June 30, 2008

Bob Jensen's New Bookmarks on June 30, 2008
Bob Jensen at Trinity University 

For earlier editions of Tidbits go to http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/.

Bob Jensen's Blogs --- http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

Many useful accounting sites (scroll down) --- http://www.iasplus.com/links/links.htm

I have an academic dilemma that I will share below. I sent a letter to the authors of a Teaching Note (case solution) urging them to withdraw the Teaching Note and correct some mistakes that I described to them in my February 26 letter. . They did not do so, so you can read below about what happened next:

1. Issues in Accounting Education (IAE) is one of my favorite journals, in part because it is more open to wide ranging research methodologies than all other research publications of the American Accounting Association (AAA)
    

2. The current February 2008 issue has an excellent printed Teaching Case:
   
   "Accounting for Derivatives and Hedging Activities: Comparison of Cash Flow versus Fair Value Hedge Accounting" Issues in Accounting Education, Vol. 23, No. 8, February 2008, pp. 103-117 --- http://aaahq.org/pubs.cfm
    

3. A Teaching Note (case solution) is available AAA members who pay a fee for an electronic subscription to this publication. There are no restrictions on who can be an AAA member and subscribe to IAE. Hence anybody in the world can download the Teaching Note as an electronic subscriber --- Subscribers may go to http://www.atypon-link.com/AAA/doi/pdf/10.2308/tnae.2008.23.1.13
   Also see http://aaahq.org/pubs.cfm
    

4. I studied this Teaching Note carefully and found, in my opinion, both serious errors and misleading assumptions. I communicated these as an error-correcting working paper to both the authors of the published Teaching Note and to the Editor of IAE. I suggested that my error corrections be appended at the end of the original Teaching Note. This would not be hard to do since the Teaching Note can only be downloaded on the Internet. Unlike the Teaching Case itself, the Teaching Note was not distributed in hard copy.
    

5. The IAE Editor informed me that my working paper would be appended to the Teaching Note. However, weeks turned into months and nothing happened. When I inquired the IAE Editor informed me that he’d had a change of heart. What was rude is that he never bothered to inform me of this until I inquired why no appendix was added to the Teaching Note.
    

6. The Editor of IAE  later informed me that he will not append my error corrections to the end of the Teaching Note until I pay a submission fee to have my submission formally refereed. It makes perfect sense that the working paper should be refereed before IAE publishes it as an appendix to the Teaching Note. However, it's ludicrous that, if I want the IAE to correct the IAE's own mistakes, I must pay the IAE to merely consider correcting its own mistakes."
   Submission fees range from $75 to $100 --- https://aaahq.org/AAAforms/journals/iaesubmit.cfm
    

7. I might add that I'm willing to make referee-suggested corrections to my own errors. However, this is not a mainline publication, and I refuse to spend more time word crafting this error-correcting working paper. One of the most difficult aspects of publishing mainline journal articles is satisfying referees who often have differing viewpoints on how the paper should be word crafted. I've just signed a contract to write a book on derivative financial instruments and hedging activities and do not have the time or inclination to word craft this error-correcting working paper. I think the editor of the IAE feels that my use of the word "errors" will embarrass the Case authors. I did make an effort to only use the word "error" when there was what I consider to be an outright error such as using cash flow hedging journal entries for a hedged item that has no cash flow risk. I refuse to call outright errors differences in assumptions when they are in fact errors. When there were differing assumptions I did not call those "errors."
    

8. The Editor may one day have a change of heart about making me pay a submission fee to get the IAE to correct its own mistakes and to word craft the paper to take out the word "error" wherever it appears. Otherwise what are serious errors, in my viewpoint, will live on forever in the Teaching Note to what is otherwise a very good Teaching Case. The Case authors could also rewrite their original Teaching Note, but across several months of communications between us they've never proposed doing so to me or the IAE editor. It would take a substantial effort to rewrite the Teaching Note, and there are complications that arise in that some problems in the Case itself are impossible to correct since the Case has already been distributed as hard copy.
    

9. This could be success arising from troubles turned inside out. In my viewpoint comparing my error-correction working paper with the original Teaching Note has value-added beyond what a perfectly rewritten Teaching Note would make to the Teaching Case. In other words, students and instructors can learn more by studying the errors themselves in the original Teaching Note. This is what I mean by turning troubles inside out to create success. For this reason you should download the current Teaching Note to keep in your own archives just in case it gets laundered later on --- http://aaahq.org/pubs.cfm 
    

10. I think both teachers and students may be misled by the current Teaching Note that can be downloaded from http://aaahq.org/pubs.cfm
    If you are using this Teaching Note, you may download, for free, my error corrections at http://www.trinity.edu/rjensen/CaseErrors.htm
     

11. My error-correcting working paper is designed to be used alongside the electronically published Teaching Note. My working paper will not make much sense to readers who do not have both the Teaching Case and the original Teaching Note for comparative purpose. The original Teaching Note has many things that are very good. I did not find errors in everything contained in the Teaching Note.
     

12. Of course my proposed error-correcting working paper contains only my opinions and could itself have errors that I do not yet know about.
    You be the judge at http://www.trinity.edu/rjensen/CaseErrors.htm
    Please let me know if you find errors in my work since my working paper can be easily corrected at this point.
     

13. Even if the IAE Editor has a change of heart and is willing to have my error-correcting working paper refereed for free, the process could take many months, possibly over a year, before my working paper is appended to the Teaching Note. If you are using this Teaching Case, you probably should take a look at http://www.trinity.edu/rjensen/CaseErrors.htm
    That in fact is my main purpose for writing the above message!

    Postscript 01
    After I circulated this message among some friends, one wrote back and wondered if Science Magazine and the the New England Journal of Medicine charges for correcting their mistakes? We're in deep trouble if that's the case.

