A special relationship with accounting

[notyoueither]

Good point.

[Dauphin]

Most countries are harmonising with International Accounting Standards (which is strongly influenced by the Standards in the UK). The US is also shifting in that direction too. The thought is that the US is too rules based, the International Standards are more about "spirit" of the Standards.

There is also a greater focus on the statements to have explanation of what the figures mean, how it fits into business thinking. It means that contingent assets and liabilities are expressed meaningfully so that no-one is under any illusions.

[DAVOUT]

The EU has been quite reluctant to adopt the valuation based on market value for some financial items. It seems that the european bankers view that the historical value was less dangerous was dramatically demonstrated by the subprime crisis : when the market value is wrong everybody are wrong, when one historical value is wrong, one balance sheet is wrong.

[Dauphin]

Valuing at historic costs can be just as "wrong". Especially if you buy lemons.

Wasn't Worldcom supposedly capitalizing its stationery as investments or something stupid, presumably based on historic cost.

[DAVOUT]

Originally posted by Dauphin
Valuing at historic costs can be just as "wrong". Especially if you buy lemons.

The point is that not many historic costs will be wrong at the same closing date, ... especially if you buy lemons

Wasn't Worldcom supposedly capitalizing its stationery as investments or something stupid, presumably based on historic cost.

The problem was not created by the cost but by the capitalizing of stationary.

[Dauphin]

Originally posted by DAVOUT

The point is that not many historic costs will be wrong at the same closing date, ... especially if you buy lemons

Deferred tax assets such as that in the opening post are not market values, they are historic cost basis calculations. You realise that right? The adjustment was made due to impairment testing of the asset and not a change due to anything related to market value.

[Dauphin]

I agree with the general point that historic costs would be all different in different companies, as they would be depending on when they bought the asset, and the so the effect of over-valuing assets based on market valuation would be tempered (not negated).

When people consider investing in a company though, they would tend to base their valuation on things other than the method of valuation used in the balance sheet of a company, regardless of what that method was.

[Kidlicious]

Originally posted by Dauphin
Most countries are harmonising with International Accounting Standards (which is strongly influenced by the Standards in the UK). The US is also shifting in that direction too. The thought is that the US is too rules based, the International Standards are more about "spirit" of the Standards.

There is also a greater focus on the statements to have explanation of what the figures mean, how it fits into business thinking. It means that contingent assets and liabilities are expressed meaningfully so that no-one is under any illusions.

Here's an interesting article on the subject. Any comments?

Fear and Loathing of the SEC
The Securities and Exchange Commission is sniffing out footholds in Europe and Asia.
Alan Rappeport
CFO.com | US
November 09, 2007
The Securities and Exchange Commission has its sights on possible footholds outside the United States. "London or Brussels have been mentioned as potential overseas offices," John Nester, an SEC spokesman, told CFO.com. "But we would want to look at Asia as well."

Such plans are still very preliminary, Nester noted. Overseas offices would function more as a base for attending meetings and forums abroad, not as outposts for policy-making, market oversight or enforcement, he said.

advertisement Indeed, with the increased movement toward the convergence of U.S. and global accounting standards, thoughts of a growing SEC presence outside the United States seem to be abounding. At a roundtable last summer, for example, a number of former SEC chairmen agreed that it was time to begin thinking about creating offices overseas.

To be sure, signs of SEC expansion are likely to rattle nerves abroad. Asked last week during an interview with CFO.com if Europe feared that the SEC might try to take over as the world's regulator, Sir David Tweedie, chairman of the International Accounting Standards Board, answered briefly but clearly. "Yes," he said.

Two new surveys explain what appears to be a distinct wariness of the SEC on the part European companies. DLA Piper, an international law firm, finds that 52 percent of respondents from 250 European companies polled about the potential of global regulation said an SEC investigation would be "damaging" or "very damaging" to them. The report noted that this sentiment stems from the pressures European firms feel from U.S. laws and the "frequency and aggression" of U.S. prosecutions. Apparently, European firms are more fearful of the SEC than they are of their own regulators.

Even the United Kingdom may have reason to worry. Despite the notion of America's "special relationship" with the U.K., companies there seem to be garnering no regulatory favor. A report by Fulbright and Jaworski, another international law firm, queried 40 British firms and found a sharp rise in inquiries from the SEC in 2007. This year the percentage of companies targeted by the SEC spiked to 81 percent; last year less than 25 percent received inquiries.

[DAVOUT]

In my above post n° 18, I referred to market value about "subprime" assets, not about deffered tax assets. I know that poor accounting can be made with any valuation concept; and I know too that the valuation based on a market distorted from the beginning like the "subprime" can be compared to nothing of this magnitude.

[Dauphin]

Originally posted by Kidicious


Here's an interesting article on the subject. Any comments?

It's an old battle that has been going on for years. That said the SEC is allowing companies listed on US stock exchanges to be IFRS compliant only - ie they don't need to be US GAAP compliant, from 2008.

[Dauphin]

Originally posted by DAVOUT
In my above post n° 18, I referred to market value about "subprime" assets, not about deffered tax assets. I know that poor accounting can be made with any valuation concept; and I know too that the valuation based on a market distorted from the beginning like the "subprime" can be compared to nothing of this magnitude.

Apologies for the phrasing of the question, I thought you were providing an additional example and not an entirely different point.

Also, you appear to be mixing balance sheet accounting methods for financial reporting purposes with the method for valuing assets for business management purposes. Buying a financial 'paper' and maintaining its book value forever may be safer for financial reporting but its not particularly useful to management or investors if its market value is greatly different. Any business decision will usually disregard the book value and use market value. A distorted market will therefore lead to incorrect business decisions for reasons other than accounting principles for financial reporting purposes.

[Cort Haus]

The word 'accounting' should be censored in thread titles. I find it highly offensive.

[Dauphin]

I am trying to kill the thread by making no-one else want to post.

[DAVOUT]

Originally posted by Dauphin



Also, you appear to be mixing balance sheet accounting methods for financial reporting purposes with the method for valuing assets for business management purposes.

You cannot offend me more. I have spend most of my professional life fighting against guys anxious to bring me to distort the rules, ... I resisted quite successfully I can modestly add.

[Dinner]

Originally posted by DAVOUT
When you get that size of "surprise" from a world industrial leader, you come to believe that the accounting, the primary aim of which is to avoid any kind of financial surprise, has badly failed. Incidentally, based on their usual creativity, the Chineses who have been educated by the US accountants, will certainly offer soon great surprises ; they have already 2 companies in the first 10 stock values.

The Shanghai stock exchange has turned into a massive bubble which will eventually pop. According to the stock value a partially state owned Chinese oil company is the most valuable company in the world yet if you look at its sales, proven reserves, debts, and other assets there is just no way it is worth more then say Exxon-Mobile.

The Chinese government blocks most mainlanders from investing over seas so if mainlanders want to get into stocks then they can only buy domestics or foreign company who list on Chinese exchanges. That means to many people with to much money chasing not that many stocks. Classic bubble situation.