Bad development
It looks increasingly as though the rating agencies, the accounting firms, and the regulatory agencies are more or less abandoning their mission in favor of making more money. Jonathan Weil at Bloomberg:
The banks demanded that the accountants give them leeway in how they report losses to investors. The accountants responded by giving away their souls.
This week, the Financial Accounting Standards Board unveiled what may be the dumbest, most bankrupt proposal in its 36-year history. If it stands, the FASB ought to change its name to the Fraudulent Accounting Standards Board. It’s that bad.
Here’s what the board is floating. Starting this quarter, U.S. companies would be allowed to report net-income figures that ignore severe, long-term price declines in securities they own. Not just debt securities, mind you, but even common stocks and other equities, too.
All a company would need to do is say it doesn’t intend to sell them and that it probably won’t have to. In most cases, it wouldn’t matter how much the value was down, or for how long. In effect, a company would have to admit being on its deathbed before the rules would force it to take hits to earnings.
So, if these rules had been in place last year, a company that still owned shares of American International Group Inc. or Fannie Mae, for instance, could exclude those stocks’ price declines from net income entirely. It would make no difference that the companies were seized by the government last year, or that both are penny stocks. The loss would get buried away from the income statement, in a balance-sheet line called “accumulated other comprehensive income.”
Desperate Bankers
These are the earnings we get when the people who write accounting standards give in to desperate bankers. And it’s no mystery why the three FASB members who voted for this — Leslie Seidman, Lawrence Smith and Chairman Robert Herz — did so. (The two who opposed it were Tom Linsmeier and Marc Siegel.)
Since the credit crisis began, the board’s members have been under assault by the banking industry and its wholly owned members of Congress. The most recent display came last week at a House Financial Services Committee hearing, where Democratic Representative Paul Kanjorski and other lawmakers beat Herz like a dog. Herz declined my request to be interviewed. A FASB spokeswoman, Chandy Smith, confirmed my understanding of how the rule change would work.
The banks want unfettered license to value their assets however they see fit, and to keep burgeoning losses out of their earnings and regulatory capital. The FASB had been holding its ground, for the most part. Now, though, the board has assumed the fetal position.
Differing Treatment
Under the current rules, securities get differing accounting treatments depending on how they are classified on the balance sheet. When labeled as trading securities, they must be assigned marked-to-market values each quarter, with all changes flowing through to net income. Otherwise, changes in value don’t hit the income statement, unless the securities have suffered what the accountants call an “other-than-temporary impairment.”
While the term may be cumbersome, the idea is that companies need to show losses in net income once they no longer can pretend that an asset’s plunge in value is only fleeting. Think of a man who gets sent to prison for 20 years. That’s not necessarily a permanent sentence. Yet it’s definitely not temporary.
The board’s proposal tosses the old principle aside…
Continue reading. For a different view, read this post.