    Postscript 02
    My message on this in the last edition, April 30, of New Bookmarks caused the IAE Editor to have a change of heart. My error-correcting working paper has been sent (at no charge to me) out for review. The original Teaching Case authors have had a change of heart and are now willing to substitute their original Teaching Note with a revised version that weaves in my suggestions. However, this process will take many months. Users of the existing Teaching Note are still advised to go to http://www.trinity.edu/rjensen/CaseErrors.htm

Bob Jensen's past presentations and lectures --- http://www.trinity.edu/rjensen/resume.htm#Presentations   
 

Bob Jensen's various threads --- http://www.trinity.edu/rjensen/threads.htm
       (Also scroll down to the table at http://www.trinity.edu/rjensen/ )

Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm

Click here to search this Website if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/

Bob Jensen's Home Page is at http://www.trinity.edu/rjensen/

CPA Examination --- http://en.wikipedia.org/wiki/Cpa_examination

Wikipedia has a rather nice summary of accounting software at http://en.wikipedia.org/wiki/Accounting_software

Bob Jensen's accounting history summary --- http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Bob Jensen's accounting theory summary --- http://www.trinity.edu/rjensen/Theory.htm

Tom Selling's blog The Accounting Onion (great on theory and practice) --- http://accountingonion.typepad.com/

XBRL Networking --- http://xbrlnetwork.ning.com/

From EDGAR Online
FREE access to the latest ANNUAL REPORTS and PROSPECTUSES from hundreds of publicly traded companies and funds.

Truth in Accounting or Lack Thereof in the Federal Government (Former Congressman Chocola) --- http://www.youtube.com/watch?v=NWTCnMioaY0 
Part 2 (unfunded liabilities of $55 trillion plus) --- http://www.youtube.com/watch?v=1Edia5pBJxE
Part 3 (this is a non-partisan problem being ignored in election promises) --- http://www.youtube.com/watch?v=lG5WFGEIU0E

Watch the Video of the non-sustainability of the U.S. economy (CBS Sixty Minutes TV Show Video) ---
http://www.youtube.com/watch?v=OS2fI2p9iVs 
Also see "US Government Immorality Will Lead to Bankruptcy" in the CBS interview with David Walker --- http://www.youtube.com/watch?v=OS2fI2p9iVs
Also at Dirty Little Secret About Universal Health Care (David Walker) --- http://www.youtube.com/watch?v=KGpY2hw7ao8

Accountancy Discussion ListServs:

For an elaboration on the reasons you should join a ListServ (usually for free) go to   http://www.trinity.edu/rjensen/ListServRoles.htm

AECM (Educators)  http://pacioli.loyola.edu/aecm/  AECM is an email Listserv list which provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm

CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/  CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.

Yahoo (Practitioners)  http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the activities of the AICPA. This can be anything  from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.

AccountantsWorld  http://accountantsworld.com/forums/default.asp?scope=1  This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.

Business Valuation Group BusValGroup-subscribe@topica.com  This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM]

Tidbits Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm

New Bookmarks Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/Bookurl.htm

Fraud Updates is now available at http://www.trinity.edu/rjensen/FraudUpdates.htm

Links to my other fraud modules can be found at http://www.trinity.edu/rjensen/Fraud.htm

Bob Jensen's Threads --- http://www.trinity.edu/rjensen/Threads.htm

Bob Jensen's new timeline on the worldwide scandals using derivative financial instruments and the evolution of accounting standards for derivatives --- http://www.trinity.edu/rjensen/FraudRotten.htm

Links to Documents on Fraud --- http://www.trinity.edu/rjensen/Fraud.htm

Bob Jensen's complete set of Enron Updates are at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates

Bob Jensen's threads on the Enron scandal are at http://www.trinity.edu/rjensen/FraudEnron.htm

Large International Accounting Firm History --- http://en.wikipedia.org/wiki/Big_Four_auditors

Global Perspectives on Accounting Education --- http://gpae.bryant.edu/%7Egpae/content.htm

A Vision of Students Today (Video) --- http://www.youtube.com/watch?v=dGCJ46vyR9o

Humor Between June 1 and June 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor063008

Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

Humor Between April 1 and April 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor043008

Humor Between March 1 and March 31, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor033108

Humor Between February 1 and February 29, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor022908   

Humor Between January 1 and January 31, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor013108  

Tidbits Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm

Congratulations to Herb and Lenore Miller

Denny Beresford informed me that Herb and Lenore Miller will celebrate their 70th anniversary on July 1 in Athens, Georgia where he retired from the University of Georgia quite a few years ago.

Herb was the co-author on the famous and successful and highly lucrative Finney and Miller textbook series. Lenore was an accountant who added more than her share to those textbooks as well. Herb's interests ranged from playing the clarinet in a dance band to working in the racing pit of AJ Foyt to frequent golf with close friends like James Don Edwards. Herb and Lenore were both excellent bridge players in their younger days before Herb's eyes became weak.

Herb was a visiting professor at Stanford when I was finishing my PhD. He motivated me to take my first full-time faculty appointment where he was a senior accounting professor --- Michigan State University. Herb and Lenore were instrumental is getting me to forget my skiing and horse raising dreams in favor of digging in to the drudgeries, albeit rewarding drudgeries, of accounting research. I never looked back!

You can read more details about Herb in his Accounting Hall of Fame page at
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/herbert-elmer-miller/
Herb was born August 11, 1914, so you go figure. Lenore grew up in Humboldt, Iowa less than 30 miles from where I grew up, although I did not know her until we met years later at Stanford.

Herb served as President of the American Accounting association 1965-1966 during which The Accounting Review  was published four times with gold covers to celebrate the Golden Anniversary of the AAA. Now Herb and Lenore are only five years away from their own Diamond Anniversary. I wish with all my heart that they will celebrate that event on July 1, 2013.

There's Love --- http://www.youtube.com/watch?v=m7050D2sVFc

Action Needed to Avoid Mission Failure
Having a major governmental accounting-type problem on CPA examinations bolstered this module in most U.S. accounting education programs, but it most likely is tokenism compared to the sink hole forming in our Federal, state, and local governments. Much of our hope for the future depends upon having a more stable, enlightened, dedicated, ethical, and knowledgeable body of civil service workers to keep our naive and often corruptible elected officials from losing this nation.

The problem is that it really takes no expertise to run for any elected office. We're in a bigger mess when the government civil service is cannot counter the ignorance and ethically-challenged elected leaders.

"Action Needed to Avoid Mission Failure,' Warns Study," AccountingEducation.com, June 26, 2008 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=147252 

Identifying the new skills and competencies that federal financial managers will need to face 21st century challenges is the focus of a research paper released recently by the AGA (Association of Government Accountants).

