August 28, 2008
SEC Announcement on Accounting Rules: We are Going International
I must admit, I did not expect the SEC announcement today that it had proposed a rule that encourages and may even require all United States companies to follow international accounting rules by 2014. This is a major policy change. Prior to the announcement, the SEC has consistently taken the position that in all things related to publicly traded companies, the rules of the United States are the gold standard for which others should strive. Companies will love the change; earnings will look more robust and there will be no disadvantage to joining United States markets or reporting in foreign markets. The SEC has abandoned the position. 100 countries use other accounting rules -- we had better get on board. Will this apply to rules that regulate stock exchanges as well? What about disclosure obligations? Sarbanes-Oxley? Does the same principle apply -- are we to abandon these rules that are stricter than those in many other countries to stay competitive in international markets? If not, why are accounting rules different?? Accounting rules are a fundamental and inherent part of any disclosure legal regime? This is big, folks, big news.
August 28, 2008 | Permalink
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I am not familiar with international accounting rules, so I have no idea how different they may be with regard to what I think is a key factor in the current death of our financial markets: Mark-to-Market Accounting run amok.
Mark to market accounting should be merged with "amortization" concepts when dealing with assets that have a measurable anticipated life span. In other words, if an asset (pool) is expected to have an economic lifespan of 10 quarters, then when its market value increases or decreases by $1,000,000, its book value shoud only be marked up or down by 10%, or $100,000, of the total change during the current quarter. Then, as the expected life span expands or contracts, adjustments to "true up" the previous quarters' markings can be made as a separate line item.
Having lost a job at a very profitable company that was brought down when FAS 157 was implemented a few years ago, I have personal experience with the havoc wreaked by mark to market accounting.
Mark to Market Accounting exaggerates gains on the way up and it exaggerates losses on the way down.
When combined with the ratings industry it is death to any valid measurement of "worth" when dealing with any long-term asset that, when held to maturity, would provide a perfectly respectable average yield over time.
MARK TO MARKET ACCOUNTING RULES HAVE MADE ALL LONG-TERM FINANCIAL ASSETS INTO UNMARKETABLE "HOT POTATOES" AND FAS 157 SHOULD BE BANNED FROM ANY CIVILIZED SOCIETY.
If a change to international accounting standards would moderate the insane effects of Mark to Market Accounting on long-term financial assets, then I am all for the change.
Imagine how screwed up everyone's books would be if they had to change the book value on their real estate or bonds every time there was a change in the market price of the moment.
Posted by: Rob C. | Sep 23, 2008 12:25:58 PM