I’m writing to bring to your attention a great resource for experimental economics. Time-sharing Experiments for the Social Sciences (TESS) is an NSF-supported infrastructure project that enables scholars (including graduate students, post-docs, and faculty) to conduct original experiments on nationally representative samples at no cost to the investigator.

TESS proposals are peer-reviewed and successful projects that are fielded using a nationally-representative internet survey panel (Knowledge Networks). This platform offers the opportunity for surveys of the general United States population, as well as specific subpopulations that are often challenging for researchers to study.

The application process is simple, and the turn-around time is generally quite fast — and our expanded capabilities mean that scholars can now conduct more complicated experiments than in the past.

Jeremy Freese (Northwestern) and Penny Visser (University of Chicago) Principal Investigators, TESS

So the new standard (my read) indicates that if information comes to the plate regarding an “event” that existed at the balance sheet date .. and that information helps with estimability of the amount booked at the balance sheet date, then one incorporates it into the estimate as of the year end.

Fine and dandy.

(Where’s my opinion, you ask? Keep reading.)

This standard (165, codification something or other)… is not very clear on what happens if estimability remains constant but the probability changes with something new coming to the plate during the period between end of year and the financial statement issuance. What if something changes the probability of occurence of the loss outcome in that time period, changing it from reasonably possible to probable? Or the other way around? From probable to reasonable possible?

The standard is clearer on examples that update the estimate of a contingency already booked. but what if that contingency is not already booked? Does it change recognition?? Could it change recognition .. to derecogntion? Are we in the same black box as in sfas 5 on this issue of derecognition??

The standard speaks in terms of “conditions that existed at the balance sheet date..” what is a condition, I ask??

Who has insight? I have an opinion (keeping with the blog)… my opinion is that i’m truly confused.

who has an answer. I’ve asked locally and gotten one strong opinion and one “yeah, i see your point.”

If you google “Bob Herz retires” you’ll have over 900,000 hits. Shortly after I arrived here, I was presented with a document that included the following: “be mindful that FAF is an independent, internationally recognized non-profit organization whose mission, activities, and operations have a profound impact beyond the confines of the organization.” I’ve studied and taught these impacts for 30 years. Now it seems that I can actually feel the reverberations. It’s a privilege to be in the midst of a 160 person staff and board with so much influence, intelligence, positive energy, and professionalism.

My first objective is to get a sense of the status of each of the FASB’s 13 projects actively in process. Watch these blog pages for announcements of round tables with project managers of several of these projects in the near future. The roundtables will update you on the status and issues and give you an opportunity to ask questions related to technical aspects of the projects and ideas for informative academic research.

I decided to start with the Financial Statement Presentation (FSP) project. In July 2010, both the IASB and FASB staffs posted “staff drafts” of an exposure draft at their individual websites. You can find the FASB’s 150-page document here. Interestingly, paragraphs BC28 through BC31 of the “basis for conclusions” section refers to a FASRI experimental study that “influenced the FASB’s decision to require entities with more than one reportable segment to present disaggregated by-function and by-nature information together in their segment note.” You can read more about this study on the FASRI WebPages.

So, academic research can make a difference. And more remains to be done. A major difference between the IASB and FASB exposure drafts pertains to the segment reporting information referred to in the paragraph above. In particular, the FASB requires by-nature reporting to vary across segments according to the manner in which management makes decisions regarding the activities of each segment. The IASB proposal requires segment by-nature reporting to conform to the disaggregation for the entity as a whole, precluding variation across segments. In addition to the research cited above, archival research such as work by Christine Botosan, Susan McMahon and Mary Stanford (2009 Working paper) discussed on the FASRI WebPages should have an impact on whether and how convergence of the IASB and FASB financial statement presentation standards eventually converge.

More generally, perhaps we can begin a discussion on these WebPages of major differences between IASB and FASB proposals and between current IFRS and U.S. GAAP. This discussion might fruitfully aim toward developing more academic research with the potential to influence the way in which FASB and IASB policy statements ultimately converge.

Disclaimer: The views expressed here are my own and do not represent positions of the Financial Accounting Standards Board. Positions of the FASB are arrived at only after extensive due process and deliberations.

The papers are

Kinney, “The Relation of Accounting Research to Teaching and Practice: A ‘Positive’ View,” Accounting Horizons (March 1989): 119-124;

Demski, J.S., and J.L. Zimmerman, “On ‘Research vs. Teaching’: A Long-Term Perspective,” Accounting Horizons (September 2000): 343-352; and

Friedman, “The Methodology of Positive Economics,” in Essays in Positive Economics, University of Chicago Press, 1953.