21st Century Financial Managers: A New Mix of Skills and Educational Levels? warns that with 60 percent of the US workforce eligible for retirement over the next 10 years and the commensurate mass retirement of skilled and experienced government financial managers, federal agencies could be left vulnerable to mission failure.

According to AGA Director of Research Anna Miller, "This report is of particular importance given the magnitude of the anticipated problem. The study highlighted those areas in which we must act if we are to avoid compromising standards of accountability and transparency to taxpayers."

Continued in article

The Association of Government Accountants --- http://www.agacgfm.org/homepage.aspx

The U.S. is now dangling on a debt and accountability cliff on the side of that sink hole, and virtually none of our presidential or congressional candidates for office are willing to face these issues because the voters themselves won't have any part of sacrificing to save our great nation.

Truth in Accounting or Lack Thereof in the Federal Government (Former Congressman Chocola) --- http://www.youtube.com/watch?v=NWTCnMioaY0 
Part 2 (unfunded liabilities of $55 trillion plus) --- http://www.youtube.com/watch?v=1Edia5pBJxE
Part 3 (this is a non-partisan problem being ignored in election promises) --- http://www.youtube.com/watch?v=lG5WFGEIU0E

Watch the Video of the non-sustainability of the U.S. economy (CBS Sixty Minutes TV Show Video) ---
http://www.youtube.com/watch?v=OS2fI2p9iVs 
Also see "US Government Immorality Will Lead to Bankruptcy" in the CBS interview with David Walker --- http://www.youtube.com/watch?v=OS2fI2p9iVs
Also at Dirty Little Secret (David Walker) --- http://www.youtube.com/watch?v=KGpY2hw7ao8

At the moment the overwhelming majority of our top accounting graduates do not aspire to civil service.
Therein lies much of the problem for our future.

June 27, 2008 reply from Richard C. Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

And now, a rebuttal from the late George Carlin.

"Now, there's one thing you might have noticed I don't complain about: politicians. Everybody complains about politicians. Everybody says they suck. Well, where do people think these politicians come from? They don't fall out of the sky. They don't pass through a membrane from another reality. They come from American parents and American families, American homes, American schools, American churches, American businesses and American universities, and they are elected by American citizens. This is the best we can do folks. This is what we have to offer. It's what our system produces: Garbage in, garbage out. If you have selfish, ignorant citizens, you're going to get selfish, ignorant leaders. Term limits ain't going to do any good; you're just going to end up with a brand new bunch of selfish, ignorant Americans. So, maybe, maybe, maybe, it's not the politicians who suck. Maybe something else sucks around here... like, the public. Yeah, the public sucks."

Richard C. Sansing
Professor of Accounting
Tuck School of Business at Dartmouth
100 Tuck Hall Hanover, NH 03755

Jensen Comment
You can watch George Carlin saying this on video at http://www.youtube.com/watch?v=SlXoIVLJWCY

Not everything that can be counted, counts. And not everything that counts can be counted.
Albert Einstein

Soto’s quotation below was forwarded to me by Denny Beresford. The question was what Soto would like to be if he wasn’t in professional baseball.
Probably be an accountant. I like to figure out stuff. In accounting, if you miss one number you get the whole thing wrong. You have to be perfect --- I'm a perfectionist.
Giovani Soto (catcher for the Chicago Cubs when asked what he'd like to be if he wasn't in baseball), as quoted in in an interview with Mary Burns in Sports Illustrated, June 2008
 

Jensen Comment 1
If Soto only knew that accountants are second only to economists in terms of inaccuracies. When accountants total up the numbers on a balance sheet the total is always accurate, but the numbers being added up can be off by 1000% or more. Accuracy varies of course. Cash counts are highly accurate. Fixed assets, net of depreciation, are make-pretend within limits. Intangible asset valuations are about as accurate as ground eyesight measurements of floating cloud dimensions on a windy day. Accountants make highly inaccurate estimates of assets, liabilities, and equities. Then accountants change hats and chairs and add these estimates up very accurately and pretend that the total must mean something --- but accountants aren't sure what.

Jensen Comment 2
There are some well-known accountants and accounting professors who lived in accounting but dreamed of being sports heroes. My best example is Herb Miller who looked like an accountant, spoke like an accountant, and was a very, very good accountant but spent many hours throughout much of his life daydreaming about being a race car driver. Herb lived out his daydreams somewhat by becoming close friends with A.J. Foyt and occasionally being present in Foyt’s pit during actual races. I think Herb’s assigned job was to stay out of the way.

You can read about A.J. Foyt at http://en.wikipedia.org/wiki/A._J._Foyt

You can read about Herb Miller at
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/herbert-elmer-miller/

From the Publisher of the AccountingWeb on June 19, 2008

Some friends of ours are currently on vacation in Russia, which got me to thinking, "I wonder what it's like to be an accountant in Russia?" I have no idea. It wasn't all that long ago that International Financial Reporting Standards were adopted by the Russian Finance Ministry, so it's probably been a rather challenging profession as of late! If you have any first-hand knowledge of accounting in the Russian Federation, please e-mail me so we can share it with AccountingWEB readers.

In the meantime, here are some key Russian facts:

• Population: 142 million
• Largest city (and capital): Moscow
• Second largest city:
  St. Petersburg
• Size: the largest country in the world by more than 2.5 million square miles
• Ethnic groups:
  Russian 79.8%,
  Tatar 3.8%,
  Ukrainian 2%,
  other 14.4%

Rob Nance
Publisher
AccountingWEB, Inc.
publisher@accountingweb.com

Bob Jensen's reply to Rob Nance

Hi Rob,

A better question is to ask what accounting became in Russia after the breakup of the Soviet Union --- http://www.worldbank.org/html/prddr/trans/janfeb99/pgs22-25.htm
The system is highly geared to tax reporting and has a long ways to go relative to IFRS.

Accounting in the former Soviet Union was pretty much an exercise in tabulating fiction --- http://www.questia.com/PM.qst?a=o&d=6827120

Accounting was an instrument of the planning and control process that substituted for market-based controls ---
http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-6281.1974.tb00002.x?cookieSet=1&journalCode=abac

Russia now has offices of the Big 4 accounting firms and maybe other Western CPA firms as well. One of my former students accepted a transfer to the PwC office in Moscow. It proved to be a fast-track to becoming a partner in PwC. Russian companies are seeking equity investors throughout the world, and to do so they have to add accounting assurances much like the other companies in the global economy seek assurances.

