Accounting Today - December 13 2010

Spirit
FROM PAGE 17

THE OTHER HALF OF THE ELEPHANT Strangely enough, though, standard-setters seem to get a half-glimpse of the elephant from time to time because they continually endorse asset impairments, which is nothing short of schizophrenic value-based accounting. Why are value decreases deemed reliable enough to warrant recognition but value increases are not?

We also point out the utter nonsense of comparing an observed market value with a fabricated (even random) book value to trigger a writedown. The explanation, of course, is auditors’ dysfunctional stranglehold on standard-setting. They jump at the chance to force losses onto income statements, but don’t want to stick their necks out by recognizing gains.

We look for ward to the day when auditors will be held accountable (in court, if necessary) for their persistent negligence in blessing duh-preciation numbers that mislead users because they have absolutely no meaning whatsoever.

DISPATCHING THE ELEPHANT

Policymakers are the only ones who can get rid of duh-preciation and create more useful accounting. However, they are figuratively using their ankuses to deal with small rodents, instead of going after the obviously huge duh-preciation elephant.

Consider the brand-new exposure draft on lease accounting that has been touted as changing everything. It doesn’t live up to that billing because it says that lessees must duh-preciate their capitalized rights to use the lessors’ property while lessors are to keep duh-preciating their property, or at least the amount left in their accounts.

The ability, responsibility, and, yes, the public duty to turn duh-preciation and impairment accounting into full valuation based on current measures of the assets’ market values lies squarely on the joint shoulders of the Securities and Exchange Commission and the Financial Accounting Standards Board (the International Accounting Standards Board has shown no inclination to tackle this issue). We implore the commissioners to instruct Chief Accountant Jim Kroeker to elevate this elephant’s prominence so that accountants will actually have to confront it.

This effort will involve asking FASB to grapple with both the old way’s flaws (so they can be eliminated) and the new way’s opportunities (so they can be implemented).

GETTING STARTED

One transitional approach would require supplemental reporting of readily available market values, most notably insured amounts, but also others based on databases and recent transactions. In fact, managers and auditors could consult the same data sources they rely on to determine whether impairment has occurred.

Some 30-plus years ago, FASB tried this ap-
proach with SFAS 33 but mistakenly labeled
it an experiment; limited it to only the larg-
est companies; allowed loosey-goosey mea-
sures, including general price indexation;
and recommended that the measures be
unaudited. Understandably, users did not get
very excited because this solution was only
temporary, the information wasn’t provided
by all firms, the measures weren’t faithful
representations of value, and no one dared
trust the unaudited numbers. Managers also
choked the last bit of perceived usefulness
out of their disclosures with disclaimers that
warned everyone against relying on them.

THE TIME IS NOW

We think it’s long past time, maybe even by 180 years, for accounting to get real about valuation, instead of continuing to claim that bogus duh-preciation and impairment numbers are relevant and reliable when they are neither. Now, SEC and FASB, reach down and pick up the ankus that Sid Davidson dropped, approach the large animal, and start poking it toward the door, sending it off to the proverbial elephants’ graveyard where it should have gone to die long, long ago.

While you’re at it, you need to do the same with all the other accounting elephants lurking around the room, namely inventory, pensions, intangibles, R&D, current/noncurrent classifications, cash flow statements, treasury stock transactions, and deferred income taxes, to name a few. Doing anything less than completely dispatching this herd will be a dereliction of your joint duties to produce useful statements that will make the capital markets better informed and more efficient.