Those of you who follow The Accounting Onion will know that Tom doesn’t pull many punches when it comes to sharing what he thinks about the current state of standard setting and financial reporting. However, for those of you who are less familiar with Tom, here are a sampling of his posts on a variety of issues.

IAS 23 and FAS 34: Political Interests Trump Accounting for Interest

FAS 52: Adding Apples and Rocks

FAS 157: Fair Value Has left the Station–But Is It on the Wrong Track?

Making Revenue Recognition Simple and Informative

The FASB’s Mission Incomprehensible

The “Preliminary Views” on Financial Statement Presentation: Seven Years of Deliberation for This?

Lease Accounting: Replacement Cost is the Only Hope for a Principles-Based Solution

If you have time, I encourage you to take a look at these (or other) posts on The Accounting Onion, and then be sure to join us on Tuesday for what promises to be a lively discussion.

And remember – you can attend Round Table Discussions in Second Life (instructions here) or on the web at our LIVE page.

If you’d like more information on this Round Table and Eddie’s research, click here to see the post introducing the topic.

He will both overview an alternative research design to measuring information risk, as well as discuss results from analysis of Level 1, 2, and 3 fair values in financial firms. Eddie is also planning to discuss related research on fair value adoption in other contexts, including the real estate industry.

The abstract of his paper on information risk follows in its entirety:

Using a sample of U.S. financial institutions, we exploit recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3 to test whether greater opacity in financial instrument fair values leads to higher cost of capital. We derive an empirical model allowing asset-specific estimates of implied betas, and find evidence that firms with greater exposure to level 3 financial assets exhibit higher betas relative to those designated as level 1 or level 2. We further find that this difference in implied betas across fair value designations is more pronounced for firms expected to have less informative disclosure environments: those firms with lower analyst following, lower market capitalization, higher analyst forecast errors, or higher analyst forecast dispersion. Overall, the results are consistent with a higher cost of capital for more opaque financial assets, but also suggest that effective disclosures can mitigate opacity across the fair value designations.

I hope you will join us on Wednesday, and remember that you can attend Round Table Discussions in Second Life (instructions here) or on the web at our LIVE page.

***********  UPDATE **************

Due to technical difficulties, we have rescheduled this Round Table Discussion for Wednesday, April 28 at 11 am ET.

Please join us!

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* UPDATE: You can watch the archived video of this Round Table event here.

You can read more about the event here.

I think a big take-away from the discussion is how little we know about the leasing market. We kept coming back to questions like “What percent of leases are structured?” and “How widespread is this? Is it just certain industries?”

More information on this Round Table event can be found at the following locations:

• Background information about the event
• Leasing Letters and Calculators
• Bill Bosco’s comment letter to the IASB

If you assumed that accounting standards wouldn’t get sucked into the highly charged health care debate, you guessed wrong! From the New York Times

An association representing 300 large corporations urged President Obama and Congress on Monday to repeal a provision of the health care overhaul that prompted AT&T, Caterpillar and other companies to announce substantial charges for the current quarter….

AT&T announced last week that it was taking a $1 billion charge because of the provision. Deere & Company announced a $150 million charge, Caterpillar a $100 million charge, and 3M a $90 million charge.

Many companies said they were taking these charges now, before the current quarter ended, to comply with accounting rules. But some corporate critics asserted that the companies’ rapid response to the health legislation was aimed at pressing the administration to repeal the provision….

Henry A. Waxman, a California Democrat who is chairman of the House Energy and Commerce Committee, criticized the charges by the companies, asserting that the health reform would save companies more money than it cost them.

Mr. Waxman sent AT&T, Caterpillar and Deere a sharp letter, questioning the charges and saying he wanted top officials from those companies to testify at an April 21 hearing he has scheduled on the issue.

Mr. Waxman and Bart Stupak, a Michigan Democrat who is chairman of the House Commerce Committee’s subcommittee on oversight and investigations, wrote to AT&T’s chairman, Randall L. Stephenson, “The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern.”