KPMG has a publication comparing IFRS with Russian GAAP --- http://snipurl.com/russiangaap 
Also see http://www.kpmg.ru/index.thtml/en/services/assurance/IFRS/IFRSpublications/

PwC has an IFRS Transition document at http://www.pwc.com/extweb/service.nsf/docid/90828387207B28F78025717B0038B2AD
Results of a 2006 survey are reported at http://snipurl.com/russiangaapsurvey

Deloitte links to a Russian translation of IFRS as well as providing information on transitioning to IFRS in Russia --- http://www.iasplus.com/country/russia.htm

A illustrative Russian set of financial statements can be found at http://www.dixy.ru/en_invest-report/

Hope this helps!

Bob Jensen's threads on accounting history, theory, and controversies --- http://www.trinity.edu/rjensen/Theory01.htm

Bob Jensen's threads on accounting firm scandals and lawsuits --- http://www.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's homepage with links to a lot of other accounting documents --- http://www.trinity.edu/rjensen/

SmartPros has an interesting site for students --- http://accounting.smartpros.com/accountingstudents.xml

AccountingWeb Student Zone --- http://www.accountingweb.com/news/student_zone.html

Bob Jensen's threads on accountancy careers --- http://www.trinity.edu/rjensen/Bookbob1.htm#careers

New IFRS XBRL Taxonomy Released --- http://accounting.smartpros.com/x62326.xml

Chronology of IFRS standards --- http://www.iasplus.com/restruct/chrono.htm

Iraq Stock Exchange Registrants Must File Financial Reports Under IFRS Accounting
We have created a new Jurisdiction Page for Iraq. Under the Iraq securities markets law, all companies listed for trading on the Iraq Stock Exchange are required to publish financial statements that are prepared in accordance with International Financial Reporting Standards. Those statements must be audited in accordance with International Standards on Auditing. Further, the Iraq banking law (administered by the Central Bank of Iraq) requires all banks to publish IFRS financial statements. We have updated our table of Use of IFRSs by Jurisdiction.
IASPlus blog from Deloitte, June 17, 2008 --- http://www.iasplus.com/index.htm

Iran has some issues with IFRS convergence but is at least considering the possibility of convergence, unlike Saudi Arabia, Japan, and Iceland that appear to be giving IFRS less consideration --- http://www.iasplus.com/resource/gaap2002.pdf

Iran has an Institute of Certified Accountants --- http://www.iasplus.com/index.htm
Professional Accountancy groups in other nations are listed at http://www.iasplus.com/links/links.htm

Many other useful accounting sites (scroll down) --- http://www.iasplus.com/links/links.htm

Deloitte also publishes an extensive Global Outlook document, although I've not found updates since 2006 --- http://www.iasplus.com/resource/0511econoutlook2006.pdf
This is a very, very useful document about global economic opportunities and risks.

Directories --- http://dir.yahoo.com/Business_and_Economy/Directories/ 

CIA World FactBook --- https://www.cia.gov/cia/publications/factbook/index.html

Bob Jensen's links to economic, accounting, and finance statistics --- http://www.trinity.edu/rjensen/Bookbob1.htm#EconStatistics

Congratulations to San Diego State University's School of Accountancy

Accounting school receives $10 million donation
San Diego State University has received a $10 million gift to name the university's nationally recognized school of accountancy the Charles W. Lamden School of Accountancy. The gift, among the largest in university history, was made by Gertrude Lamden in honor of her late husband who was instrumental in launching SDSU's College of Business Administration.

Organization, Compensation, and Litigation in the Large Public Accounting Firms

A very good friend sent this message to me:

Bob,

See - http://thecaq.org/publicpolicy/treasurydata.htm 

Some great information about the organization of major accounting firms, their finances (including average partner comp) and litigation.

Question
Is the present audit model broken?

No New Protections to Protect the Big Four International Auditing Firms from Insolvency
"A New Big Eight: Suggesting a Deal the Big Four Can’t Refuse," by Tom Selling, The Accounting Onion, June 22, 2008 ---
http://accountingonion.typepad.com/

Jim Peterson, who blogs on the auditing profession, has written an excellent summary and analysis of the failure of the U.S. Treasury Department's Advisory Committee on the Auditing Profession to recommend a solution to the Big Four’s exposure to liabilities that threaten their solvency.  Jim's blog, Re:Balance, is worth reading simply out of appreciation for Jim’s elegant writing style.  Also, check out his funky bow tie!

“Did anyone really think that the endless chatter about saving the system of privately-provided audits for large global companies would come to anything? ….

…those sincerely believing in the importance of large-company assurance are avoiding an election between two unappealing choices: Either put every effort to assure that the Big Four are insulated from the very catastrophic risks that the critics insist they must remain exposed to, or start the process of designing the new audit model that must arise after the collapse of the Big Four under the abdication of the Treasury Committee and its counterparts.”

I agree with Jim that the current audit model is broken. The notion of independence from management is fatally flawed, and much of what passes for auditing does not create useful information for investors. Ironically, the “services” that merely provide a perfunctory rubber stamp on management’s judgments may create the Big Four's most significant exposures to liability. Walter Schuetze, former SEC Chief Accountant and FASB member, explained this much better than I can in a 2003 speech to the New York State Society of CPAs. The deafening silence in response to his challenge to make audits simpler and more relevant attests to the fact that political will to fight deeply entrenched interests in the current system is virtually non-existent.

Continued in article

Andy Bailey's letter to the Department of the Treasury --- http://www.trinity.edu/rjensen/Bailey2008.htm 

Bob Jensen's threads on professionalism --- http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

Bob Jensen's threads on accounting careers are at http://www.trinity.edu/rjensen/Bookbob1.htm#careers

Bob Jensen's threads on scandals in the large firms --- http://www.trinity.edu/rjensen/Fraud001.htm

A Timeline of Financial Scandals and Accounting Standards Development --- http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Big is Sometimes Better When it Comes to Auditing

"PCAOB Inspections of Smaller CPA Firms: Initial Evidence from Inspection Reports," by Dana R Hermanson, Richard W Houston and John C Rice, Accounting Horizons, June 2007 --- http://www.atypon-link.com/AAA/doi/abs/10.2308/acch.2007.21.2.137

We examine 316 Public Company Accounting Oversight Board (PCAOB) inspection reports issued to smaller CPA firms (100 or fewer issuer clients) through July 2006. We find that 60 percent of the inspected firms have audit deficiencies. Firms with audit deficiencies are smaller, have a larger number of issuer clients, and are growing more rapidly than firms without deficiencies, suggesting an over-extension into the issuer client market by some firms. Deficiencies are more likely for inspections conducted in 2004 than 2005, and the PCAOB appears to have targeted smaller, riskier, rapidly growing audit firms for its 2004 inspections. In addition, we find some evidence that clients of deficiency firms are smaller, less profitable, and more highly leveraged. We also summarize the most common audit deficiencies and offer implications and directions for future research.