I suspect many of the academics who follow this blog have seen these papers, as I borrowed from existing syllabi when developing our course. For the doctoral students or faculty who are unfamiliar with these, I highly recommend them.  For non-academics, I strongly recommend the Kinney article.  The first two papers basically remind me of the importance and inter-relatedness of the research and teaching aspects of my career. The Kinney and Friedman papers remind me that important questions exist as to why the world of accounting is the way it is.  Further, they remind us that knowing more about how the world works is a prerequisite for making informed policy choices.  In my view, this is the underlying raison d’être for FASRI.

Yeah, it was a tough week.  But these papers help get me excited about research and teaching all over again.  I am interested if blog readers have any other similar “pick-me-up” papers that I should consider including next year.

A WSJ article reports that “[FAF President Jack] Brennan said in an interview that the decision to step down was Herz’s and that the foundation hadn’t received any pressure from the government or outside parties to replace him. FASB is an independent standard-setting body, although its activities are overseen by the Securities and Exchange Commission. The board’s activities are also subject to congressional oversight hearings. Herz wasn’t available to comment. ”

In addition, the FAF announced that the board will also grow back to 7 members from its current 5 member board.

The full FAF press release is available here.

This is interesting news, especially in light of the substantial standard setting agenda that the board faces over the next few years.

If someone asks me, “What’s a 10-K?” I’ll tell them it’s a document submitted to the SEC containing the annual financial statements of a company. If pressed, I’ll probably mention the footnotes, MD&A, etc. It’s that “etc.” part that a recent CFO.com article perked my interest about. The article talks about the increasing use of mandatory disclosures as a method not of reporting, but rather of policy making.

Imposing new disclosure requirements on companies is one way lawmakers can indirectly change companies’ policies. “If they’re trying to shape a particular type of behavior when they can’t require a company to do something, they will require disclosures that are potentially embarrassing if the company doesn’t do what’s being asked,” says Gary Brown, a shareholder at law firm Baker, Donelson, Bearman, Caldwell & Berkowitz, who counsels companies on SEC compliance and corporate-governance issues.

Some proposals currently in the works at congress include requiring companies to disclose (in annual and quarterly SEC filings) business dealings with companies in Iran, employee hedge options, and payments made for political activities (e.g. lobbying).

Help me anybody. How much is the one versus the other?

One of The University of Texas psychology faculty members wrote about this event; he’s quite smart. He and I overlapped at the University of Illinois in the 1980’s – he in psychology and me, down the street in “commerce.” We took a few classes together. While I have not yet proven that debits fail to equal credits, he’s made a number of important inroads into human psychology….

In any event, he wrote a beautiful commentary. See below….
——————————————————————————————-
Why science is self-correcting

There’s no point in scientific misconduct; it is always found.

Published on August 10, 2010 ART MARKMAN, THE UNIVERSITY OF TEXAS

According to the August 10, 2010 Boston Globe, Harvard University psychologist Marc Hauser has decided to take a yearlong leave of absence after evidence of scientific misconduct was found in his lab. On the basis of an investigation by Harvard University, at least one scientific paper (from the journal Cognition) has been retracted, and others may be as well. Hauser is a prominent member of the scientific community. Much of his research has looked at non-human primates and has examined complex mental abilities such as communication and reasoning.

I find cases like this both frustrating and reassuring at the same time.

The frustrating part of cases of misconduct is fairly obvious. As a scientist, all I really have is the integrity of my data. Theories are nice, of course. We create theories to help us to explain patterns of data. But, really, theories are most useful because they help use to develop new questions that we can ask that will help use to collect new data. Our understanding of all facets of the universe from the movements of the planets to the behavior of people is rooted in our ability to collect good data.

And scientists hold a special place in their hearts for people who collected and analyzed good data. Newton may have come up with the laws of motion, but he recognized the importance of previous scientists like Tycho Brahe and Johannes Kepler whose data was crucial in revising our beliefs about the way planets move around the sun. As Newton said, “If I have seen further, it is only by standing on the shoulders of giants.” So, it is frustrating to hear about misconduct that compromises the integrity of the data in the field.

At the same time, cases of misconduct are reassuring. Science is remarkably self-correcting. When we publish papers in scientific journals, we organize our papers in a way that reflects the ideals laid out by Francis Bacon. We give enough of the details about our methods that someone else could repeat the study we are presenting. We present details about the analysis of our data. After a paper is published, authors often make their data available to others who want to do additional analyses of the work. If a result piques the interest of other scientists, then their first step is usually to try to repeat the experiment, perhaps with a few changes to test alternative explanations for a finding.