Their letter said AT&T’s moves “appear to conflict with independent analyses,” including a finding by the Business Roundtable, an association of chief executives, that health care reform would reduce insurance cost trends for businesses by more than $3,000 for each employee over the next 10 years.

Responding to such criticism, Mr. Klein said: “These announcements are required under accounting rules, and we should all expect more of such announcements in coming days and weeks. We’re very troubled that these announcements have been challenged by officials in Obama administration and Congress.”

The fuss is driven by the complexities of financial reporting for tax liabilities and changes in the law, a topic that UT Austin’s Lillian Mills has been studying in details for some time.  She will be discussing why the signing of the law generated such large charge-offs, and more generally discussing her research on how financial reporting interact with tax and other tax laws.

She will also talk about her research on FIN48, her experiences conducting policy-oriented research as one of the handful of accountants with access to IRS data (a nice parallel to FASRI), and the extent to which tax law and financial reporting standards are “coupled.”  Coupling of financial reporting standards and bank regulation has been a very hot topic at FASRI, so the parallels and contrasts should be interesting.

Join us at 4pm ET, Tuesday April 6th, in Second Life or on the web.  See you there!

* UPDATE: You can watch the archived video of this Round Table event here.

Adam Grant, a management professor from Wharton, presented some of his work at OU on Monday. He began with a story of a university’s call center where student employees call alums for donations.  The employees hated their jobs.  Managers in the call center had tried all kinds of traditional motivation tools.  Adam learned that most of the money raised went to scholarships, so he arranged to have a scholarship recipient spend 5 minutes with half of the callers to explain what a difference the scholarship made in his life.  The other half did not meet the recipient.  Over a 6 week period, the performance of the treatment callers was 2-4 times that of the control group.

Upon seeing the results, the call center managers started explaining the importance of the scholarships to new employees.  No effect; the callers only responded to hearing directly from the beneficiaries.  Adam tested a lot of other aspects of how appealing to pro-social emotions can lead to better performance.  I think that folks who do principal agent modeling and empirical work on compensation plans may be very interested in his work.

In regards to financial reporting, I know that auditors attend a lot of education sessions related to fraud, and they probably hear how missing a fraud can have severe consequences to their careers and their firms.  I wonder if a visit by widows and orphans who had their savings wiped out by a fraud might prove a better motivator?

The Equipment Leasing and Finance Association (ELFA) is the trade association representing financial services companies and manufacturers in the $650 billion U.S. equipment finance sector. ELFA members are the driving force behind the growth in the commercial equipment finance market and contribute to capital formation in the U.S. and abroad. Overall, business investment in equipment and software accounts for 8.0 percent of the GDP; the commercial equipment finance sector contributes about 4.5 percent to the GDP.

You won’t be too surprised to hear that Bill has some concerns about the proposed standards for lease accounting, which would make it harder for lessees to keep lease-like financing off their balance sheets, while simultaneously delaying revenue recognition by lessors (the lessee would recognize a liability instantly, while the lessor would recognize revenue over the term of the lease).  In an article focusing on the trucking industry, Bill notes four particular issues:

• Increased cost of capital — With more assets on their balance sheets, lessees may be required to hold additional capital.

• Increased cost to small businesses — Complex rules will be applied across the board to all leases, regardless of their size and/or nature. The costs of the proposals are likely to significantly outweigh any benefits for smaller lease transactions and smaller, less sophisticated lessees. Because 95% of leased items are small ticket, these transactions will be most affected.

• Treatment of certain options will be difficult and costly to apply — The new rules would favor a single asset and liability model in an approach that implies lessees will have to determine their most likely lease term when confronted with lease contracts that include options. Requiring lessees to make an estimate of their most likely lease term is unrealistic and burdensome and involves a significant amount of guesswork.