"Accounting for Second Life," by Richard A. Johnson and Joyce M. Middleton, Journal of Accountancy, June 2008 --- http://www.aicpa.org/pubs/jofa/jun2008/second_life.htm 

EXECUTIVE SUMMARY

Second Life is a virtual world with education, public relations, and economic implications. CPA Island is the center of the public accounting profession in Second Life.

At a minimum, CPA Island presents a creative communication medium to appeal to a new generation. This generation has grown up with high-speed Internet connectivity, instant messaging, and multiplayer online gaming.

The spirit behind CPA Island goes beyond clearly demonstrating an awareness of the different skill set of this new generation. It embraces and celebrates these skills as important to the future of the accounting profession.

The economic implications of Second Life are just now unfolding. Suspend disbelief, log on, and experience CPA Island and the other aspects of Second Life for yourself.

Bob Jensen's threads on Second Life virtual worlds are at http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife

"Accounting Grads Are Most Employable: Survey," SmartPros, May 27, 2008 --- http://accounting.smartpros.com/x61963.xml

Bob Jensen's threads on careers are at http://www.trinity.edu/rjensen/Bookbob1.htm#careers

Roger Collins called my attention to this link.

Where is insider trading more evident and difficult to stop than in the U.S. capital markets --- well England for one
"Bradford & Bingley: Time the FSA got serious on insider trading," by Martin Waller, London Times, June 6, 2008 --- http://business.timesonline.co.uk/tol/business/columnists/article4076208.ece

Bob Jensen's Rotten to the Core threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

Accounting Golden Fleece Quotations (read that bull crap)

I want to conclude by explaining what I mean by "truly believe." I'm just a politician ... whoops, I mean lawyer ... who really doesn't know much about what all you CFOs have to go through to make your numbers. Frankly, the details of the differences between IFRS and U.S. GAAP don't concern me much. I just threw in "truly" to impress upon you that I am on your side -- kind of like "no kidding," or "I swear." In other words, even though I don’t have a single good answer to any of the questions I have raised today, don’t worry, because we're going through with this anyway. I truly believe that If IFRS is good for you, it's good for the SEC; and it must be good for everyone.
John White, Director of the SEC’s Division of Corporation Finance, as quoted by Tom Selling in The Accounting Onion, June 9, 2008 --- http://accountingonion.typepad.com/theaccountingonion/2008/06/accounting-convergence-decoding-john-whites-speech.html

Jensen Comment
The roaring SEC-FASB (read that Cox-Herz) Train replacing domestic accounting standards such as U.S. and Canadian GAAP is analogous to letting the United Nations govern the world. Both the U.N. and the International Accounting Standards Board have lofty intentions, but multinational politics is a nightmare to behold

The IASB defines IFRS as a set of International Financial Reporting Standards --- http://www.iasb.org/Home.htm

Bob Jensen defines IFRS as International Fleecing of Responsible Standards

International auditing firms are seeking a judgmental (read that softer) set of standards under lobbying pressure from their large multinational clients. Bright lines led to $billions of losses in litigation in the U.S. because a client, with the blessing or incompetence of an auditor, crossed a line such as the old SPE 3% line that was a huge factor in the demise of Andersen and Enron --- http://www.trinity.edu/rjensen/Fraud001.htm 

I’m presently doing a funded research study comparing FAS 133 with IAS 39. FAS 133 has lots of bright lines and lots of examples, especially DIG examples, of how to account for complicated hedges.  IAS 39 is like driving down a mountain road on a moonless night without any headlights, road signs, or guard rails. With over a thousand variations of financial instrument derivative contracts and thousands of types hedging strategies, IAS 39 lets clients manage earnings most any way they like without detailed rules of the road and bright lines  that give them and their auditors guidance.

Eventually IFRS will be all fair value accounting on moonless nights. Accountability is going into the ditch or over a cliff --- http://www.trinity.edu/rjensen/theory01.htm#FairValue

David Albrecht forwarded the following link from the Financial Times:

"Accounting rule-makers putting markets at risk," by Michael Starkie, Financial Times,.June 12 2008 --- Click Here

Sir, Whither accounting?

I write this letter in a personal capacity. My qualifications for expressing these opinions are that I have been chief accountant at BP for the past 14 years and have been for some years chairman of the UK's CBI Financial Reporting Panel and a member of the European Financial Reporting Advisory Group Technical Expert Group.

Recent years have seen major changes in the topography of accounting standards; acceptance by the European Union (subject to endorsement) of International Financial Reporting Standards and by other countries also, and the decline in the influence of US generally accepted accounting principles as the US capital markets have become relatively less attractive.

What a wasted opportunity, then, that the current body of IFRS is so unhelpful for the markets when the accounting world was given this historic opportunity to create something that should have been both useful for markets and with the potential to be welcomed globally. I recall a year or two ago that the heads of leading accounting firms said that current international financial reporting was broken. But nothing has been done about this.

And the future looks even bleaker. The International Accounting Standards Board continues to develop an accounting model about which users of financial information have grave misgivings. Probably the most disturbing example is the use of predominantly mark-to-model exit values in the balance sheet, which cannot be relevant for a market trying to assess the economic performance and position of companies that have the intention of continuing to operate as going concerns. In the interests of brevity I will not list other examples though there are enough voices of protest being raised by those in the financial world to make it apparent that all is far from well.

