Tag Archives | FASB

American Institute of Certified Public Accountants – AICPA

American Institute of Certified Public Accountants (AICPA) Definition

The American Institute of Certified Public Accountants (AICPA) is a professional organization for Certified Public Accountants (CPAs) in the United States. The organization dates back to 1887.

The AICPA creates and grades the CPA examination. In addition, it is also the organization that authored many of the original financial accounting and reporting standards included in GAAP –  though FASB is now responsible for GAAP.

The AICPA’s primary objectives include the following: advocacy on behalf of members, certification and licensing of new members, promoting public awareness of CPA professionalism, recruiting and educating prospective CPAs, and establishing professional standards.

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AICPA Website

For more information on the AICPA, go to: AICPA.org

See Also:
Statement of Financial Accounting Standards – SFAS
Sensitivity Analysis Definition
Standard Chart of Accounts
Problems in Chart of Accounts Design
Future of the Accounting Workforce

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Operating Leases Going Away?

The FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) are recommending that the use of operating leases be scrapped and that all leases be treated as capital leases. For over 40 years FAS 13 has been the standard. This step will change all that.

Under the proposed rules operating leases will be capitalized with both an asset and a liability account. Rent expense would go away and depreciation and interest expense would take it’s place.

Why is this important to a CFO? It’s the financial ratios! EBITDA no longer becomes useful in valuing a company. Your debt to equity ratio becomes inflated and the debt service coverage ratio becomes compressed. All you bank covenants will have to be modified to reflect the new presentation.

The question is: does this increased complexity add value to the process of evaluating the financial performance of a company? We will have to wait and see. Until July 2010 the accounting regulators are soliciting comments to their proposed changes. Implementation would not begin until 2011.

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When Crisis Breeds Future Crises

One can’t help but watch the actions of the Federal Reserve, Treasury Department, the FASB, the Congress, etc…and wonder what new crises for which we are being set up. In the near term greater inflation and higher interest rates seem likely. But in the long run are we not simply setting ourselves up for a larger bubble that will inevitably burst? The Fed continues to press the ‘Easy’ monetary button relentlessly. The Congress and the Executive Branch do not seem to have found a matter unworthy of greater expenditure. Our national debt increases by the trillion within a week. Our government’s deficit moves towards 10% of our national income.

The FASB changes accounting rules meant to provide a more accurate view of a company’s true financial position to the users of their financial statements. Since that was inconvenient for those who made poor business decisions, the rule has been relaxed.

One cannot help but wonder when the true day of reckoning will occur. In a capitalist economy (or at least an economy which is purportedly capitalistic) those companies unable to stay in business will shutter their doors. In the US economy, those companies are put on life support by the powers that be in DC. Your Surburban’s warranty will be serviced by Uncle Sam.

Anyways, this doesn’t even consider the looming mess that is the social entitlement programs.

So the buck is inflated some more and rolled on down the road, while we wait to capitalize on the next bubble.

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FASB Eases Mark-To-Market.

Today the Financial Accounting Standards Board (FASB) changed FAS 157, providing companies more flexibility in determining the fair value of their investments held. In addition, the FASB also granted companies more flexibility in taking impairment charges on investment losses. The changes will take effect in Q2, though companies will be free to report Q1 under the new rules.

It will be interesting to follow the impact of these rule changes on those companies most affected by the “toxic assets” on their balance sheet. Will the change enable them to workout their problems or will it mask future poor decision making?

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FASB Change to FAS 157 at odds with Geithner’s Plan

This week the FASB is considering relaxing the mark-to-market accounting rule, which would seem to undercut the US Treasury Department’s plan to help banks fix their balance sheets by ridding themselves of the so-called “toxic assets.”

As a taxpayer, I’d have to say that I prefer the FASB’s approach to the Treasury’s. The Treasury plan counts on helping banks rid themselves of problem loans by selling those loans to private parties (presumably including those evil hedge funds), which would provide a limited amount of equity investment, along with Uncle Sam as a co-equity partner and also the provider of the debt financing. If the investment is good, the private partner gets a good chunk of the upside. If not, We The People eat it.

It makes good sense that at some point those who had a hand in making these now-problem loans find a way to get out of their mess. Changing the mark-to-market rule in this context is not a bad thing.

Geithner’s plan is less appealing, but may very well improve lending (albeit at a handsome price). Though it simply looks like another way for the taxpayer to subsidize those who got us into this predicament.

It will be interesting to see how this plays out. One thing does seem certain: the taxpayer will lose.

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Mark to Market Controversy vs The Laws of Finance

A large part of the mark to market controversy revolves around the fact that mark to market accounting is in direct violation of a fundamental law of finance.

Mark to Market Controversy vs The Laws of Finance

It has long been accepted that when financing assets you should match the term of the debt with the life of the underlying asset. In other words, long term assets should be financed with long term debt and short term assets should be financed with a short term liability.

Mark to Market

Mark to market accounting ignores the liquidity of the underlying asset. In fact, in many respects it converts the characteristics of long term assets into short term assets.

Assume that I am going to finance a house. The house should last at least forty years, consequently, I place a thirty year mortgage on it. Unless I sell the house during the thirty years then I should pay off the mortgage. No problem; everybody wins!

However, what if I were to place a short term debt on a long term asset? I would stand a very good chance of losing my investment in a down economy. The same situation holds true for a lender who makes a long term loan secured by a short term asset.

But a house is a long term asset you say! What is a long term asset? A long term asset is an asset whose expected life is greater than one year. In the case of a mortgage it is a loan whose maturity is greater than one year. The problem with mark to market accounting is that you must treat that asset as if it were sold every day. In effect converting the long term asset into the characteristics of a short term asset.

From the banks perspective you now have a long term asset (ie: mortgage) secured by a short term asset (ie: house). The total opposite of what we are taught in the laws of finance.

The bottom line is that mark to market accounting distorts the true economics of the transaction versus reflecting it. Mark to market accounting has to go before the banking community can recover.

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