• Timing — Companies across the spectrum are reporting significant decreases in business volume, increases in bankruptcy filings and lowered earnings as a result of the economic environment. An accounting standard that distorts economic reality by accounting for all leases the same way erodes earnings per share, creates deferred tax liability and causes companies to amortize assets more quickly than they should will add unnecessary burden to companies under economic pressures.

Bill is also quoted in this CFO.com article, “When is a Lease a Lease?”

Please join us in a discussion of the industry view of the significant changes being proposed by the FASB and IASB.  Information on how to participate is here.

I use segments of the House testimony in my class to provide a vivid example of political pressure in standard setting.  I think the Weil article will add a nice follow up to this example.
By the way, all of this is related to the Roundtable for tomorrow on the predictivability of fair value.

To view the archived video and a brief summary of the event, click here.

Additional information about Jim and this Round Table Event can be found here.

Follow-up comments from this event can be found here.

Over the next few weeks I’ll be posting videos of previous Round Table discussions. We hope this will make the archived discussions more accessible to readers.

We welcome any comments or follow-up questions regarding today’s Round Table topic.

Many accountants have only passing familiarity with Emissions Trading Schemes.  As the FASB project page describes,

Emission trading schemes to reduce greenhouse gas emissions have expanded rapidly in recent years at the state, national, and international levels. Cap and trade schemes are a common emission allowance approach. In a cap and trade scheme, a government (or government agency) typically issues tradable rights (allowances) to emit to participating entities. Participants may buy and sell allowances with others, and liquid markets have developed to facilitate this trading activity. At the end of a compliance period, participants are required to deliver allowances equal to their actual emissions, and they may be required pay a fine or suffer other penalties for emissions in excess of remitted allowances.

In a typical U.S. cap and trade scheme, each individual emissions allowance has a vintage year designation, indicating the first year an allowance may be used. Unused allowances may be carried forward to future years. Allowances with the same vintage year designation are fungible and may be remitted by any party to cover its emissions from any source. In these schemes, vintage year swaps among participants are common, as government agencies typically issue allowances for multiple years at a time. For example, a entity may expect to install equipment to reduce its emissions in 2009 but may need additional allowances in 2008 to cover a projected shortfall. That entity might exchange some of its allowances with a 2010 vintage year designation (when it expects to have reduced emissions) for allowances with a 2008 designation with another entity that has an opposite exposure.

You might know that emissions trading schemes are a hot-button political topic.  (The US House of Representatives has passed a bill providing for a cap-and-trade program, but the Senate has not.  You can see previous FASRI blog post and discussion on the matter here.)  But such schemes also present vexing accounting challenges.  A particular challenge arises when a firm receives an allowance free of charge.  Does this give the firm an asset?  If so, for what amount?  If that amount is not zero, what is the other side of the entry?  A gain?  Or a liability for pollution that has not yet occurred (and is therefore hard to construe as a liability).

Naomi Soderstrom, along with Derek Johnston and Stephan Sefcik, has recently published a paper on the value implications of emissions allowances:

This paper examines the valuation implications of greenhouse gas (GHG) emissions allowances. We posit that the value of a firm’s bank of emission allowances has two components that are likely to be positively valued by the capital market: (1) an asset value component; and (2) a real option value component. Since the necessary data to examine this research hypothesis in the setting of GHG emission allowances is not yet available, we test our conjecture by examining the value relevance of sulfur dioxide (SO2) emission allowances held by US electric utilities. Empirical results reveal that the capital market assigns a positive price to a firm’s bank of SO2 emission allowances, consistent with the argument that emission allowances have, at least, an asset value component that is assigned a positive price by the market. We also find weak evidence
consistent with the market assigning a real option value to the allowance banks.

Naomi will be presenting her research results, but more importantly will be introducing us to the relatively unknown but important emissions trading markets, and indicating directions for future work.  Shayne will weigh in with some standard setting insights and updates.

Details on attending are available here, and of course you can always watch right on the web, at our LIVE page.

* UPDATE: The archived video of this Round Table can be found here.