How have things come to this pass? I have concluded, albeit with regret, that the fundamental problem is the members of the IASB. Collectively as board members they do not have the experience and wisdom to produce and maintain accounting standards that are useful for the capital markets and the wider economy. And some of the board members are clearly committed to an extreme view of recognition and measurement which will severely damage the operation of markets and ultimately economies. Recent appointments to the board are too little and too late to change the overall thrust.

Continued in article

Bob Jensen's threads on controversies in accountancy standard setting are at http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

Accounting Golden Fleece Research

June 8, 2008 message from David Albrecht [albrecht@PROFALBRECHT.COM]

I've been thinking quite a bit about the teaching of accounting. In the current environment, I think we have made it more difficult than ever for good teaching to take place. Here are a few 21st century environmental factors, all different in some way (if only in degree) from what we've experienced the past, that I think cause the most difficulty.

(1) Mass education and lack of budget. (2) Lack of respect for seasons of life. (3) Teaching research versus teaching a world-view. (4) Focus on content more focused than ever.

(1) Mass education and lack of budget. These issues have been problematic for decades, but seems to be more critical at the present time. State support of higher education has been on the wane for decades. In the 21st century, states are supporting higher education less than ever. Oh, there are a few stories of states pumping in a few extra dollars on a relative basis, it hasn't seemed to be permanent (see Ohio). Public colleges/universities (in which about 80% of America's freshmen start out) have responded by placing intense pressure on keeping up enrollment (or even expanding) so they can stay solvent. When huge enrollment increases don't materialize, they cut the cost of faculty by (1) reducing lines, and (2) relying more on full-time faculty with non-terminal degrees, and (3) relying on ever more temporary adjuncts. Nearly 20 years ago when I got hired at BGSU, its CBA was proud of 20-25 student sections. This coming fall I'm at 50-60 students across the board (actually been there for a few years). 15+ years ago I helped in the evolutionary development of Monopoly as a teaching tool for financial accounting. Now, I have so many students to teach that I'm reluctant to use it.

How has this made the teaching and learning of accounting more difficult? At a time when we understand much more about teaching and learning and we as professors should doing more with it, too many students and too few colleagues preclude our being able to do much about it.

(2) Lack of respect for seasons of life. I think we as humans are as inherently valuable in a later season of life as in earlier seasons. Having a high number displaying on my odometer of life, I can say with quite a bit of confidence that I'm no longer as attractive and sexy as I fantasize that I once was. I'm also less athletic than I once was. These factors don't make me less valuable as a person. Where once I was loved by older generations of Albrechts, now I'm loved by younger generations of Albrechts, but I'm still loved. 50-something grandfathers don't do the same thing as 20/30-something parents. I shouldn't be judged by the number of diapers I've changed recently, nor the number of school activities I've ferried my children to. My contributions there are in the past.

Thanks to new academic policies, I'm much less likely keep receiving institutional love if I lose attractiveness and sexiness in the publication area. I'm pretty sure that I'm wiser in teaching (made finalist for the university teaching award again) and service than ever, but I lack the ability to garner and focus sufficient energy for research projects requiring longer time horizons. I may not be able to teach from my stock of current research findings, but I'm much wiser and better able to teach from my more fully developed world view. But I'm in an older season of academic life where what I do has changed. If refereed publications for an academic is like supporting school activities for a parent, then why should a senior academic be judged according to a younger academic's activity set?

How does this affect teaching? Just try switching schools based on a teaching record when only publication records matter. At a time when schools could be bidding on my ability to help students learn, they are shunning me for publications. Schools get what they pay for, and they pay for publications and not teaching. Not too long ago I was told that I'd been doing nothing of value. Hmmph, despite being a respected teacher and a respected faculty leader, my activities were valueless. The natural human response is to pack it in. That is what I fear is happening across the country in accounting academia. Lack of respect for later seasons of life has resulted their surgical removal. If senior faculty aren't forced out early, they continue a mere shells of what they once were.

(3) Teaching research versus teaching a world view. The current AACSB focus on professors being qualified to teach is grounded on their possessing a recent track record of research/publication productivity. This is so AACSB schools can advertise their degrees as value added from a knowledge perspective. Given the accounting discipline's many problems in generating research findings of value, if there was any truth to AACSB advertising, then it would tout GIGO (garbage-in, garbage-out). And do current accounting research findings contribute to wisdom? Only to the extent that outsiders can view it and wisely conclude it is in a sorry state.

As a younger academic I was more concerned with how to work in the world. Now I'm concerned about how the world works. After spending more than two decades in trying to make sense of it all, I conclude that I understand something about it. As a younger academic, any comments I would have made about how the world works would have been pure poppycock (this word has an interesting entomology). Moreover, world-views are not publishable and would have been as publishable then as it is now (so I never would have been interested in pursuing it). Never-the-less, at the current time I'm more willing and able to enter into discussions on some topics in which a seasoned world view can lend some insight. Does everyone agree with me? Certainly not. However, some write and tell me they do.

What has this to do with the teaching of accounting and why is teaching/learning now more difficult? Just because a senior academic has few (or none) personal research results from which to teach does not mean that a senior academic has nothing to teach. The focus on teaching research results in not permitting some to teach at all, when other-wise they would still be teaching and presenting a world view. We've thrown the geezers out with the bath water.

(4) Focus on content more focused than ever. Twenty years into an educational revolution, I think the proponents of the two paradigms are more entrenched than ever. Especially in accounting.

Explaining why this is a problem requires some length. Ernest Boyer's seminal work, Scholarship Reconsidered, Priorities of the Professoriate, presented what I view as a holistic view of academia. Trashing the traditional teaching-research-service model as three independent silos, Boyer advocates a view with four areas of scholarship: discovery, integration, application, and teaching. The follow-up by Glassick, Huber and Maeroff, Scholarship Assessed: Evaluation of the Professoriate, discusses how to put Boyer's work into practice. I think a currently popular term, engagement, is an unstated but essential ingredient of the two works.

Barr and Tagg's important work, From Teaching to Learning - A New Paradigm for Undergraduate Education (Change, 1995), firmly a part of the larger Boyer picture, presents how there are really two paradigms in place for undergraduate collegiate education, the traditional content centered (or teacher centered) approach and a newer learning centered ( approach. The essence of the two approaches is that the content centered approach has focus on what students are to know, and the learning centered approach has a focus on what students learn to do with what they know.

