1、Bob Jensen Emeritus Professor of Accounting Trinity University in San Antonio 190 Sunset Hill Road Sugar Hill, NH 03586 603-823-8482 rjensentrinity.edu http:/www.trinity.edu/rjensen/ Bob Jensens Summary of Accounting History and Theoryhttp:/www.trinity.edu/rjensen/theory.htm “Not everything that can
2、 be counted, counts. And not everything that counts can be counted.” Albert Einstein,Fair Value Accounting FAS 105, 107, 115, 130, 133, 141, 142, 155, 157, 159,The government gave them 105% for their $200,000 subprime mortgage. They then sold the house for $37,000, got married, and are escaping from
3、 California.,So are we now that we flipped the doghouse!,Alternative Accounting Measures of Value of Assets and Liabilities “Skate to where the puck is going, not to where it is.” Wayne Gretsky (as quoted for many years by Jerry Trites ),Historical Cost of Individual Assets and Liabilities Summed in
4、 Balance Sheet (Book Value)Historical Cost With Price Level Adjustments (PLA)Entry Value (Replacement Cost, Current Cost),Alternative Accounting Measures of Value of Assets and Liabilities “Skate to where the puck is going, not to where it is.” Wayne Gretsky (as quoted for many years by Jerry Trites
5、 ),Exit Value (Net Liquidation Value)Economic Value (Discounted Cash Flows, FCF, Residual Income)Market Value of Entire Firm (Cash Versus Stock Trade)Market Value of All Shares Outstanding,Alternative Accounting Measures of Value of Assets and Liabilities Skate to where the puck is going, not to whe
6、re it is. Wayne Gretsky (as quoted for many years by Jerry Trites ),Graduate student Derek Panchuk and professor Joan Vickers, who discovered the Quiet Eye phenomenon, have just completed the most comprehensive, on-ice hockey study to determine where elite goalies focus their eyes in order to make a
7、 save. Simply put, they found that goalies should keep their eyes on the puck. In an article to be published in the journal Human Movement Science, Panchuk and Vickers discovered that the best goaltenders rest their gaze directly on the puck and shooters stick almost a full second before the shot is
8、 released. When they do that they make the save over 75 per cent of the time. “Keep your eyes on the puck,“ PhysOrg, October 26, 2006 - http:/ 33 from 1979-1984 (ended with FAS 82),Knotted Strings,South American Indian culture apparently used layers of knotted strings as a complicated ledger. Two Ha
9、rvard University researchers believe they have uncovered the meaning of a group of Incan khipus, cryptic assemblages of string and knots that were used by the South American civilization for record-keeping and perhaps even as a written language. Researchers have long known that some knot patterns re
10、presented a specific number. Archeologist Gary Urton and mathematician Carrie Brezine report today in the journal Science that computer analysis of 21 khipus showed how individual strings were combined into multilayered collections that were used as a kind of ledger. Thomas H. Maugh, “Researchers Th
11、ink Theyve Got the Incas Numbers,“ Los Angeles Times, August 12, 2005,Origins of Double Entry Accounting are Unknown,1300s A.D. crusades opened the Middle East and Mediterranean trade routes Venice and Genoa became venture trading centers for commerce 1296 A.D. Fini Ledgers in Florence 1340 City of
12、Massri Treasurers Accounts are in Double Entry form. 1494 Luca Paciolis Summa de Arithmetica Geometria Proportionalita (A Review of Arithmetic, Geometry and Proportions),Going Concern and Accrual Accounting Evolved in the 1500s,Venture accounting over the life of a venture with interim statements ev
13、olved in The Netherlands 1673 Code of Commerce in France requires biannual balance sheet reporting Charge and Discharge Agency Responsibility and Stewardship Accounting in English trust accounting,Limited liability Corporations (divorced professional management from ownership shares),1555 A.D. Russi
14、a Company 1600 A.D. East India Company 1670 A.D. Hudsons Bay Company Englands Joint Stock Companies Act of 1844 required depreciation accounting for railroads, mining, and manufacturing (although the concept of depreciation dates back to Roman times).,Speculation Fever and Stewardship,Fraud and corr
15、uption festered and grew with the trading of joint stock, especially after 1600 A.D. The South Seas Company scandal (reporting stock sales as income and paying dividends out of capital) led to Englands Bubble Act in 1720 A.D. that focused on misleading accounting practices that helped managers rip o
16、ff investors, especially by crediting stock sales to income.,Laissez-Faire Accounting survived endless debates and scandals until the Great Depression in 1933,Much of the debate focused on capital maintenance (e.g., failure to charge off depreciation and failure to provide for replacement of operati
17、ng assets), but governments did not legally impose auditing requirements and serious GAAP until the U.S. securities laws in the early 1930s. Accountants were vocal in reform movements, but governments were slow to react with legislation and courts failed to establish consistent GAAP. Creation of the
