David Kirkpatrick

December 17, 2008

FASB already alters 141(R)

Filed under: Business — Tags: , , , — David Kirkpatrick @ 2:56 pm

Here’s an article on the subject from CFO.com titled, “Merger Guide for the Perplexed.” I think the title alone sums up this situation.

From the link:

Practical issues outweighed deeper merger-accounting questions on Monday, as the Financial Accounting Standards Board issued a proposed “Band-Aid” rule fix for the standard that governs business combinations. The rule change solves a perplexing problem for corporate accountants who said defense attorneys refused to provide information to help them quantify potential losses linked to lawsuits.

The current rule, 141(R), which the FASB hopes to fix with its newest proposal, requires companies to estimate and recognize the fair value of contingent liabilities — such as losses related to lawsuits — in most situations. The proposed adjustment would give companies more leeway in determining whether those losses could be quantified using fair value accounting.

Ironically, Monday was also the day that FAS 141(R) went into effect for companies with fiscal years beginning after Dec. 15, 2008. “This is the first Band-Aid for FAS 141(R) — and there will be more,” asserted Jay Hanson, national director of accounting with McGladrey & Pullen.

The Band-Aid, known as 141(R)-a, affects acquiring companies that buy businesses that are embroiled in a lawsuit, and which eventually may be forced to shell out damages or settlement payments. The rule also applies to contingent assets — the future settlement payments a company may receive — but the controversy, as well as investors, are focused on the liability question.

July 24, 2008

Fair-value financial reporting rewards deadbeats

Filed under: Business, Politics — Tags: , , , — David Kirkpatrick @ 3:48 pm

This is a CFO.com story from earlier this month with a distressing bit of news about fair-value reporting:

Panelists of a Securities and Exchange Commission roundtable on fair-value financial reporting on Wednesday clashed over an accounting provision under which a company can boost its reported earnings by becoming less creditworthy.

In the provision, paragraph 15 of standard number 157, the Financial Accounting Standards Board’s controversial new stricture on fair-value accounting, FASB states that the fair value of a company’s liability must reflect the risk that the company won’t pay it back. Thus, as the risk that companies won’t pay back their debts rises, their reported liabilities actually decrease–and may even provide an earnings boost.

Illogical as the provision sounds—and it sounds illogical to many—quite a few companies are already making hay by using it. The rewards for potential deadbeats can be large, according to a Credit Suisse report on the first-quarter 2008 10-Qs of the 380 members of the S&P 500 that have either a November or December year-end close, the first big companies to adopt FAS 157. For the 25 companies with the biggest amounts of liabilities on their balance sheets measured at fair value, widening credit spreads—an indication of a lack of creditworthiness—spawned first-quarter earnings gains ranging from $11 million to $3.6 billion, according to the study.

June 16, 2008

FAS 141(R) cools dealmaking

Here’s a CFO.com article covering a Deloitte survey that found a six-month-old FASB rule is having a negative effect on mergers and acquisitions.

From the link:

Just six months after the Financial Accounting Standards Board issued its revised rule on business combinations, corporate executives are saying the technical pronouncement will change the way they do business.

In a recent survey, 40 percent of 1,850 executives said FAS 141(R), Business Combinations, would cause them to “rethink” deal strategy and affect planned deal activity, according to Deloitte Financial Advisory Services, which conducted the online poll.

Only 4 percent of the respondents said their companies have already finished assessing the valuation impact of the new rule.

“The finance and accounting, business development, tax and legal departments of companies are working to understand the implications of Statement 141(R), as the process for how a deal is consummated and reported will require significant preliminary and ongoing analyses,” noted Stamos Nicholas, Deloitte’s national business valuation leader.

FAS 141(R) is the first global standard to be issued since FASB and its overseas counterpart, the International Accounting Standards Board, began their joint rulemaking convergence project in 2002. One aim of the project is to harmonize international standards with U.S. generally accepted accounting principles to better meet the demands of global investors. It’s also intended to cut complexity and costs from the financial reporting process, particularly for multinationals that are forced to record results using several different local standards

March 31, 2008

New FASB rule on derivatives

Filed under: Business — Tags: , , , , — David Kirkpatrick @ 12:31 am

Little heard about before recently, and still pretty arcane, derivatives reporting must now meet a Financial Accounting Standards Board disclosure rule.

From the CFO.com link:

Under the new rule, issuers must disclose the fair values of derivatives they use, as well as their gains and losses from the instruments, in tables accompanying their financial statements. Perhaps with a nod to the current credit crunch — FASB was in the last stages of hatching the standard as the subprime crisis deepened — the standard requires companies to reveal features of their derivatives that are related to credit risk.

To be sure, the standard changes nothing about the accounting for derivatives. But it does make the often-cloudy reporting of them much more transparent to the users of financial statements, Mulford thinks. “With these tables, derivatives can’t be hidden from view in a way they were on, say, Enron’s balance sheet and income statement,” he told CFO.com. “Investors will be better able to assess the contribution of derivatives to earnings and financial risk, and in the process, they’ll be better able to judge earnings sustainability.”

The new standard requires employers to reveal where they put the results of their derivatives investments on their financial statements and spell out how much they are; how derivatives are accounted for; and how derivatives affect their balance sheet, income statement, and future cash flows. (While 161 requires companies to disclose where they report derivatives’ effects on their income statements and balance sheets, it doesn’t require such reporting in cash-flow statements. FASB plans to address disclosures of derivatives’ location on cash-flow statements in the context of its ongoing project on financial-statement presentation.)