Whether or not 21st century academics (accounting and otherwise) have read and reflected on Boyer, they most certainly are aware of the paradigmic struggles. It has seeped in via osmosis, if nothing else. L. Dee Fink (of Creating Significant Learning Opportunities fame) has publicly wondered why the new approach has not caught on across America. I've told him that I think it is because the aging generation of baby-boom academics has viewed it as criticism of their life-long efforts, and this criticism has cut to the bone. Instead of viewing at least parts of the new paradigm with an open mind, they simply are not about to tarnish their careers as they now approach retirement. They are concerned with legacy. Moreover, moving to the new paradigm takes significant mental and physical effort, in decreasing supply as aging baby-boomers get older.

Moreover, the AACSB has set teaching qualifications in terms of knowledge. No where does the AACSB say that to be qualified to teach accounting or business must one actually be able to teach in such a way so that students learn.

I've tried to keep my eyes and ears open. Everywhere I go and everywhere I look I see a wealth of knowledge-oriented, multiple-choice tests. Many of the presentations I see at AAA ELS sessions appear to be bandages for those in the teaching/content paradigm.

What does all of this have to do with teaching accounting? Given that accounting and auditing are two areas undergoing rapid change, and the current educational environment detracts from our ability to send out students well-equipped to succeed. In addition, at a time when any change should be welcomed, we are less likely to see it.

David Albrecht
Bowling Green

June 8, 2008 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

Albrecht wrote:
L. Dee Fink (of Creating Significant Learning Opportunities fame) has publicly wondered why the new approach has not caught on across America. I've told him that I think it is because the aging generation of baby-boom academics has viewed it as criticism of their life-long efforts, and this criticism has cut to the bone.

Dunbar:
I am reading a fascinating book, Mistakes Were Made (but not by me), by Tavris and Aronson. I wonder if I defend my approach to teaching (and a lot of other things) because of self-justification. I think we all deal with cognitive dissonance to some degree by coming up with arguments to support why we are right in what we think or do. The question is where do we draw the line, and how do we know when we should be trying to examine our justifications with an attempt at independence. Self-examination is darn hard.

I remember Wheeler (Michigan) questioning whether the then existing trend of CPA firms to sell product instead of professional services was damaging the independence of CPAs. He was almost booed out of the room by academics. Some of us may have changed our memories of that incident because it seems ludicrous now, at least to me that we didn’t applaud him. Changing with the times was not the thing to do, but how does one know when we should change? Now we say change the way we teach, and no wonder some of us hang on to old ways of doing things. Coming up with reasons why what we are doing could be wrong creates cognitive dissonance!

Amy Dunbar

UConn

 

June 9, 2008 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

One of the network affiliate television stations in Atlanta runs a periodic series of exposes in which they disclose how state provided research dollars are being "wasted" on many projects. The examples are usually those that involve travel expenses and other expenditures for scientific studies that appear to be of dubious value - e.g., the sex life of pigs (I made this up but it's a good example of the type of thing they cover). When I see these stories I wonder what the reporters would think about the dollars going to finance much of accounting research - would that result in the same kind of "outrage" among taxpayer/viewers? On the other hand, the topics studied would usually be so obscure that they wouldn't mean a thing to the viewers of the shows.

Denny Beresford

June 9, 2008 reply from Bob Jensen

Hi Denny,

I think Senator Proxmire probably had some better examples than the "sex life of pigs" since horny pigs might truly be of value to our food supply, especially if pigs' interest in sex wanes. Proxmire's Golden Fleece awards are at http://en.wikipedia.org/wiki/Golden_Fleece_Award

The problem with some, certainly not all, basic research in academe is that when funded it appears to be a waste of money at the time but may become important much later in life. Mathematical proofs are probably the best example. Some proofs of the past were deemed little more than wasted analytics before their importance was discovered centuries later.

As timing luck would have it, Sixty Minutes on CBS had a show related to this topic last night (June 8, 2008) justifying Howard Hughes Medical Research Foundation --- http://www.cbsnews.com/stories/2004/07/13/60minutes/main629388.shtml 

In a surprisingly multi-million dollar way, the multi-billion Howard Hughes Foundation funds basic medical research that cannot get more practically-minded NIH funds or other government grants.

Of course it is always possible to fleece taxpayers and research funding foundations for research that almost certainly fleeces the public with epsilon chance of ever being relevant to the world. I think Bill Proxmire identified many of those fleecing projects; But then again, maybe not in some instances.

Basic research is a service to society so steeped in externalities that it truly defies Adam Smith's "Invisible Hand" --- http://en.wikipedia.org/wiki/Adam_Smith 

My arguments with the takeover of our accounting doctoral programs by accountics professors is not so much that accountics is not worthwhile. My objection is that accountics professors turned these doctoral programs and editorships of some of our leading research journals into their own dysfunctional monopoly on methodology --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms 

In other words, it’s the monopoly that's dysfunctional rather than much of the accountics research itself. Having said this, accountics research might have more value if somebody somewhere sometime saw fit to replicate the studies to test for errors in either the data or the models or both.

Maybe somebody in the 23rd Century will find it of great benefit to, for the first time, replicate an accountics research finding in the 20th Century. This happens in mathematics and science. I'm not so optimistic about accounting research where much of the practical value today comes from normative methods and case studies rather than accountics models with hundreds of missing variables.

Bob Jensen.

January 9, 2008 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

Denny, Bob,...,

Jensen wrote:
The problem with some, certainly not all, basic research in academe is that when funded it appears to be a waste of money at the time but may become important much later in life. Mathematical proofs are probably the best example. Some proofs of the past were deemed little more than wasted analytics before their importance was discovered centuries later.

I entirely agree. There is a great need for basic as well as applied research. The results of under-investments in basic research shows up in the long run. I can give two examples:

Bell Labs used to be the place to be in most branches of science When the financiers conquered the world and the management adopted tunnel-vision, investments in such research plummeted, and we all know the rest of the story.

Xerox PARC used to be the place to be for any one interested in computing until recently. Mismanagement and tunnel vision led to its demise as a part of Xerox, and we all know the rest of the story.

I could give more examples.

Over the last two decades or so, funding in basic research by corporations has dropped and the void has not been filled. Funding by government too has plummeted. Tragically, the universities have not filled the void.

Two shining examples of support for theoretical research in the corporate sector are Microsoft's Bill Labs, and IBM's Watson Labs.