Because scientists are always repeating each other’s experiments, it is hard for afictitious result to hang on for very long. When the studies are fairly easy to conduct (as it is for many psychology studies run with university undergraduates), it quickly becomes clear when a finding is hard to obtain again. For studies that are harder to conduct (like the studies that Marc Hauser does with primates), it may take longer for problems to surface. Ultimately, though, the scientific method is self-correcting. The field is able to separate the good results from the bad fairly quickly. And that is reassuring. There is probably a lesson in here for fraud in other sectors of the world like the financial community, business, and politics. There is something to be said for allowing others to have access to your data and your methods. But, we can take up that topic another time.

So, as it pertains to leases, “speak now or forever hold you peace.” Comment letters are due December 15th.

I’ve also recently begun reading a book by Robert Eccles (Harvard University) and Michael Krzus (Grant Thornton), titled One Report, which also contributes to this discussion.  You can find copies of this book here, ISBN 978-0-470-58751-5.  The authors make the case that integrated reporting is an essential feature of future corporate reporting, and they highlight examples of organizations that are already providing such reports to their stakeholders.

Where are the boundaries of financial reporting?  In our courses, in public policy debates, in standard setting, in regulation, should corporate/organizational reporting about aspects of organizations’ interactions with stakeholders be a standard part of reporting?  If so, how?  In what form?  Regulated by whom? 

These are all interesting questions.  And as I said, it seems I’m hearing more about them every day.  Where do we academics fit in?  How can we contribute?

My key take-away from these conversations is that analysts’ request for the direct method is in part a request for symmetry in how information is displayed/disaggregated across the financial statements, and a way to encourage companies to give equal weight and equal treatment to each of the primary financial statements. GAAP net income is largely an accrual-based number and the income statement disaggregates that accrual-based number into accrual-based line items. Total assets, total liabilities, and shareholders’ equity are disaggregated on the balance sheet into the components that constitute those totals. This lets users identify the sources of those totals and assign different valuations to each asset and liability component if they choose to (especially since many of the line items are measured at historical cost).

For some reason, operating cash flow under the indirect cash flow method does not receive the same treatment. The total operating cash flow number is the only item in the operating section of the cash flow statement that is a true cash-based number. The indirect cash flow statement is an itemized list of changes in the other financial statements that are necessary to get from net income to operating cash flow. As a result, unlike with the income statement, an analyst cannot make judgments about which components belong and don’t belong in a normalized operating cash flow number because the analyst does not know what the operating cash flow cash components actually are! In that regard, operating cash flow is a bit of a “black box.”

I confess, I still find myself wondering how much effect direct cash flow reporting will have on decision making. More information is better—free disposal, and all that–but there are other ways of conveying cash flow information (such as extensive footnote disclosure). One possibility is that a direct cash flow report would focus more analyst attention on cash flows, which in turn would lead to more and earlier cash flow disclosures in earnings announcements, more discussion of in conference calls, and so on. Unfortunately, direct cash flow reporting is so rare in the US, and so abbreviated in other countries (compared to what the FASB and IASB are proposing) that it is hard to infer the benefits of the proposals from existing data.

FAF, FASB, and GASB on Twitter.

Follow them here.

“The American Bankers Association (ABA) respectfully requests that the Financial Stability Oversight Council, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, examine the impact of a recent accounting proposal that will have a significant impact on the financial system. “Fair value accounting” (also known as “mark to market accounting”) is being proposed by the FASB for all financial instruments.  For banking institutions, whose primary assets and liabilities are financial instruments, such accounting could dramatically change banking products and services as well as change how banking institutions are viewed by shareholders, depositors, and regulators.”

The letter from Edward Yingling of the ABA to Timothy Geithner of the Treasury goes on to list several perceived shortcomings of the FASB’s proposal.  Interestingly, the letter asserts that the proposed standard hampers international accounting convergence, even though the proposal is generated from the joint IASB/FASB project on financial instruments.  The two Boards are handling this topic in a non-synchronized manner, but I was still surprised that the letter cast it as a step back from convergence.

Under an early version of the financial reform legislation, the Council would have had a more direct effect on FASB standards – all changes in standards would have to be approved by the Council, at least before they were applied to banks.  Fortunately, the final version of the bill limits the Council to writing comment letters.

I am interested to see if the Council will add another straw of dissent on the back of this FASB proposal.  Or will the non-banking members of this Council end up supporting the FASB’s proposal?  Or will they stay out of the fight?