18、 SEC in an effort to regain public trust in financial reporting and equity investing. Many firms did have independent audits and conformed to the best GAAP traditions of the day (thereby giving some evidence that Agency Theory works sometimes.) Agency theory hypothesizes that it is in the best inter
19、est of management to contract for protection of investors and avoid scandalous asymmetries of information.,After 1933, the AICPA and the SEC seriously attempted to generate accounting standards, enforce accounting standards, and provide academic justification for promulgated standards.,ASRs of the S
20、EC In a 3-2 vote the SEC followed George O. Mays efforts to mandate external audits of securities traded across state lines in the U.S. 1939-1959 A.D.: Accounting standards were generated by the AICPAs Committee on Accounting Procedure (CAP) that issued Accounting Research Bulletins (51 ARBs) - but
21、the tendency was to overlook controversial issues such as off-balance sheet financing, public disclosure of management forecasts, price-level accounting, current cost accounting, and exit value accounting. Controversial items avoided by the CAP included management compensation accounting, pension ac
22、counting, post-employment benefits accounting, and off balance sheet financing (OBSF). The CAP did very little to restrain diversity of reporting.,After 1933, the AICPA and the SEC seriously attempted to generate accounting standards, enforce accounting standards, and provide academic justification
23、for promulgated standards.,1960-1972 A.D.: Accounting standards in the U.S. were generated by the AICPAs Accounting Principles Board (APB) that had more members than the CAP and a mandate to attack more controversial reporting issues. The APB attacked some controversial issues but often failed to re
24、solve their own disputes on such issues as pooling versus purchase accounting for mergers. 1972-? A.D. Accounting standards in the U.S. were, and still are, being generated by the Financial Accounting Standards Board (FASB) that has seven members, including required members from industry, academe, a
25、nd financial analysts in addition to members from public accountancy. FASB members must divorce themselves from previous income ties and work full time for the FASB. The formation of the FASB was a desperation move by CPAs to stave off threatened takeover of accounting standards by the Federal Gover
26、nment (there were the Moss and Metcalf bills to do just that under pending legislation in the U.S. House and Senate). Unlike the CAP and APB, the FASB has a full-time research staff and has issued highly controversial standards forcing firms to abide by pension accounting rules, capitalization of ma
27、ny leases, and booking of many previous OBSF items (capital leases, pensions, post-employment benefits, income tax accounting, derivative financial instruments, pooling accounting, etc.). The road has been long and hard on some other issues where attempts to issue new standards (e.g., expensing of d
28、ry holes in oil and gas accounting and booking of employee stock options) have been thwarted by highly-publicized political pressuring by corporations.,In 2007 International Harmonization is Becoming a Reality,In Year 2008 foreign corporations may file reports with the SEC and be listed on U.S. stoc
29、k exchanges using IASB standards rather than FASB standards without reconciling the two. The U.S., Canada, and other nations are working toward adoption of IASB standards in place of domestic accounting standards.,Fair Value Accounting Under the IASB & FASB,IASB is exploring with FASB accounting for
30、 fair-value accounting as part of a wider project on measurement. It is in the context of this long-planned effort, and not some recent reaction, that the IASB is planning to and will explore issues related to fair-value accounting. IAS 32 and 39 Require Fair Value Accounting for Financial Instrumen
31、ts in Many Instances,Fair Value Accounting Under the IASB & FASB,The main problem of fair value adjustment is that many (most?) of the adjustments cause enormous fluctuations in earnings, assets, and liabilities that are washed out over time and never realized. The main advantage is that interim imp
32、acts that “might be” realized are booked. Its a war between “might be” versus “might never.” The war has been waging for over a century with respect to booked assets and two decades with respect to unbooked derivative instruments, contingencies, and intangibles.,Fair Value Accounting Under the IASB
33、& FASB,Holder, Hopkins, and Wablen (The Accounting Review, 2004, pp. 453-472) found, in a sample of 200 banks, that fair value accounting gave rise to more than five times more earnings volatility than traditional GAAP earnings. Much of the volatilty washes out over time such that earnings increases
