because workers don't see a tax does not mean that they don't feel its impact. If America is going to remain the developed world's leading job creator and economic engine, corporate tax rates are going to have to fall -- and by more than even Mr. Rangel has suggested.

You can read much more about corporate taxes at http://en.wikipedia.org/wiki/Corporate_Income_Tax

Congratulations to Andrea Locke from New Zealand

A New Zealand accounting student has scored the the highest mark in the world on the financial reporting exam run by the Association of Certified Chartered Accountants (ACCA), beating more than 20,000 other people. Less than half of those who sit it pass the financial reporting exam. Twenty-seven-year-old Andrea Locke, of Arrowtown, NZ and originally from England, scored 95 percent on the three-hour exam. She is studying for by correspondence. Forty-five percent passed the exam, which was given in June.
AccountingWeb, December 6, 2007 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=104318

XBRL and the SEC in December 2007

"SEC releases taxonomy for GAAP financial reports," AccountingWeb, December 6, 2007 --- 

The Securities and Exchange Commission's Office of Interactive Disclosure is heralding the release for public comment of computer labels that will help companies make their financial disclosures more useful for investors. The labels are already supported by at least nine software companies whose products will enable public companies to make quarterly and annual financial reports available in interactive data form instead of text form. Interactive data concepts allow companies to present their financial information in an electronic format that investors, analysts, and others can use to more easily locate and analyze desired information. The interactive data is encoded in a format known as eXtensible Business Reporting Language (XBRL), which allows companies to map their financial information to a set of computer codes that represent U.S. GAAP accounting standards. This standardized list of codes used to represent U.S. GAAP is known as a taxonomy.

The SEC's Office of Interactive Disclosure, created in October to lead the transformation to interactive financial reporting by public companies, encourages broad public review of the taxonomy and the corresponding instructions about how to create a financial statement in XBRL.

"We've been saying that interactive data is on the brink of transforming the review and analysis of financial information for the benefit of investors and public companies alike," said David Blaszkowsky, Director of the SEC's Office of Interactive Disclosure. "With the release of this taxonomy today, investors can now begin to visually see the progress being made, and so will every public company that uses GAAP. Interactive data is no longer merely an up-and-comer, it's becoming reality. We encourage both users and preparers of financial information to participate in this public review so we can advance interactive data to be recognized as, not only amazing technology, but a superior way of doing business and making faster, cheaper, and more informed investment decisions."

The SEC launched its interactive data filing initiative in April 2005 to make filings more accessible and understandable to the common investor. A test group of public companies have since been voluntarily submitting XBRL documents as exhibits to periodic reports and Investment Company Act filings. Through feedback from these voluntary XBRL filers and a global collaboration of technologists, the XBRL US project team created tags for a financial reporting taxonomy that covers every U.S. GAAP accounting concept — virtually every fact that a company might want to report on its financial statements and in its footnotes.

The SEC will use the initial financial statements prepared using the new taxonomy to help it update its electronic filing system to seamlessly accept and render the filings.

"We have gone a long way since we started this in 2005. The voluntary pilot program started out when there was nothing like the fully-fledged taxonomies that we are going to release to the public on Wednesday," SEC Chairman Christopher Cox told a media briefing in Vancouver earlier this week.

"That's really what got us from a slow jog to right now, a full gallop," he said following a presentation to the 16th annual XBRL International Conference.

A free taxonomy review tool is publicly available on the Internet at usgaap.xbrl.us along with other information, including the nine software companies whose products are compatible with the new draft taxonomy. The public comment period ends on April 5, 2008.

Once the testing period ends, regulators expect to be ready to propose that U.S. companies begin filing financial reports in XBRL format.

"A lot is going to depend on the acceptance phase that we are now entering for the U.S. GAAP taxonomies," Cox told Reuters news.

"If that all works the way it's supposed to then we'll have some opportunities to introduce it more broadly. If there are suggestions from people who are using it that are going to take time to meet, then that will influence our thinking."

Some U.S. companies, including General Electric, Microsoft, and United Technologies Corp., are already using XBRL voluntarily, and international acceptance has been strong, with several countries, including Japan, China, and the Netherlands, embracing the format.

Informative podcasts available

XBRL US, Inc., the nonprofit consortium dedicated to the adoption of XBRL, initiated its first two podcasts featuring important stakeholders. The programs featured Jeff Diermeier, CFA, president and CEO of CFA Institute, and Barry Melancon, president and CEO of the American Institute of Certified Public Accountants. Podcasts can be downloaded to a handheld device or simply listened to online at http://xbrl.us.

The series of 10-minute interviews will feature industry experts presenting their view on interactive data or covering a specific topic related to XBRL. The series is designed to address key stakeholder viewpoints but will also feature timely and sometimes controversial topics related to the use of interactive data in different reporting situations.

Diermeier kicked off the webcast series, reflecting the fact that Wall Street is the ultimate stakeholder in the XBRL movement. CFA Institute, a global professional association that is well known for its administration of the Chartered Financial Analyst(R) (CFA(R)) and Certificate in Investment Performance Measurement (CIPM) curriculum and exam programs, recently became a member of XBRL US and has been conducting a roadshow series to educate its members about interactive data. It has also surveyed its members about their awareness

Continued in article

December 8, 2007 message from Roger Debreceny [Roger@DEBRECENY.COM]

XBRL International has held its semi-annual meeting in Vancouver this week. Some key elements of the meeting were:

• As many on AECM will know, the new (see what $5m will buy) US GAAP XBRL taxonomy is on its way. It has moved from internal review within the XBRL community to public review. See www.xbrl.us and http://usgaap.xbrl.us/ for the draft taxonomy. You can sign up to review the taxonomy, code financials etc. The quality of the taxonomy is central to the adoption of XBRL by the SEC.
• An interesting set of ideas from Peter Wallison of the AEI on the role of XBRL in capital markets presented as a keynote at the meeting is at http://www.aei.org/publications/filter.all,pubID.27191/pub_detail.asp
• There are two new MP3 podcasts on XBRL at www.xbrl.us .. Mark Bolgiano, CEO of XBRL US, interviews AICPA President Barry Melancon and CFA Institute President Jeff Diermeier.

Later, all presentations will be available at http://archive.xbrl.org/. Presentations from earlier XBRL International conferences are available on the archive.

 

Roger

 

 

..................................................................

Roger Debreceny

Shidler College Distinguished Professor of Accounting

School of Accountancy

Shidler College of Business

University of Hawai`i at Mānoa

2404 Maile Way, Honolulu, HI 96822, USA

roger@debreceny.com
rogersd@hawaii.edu

Office: +1 808 956 8545 Cell: +1 808 393 1352