34、 and decreases from fair value adjustments have zero effect on cash in most instances. This is misleading for going concerns.,Fair Value Accounting Under the IASB & FASB,Hirst and Hopkins (Journal of Accounting Research, 1998, pp. 47-75) found, in a sample of 200 banks, that fair value accounting im
35、proved bank equity analyst judgments about risk and value. Ahmed, Kilic, and Lobo (The Accounting Review, 2006, pp. 567-588) found that fair value booking of derivatives after FAS 133 was far more important than mere disclosures in footnotes for banking financial statements. More study needed for no
36、n-financial business firms.,Fair Valuing Debt Better/Worse Credit Standing = Loss/Gain,Barge (James Barge, senior vice president and controller for Time Warner) also cited as problematic the hypothetical case of a company whose creditworthiness is downgraded by the rating agencies. By marking down t
37、he debts value on its balance sheet, the company would realize more income, a scenario Barge called “nonsensical.“ He warned of a host of such effects arising under fair value when a company changes its capital structure.,Fair Valuing Debt Better/Worse Credit Standing = Loss/Gain,Actually there is p
38、otential gain from buying back debt cheaper due to lowered credit rating. Actually there is potential loss from buying back debt cheaper due to improved credit rating. Chasteen and Ransom (Acctg. Horizons, June 2007, pp. 119-136) advocate immediate recognition of such gains & losses and future carry
39、ing of debt at risk free rates.,Fair Value Accounting Under the IASB & FASB,Barge also cited where the acquisition of intangible assets that a company does not intend to use as a further example of fair values potentially worrisome effects. Under current GAAP, their value is included in goodwill and
40、 subject to annual impairment testing for possible write-off. But if, as FASB is contemplating, the value of those assets would be recorded on the balance sheet along with that of the associated tangible assets that were acquired, Barge worries that an immediate write-off would then be required even
41、 though it would not reflect the acquiring companys economics.,Key FASB Standards on Fair Value Acctg.,FAS 105 - Disclosure of OBSF and market risks of instruments FAS 107 - Requirements for disclosure of FV FAS 115 - HTM vs. AFS vs. Trading FAS 130 - OCI offset instead of current earnings FAS 133 -
42、 FV required for derivative instruments FAS 141 - Identify and FV intangibles in acquisitions FAS 142 - Must est. FV of “Goodwill” remaining FAS 155 - Requires FV acctg. for hybrid securities FAS 157 - Defines FV and hierarchy of meas. pref. FAS 159 - FVO for financial instruments,“How to Save the F
43、inancial System,“ by William M. Isaac, The Wall Street Journal, September 19, 2008,Suspend the Fair Value Accounting rules “Biggest culprit for banking collapse” is FAS 115 that in bad times requires markdowns to “fire sale” values Clamp down on abuses by short sellers Short sellers are engaged in a
44、buses such as purchasing credit default swaps on corporate bonds (essentially bets on whether a borrower will default) Withdraw the Basel II capital rules (2007) Allow high leverage capital ratios in good times, but require much higher ratios for banks losing money.,Key FASB Standards on Fair Value
45、Acctg.,FAS 105 - 1990 FAS 107 - 1991 to be effective in 1993 FAS 115 - 1993 to be effective in 1994 FAS 130 - 1997 to be effective in 1998 FAS 133 - 1998 but later delayed until 2000 FAS 141 - 2001 FAS 142 - 2001 FAS 155 - 2006 FAS 157 - 2006 FAS 159 - 2007 to be effective in 2008,FAS 105 in 1990 Di
46、sclosure of OBSF Market and Credit Risk,The face, contract, or notional principal amount The nature and terms of the instruments and a discussion of their credit and market risk, cash requirements, and related accounting policies The accounting loss the entity would incur if any party to the financi
47、al instrument failed completely to perform according to the terms of the contract and the collateral or other security, if any, for the amount due proved to be of no value to the entity The entitys policy for requiring collateral or other security on financial instruments it accepts and a descriptio
48、n of collateral on instruments presently held. This Statement also requires disclosure of information about significant concentrations of credit risk from an individual counterparty or groups of counterparties for all financial instruments.,FAS 107 effective in 1993 Disclosure of Fair Value of Fin.
49、Instruments,This Statement extends existing fair value disclosure practices for some instruments by requiring all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value. If estimating fair value is not practicable, this Statement requires disclosure of descriptive information pertinent to estimating the value of a financial instrument. Disclosures about fair value are not required for certain financial instruments listed in paragraph 8.,