In case of both, the importance of basic research for the advancement of applied research is recognized. Should we wonder that IBM leads in patent registrations since the lingering death of Bell Labs many years ago? Recently I was at IBM Watson's Hawthorne Labs in West chester, and saw their "patent wall" -- one of the walls on the first floor where each IBM patent is painted in fine print; and they were almost running out of wall space.

Jensen wrote:
My arguments with the takeover of our accounting doctoral programs by accountics professors is not so much that accountics is not worthwhile. My objection is that accountics professors turned these doctoral programs and editorships of some of our leading research journals into their own dysfunctional monopoly on methodology --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

In other words, it's the monopoly that's dysfunctional rather than much of the accountics research itself. Having said this, accountics research might have more value if somebody somewhere sometime saw fit to replicate the studies to test for errors in either the data or the models or both.

Value of basic research is recognised by the society, though at times the idea may be so profoundly subtle that it takes a long time to recognise the use, or if the technologies needed to harness such theoretical results are not developed.

I can give examples of theoretical developments in statistics having to do with data visualisation which were developed a long time ago, and the theoretical developments in mathematical programming that needed advancements in computing technologies. The gap was wider in case of the theoretical results in non-Euclidean geometries to find their realisation in data visualisation.

Accounting is a different story altogether. Most financial accounting research resembles alchemy, theology, or simply voodoo magic. In fact, I think financial accounting is a theory-less discipline devoid of any ACCOUNTING implications (I am being deliberately provocative).

In accounting academia, we are also a practice-less discipline. We flagrantly ignore practice and in fact denigrate it. I am not being provocative here, just being truthful.

Jagdish

"The Revisions to IFRS 3:  Bad Enough to Abandon Faith in IFRS?" by Tom Selling, The Accounting Onion, June 16, 2008 --- http://accountingonion.typepad.com/theaccountingonion/2008/06/ifrs-3-fall-short-of-convergence-again.html

In my previous post, I described how an SEC honcho, while speaking to the choir at an event sponsored by FEI, espoused his version of faith-based accounting; though he could not provide a single, solid reason to explain why the U.S. should adopt IFRS, he has seen the light and has become a true believer. In contrast, reason-based accounting permits recitation of a vast litany of blasphemies against IFRS to make one a serious, if not committed, agnostic. Today, I write of one of these latest abominations: the latest revision to IFRS 3 on the accounting for business combinations.

Goodwill and NCI: IASB Fakes Right and Goes Left

Perhaps the most significant development in the accounting for business combinations is that FAS 141(R) now requires the same basis of measurement for assets acquired and liabilities assumed, regardless of the percentage of a company acquired (so long as control is achieved). Therefore, if control is attained without purchasing 100% of the existing equity interests in the acquiree, non-controlling interests (NCI) must be measured at full fair value.

As you may be aware from reading my post "What Good Comes from Goodwill Accounting?", I am not a big fan of recognizing 'goodwill' under any circumstance, so I will grant that the justification for the FASB's approach is not airtight. Nevertheless, it was common knowledge that the FASB was given to understand that, by sticking its neck out to make these controversial changes to FAS 141(R), the IASB would follow suit.

Instead, the IASB reneged on its promise in the worst way imaginable: they voted to allow entities a free choice between the partial and full fair value alternatives to goodwill and NCI measurement. What's more, issuers can make their choice on a transaction-by-transaction basis -- kind of like going to church one week and synagogue the next. Not even the most devoted acolyte can spin this any other way except as a significant step backwards from establishing the IASB as a credible agent of quality financial reporting and investor protection.

And, it's not just me who is outraged. Read the strongly-worded dissents* of Mary Barth and John Smith, two of the three Americans on the IASB. As to the third American, Jim Leisenring, I guess I shouldn't be surprised that he capitulated to the majority. Leisenring was the most prominent voice in support of FAS 133 (on hedge accounting) when he was on the FASB; a standard whose middle name is inconsistency. Be that as it may, one can only imagine where the IASB will take the interests of U.S. investors when our membership, and hence our influence, on IFRS inevitably wanes.

Mind These GAAPs, Too

If the unprincipled and unconstrained choice of accounting treatments for goodwill and NCI aren't enough for you to abandon any faith in a high-quality convergence, consider two more of the numerous departures from U.S. GAAP; these may be even worse.

First, the devilish game of managing the timing of contingent liabilities still thrives in IFRS. FAS 141(R) now requires that any non-contractual, contingent liability assumed in a business combination must be recognized at fair value, if the probability of occurrence is more likely than not. IFRS allows any contingent liability to be recognized, regardless of likelihood, if it can be reliably measured.

As I discussed in a previous post on IASB machinations of contingent liability accounting, the ubiquitous criterion of "reliable measurement" is one of those areas of "judgment" in IFRS that help management make their numbers with little chance of being challenged by auditors. Here is how this game will be played in a business combination under IFRS 3(R): if management thinks that goodwill won't be impaired any time soon, they will recognize contingent liabilities to the max. The effect is to create an earnings bank of liability write downs when unlikely events become, as anticipated, resolved without the incurrence of an actual liability. And speaking of inconsistency, IFRS 3(R) provides that all intangible assets are to be recognized, even if their fair values cannot be measured reliably. Where is the "principle" for that one?

Second, FAS 141(R) requires extensive disclosures that are designed to aid analysts in determining the past and future effect of a business combination on earnings and financial position. For example, FAS 141(R) requires the following disclosures:

The amount of revenue and earnings of the acquiree since the date of acquisition. Revenue and earnings of the combined entity for the current period as though the acquisition had been consummated as of the beginning of the period Revenue and earnings of the combined entity for the previous period, as if the acquisition had been consummated as of the beginning of the previous period. Inexplicably, IFRS does not require the third item, above. Therefore, inferences as to earnings trends of the combined entity from historical financial statements are defeated.

The recent activities of the IASB, the high priests of IFRS, confirm that they are most definitely not the august body to which the future of U.S. financial accounting standards should be entrusted. To those who persist in practicing faith-based accounting, put IFRS's accounting for business combinations in your pipe and smoke it.

--------------------------

*Unlike statements of the FASB, IFRS publications are not freely available. Just thought you might want to know why I didn't provide a link.

Bob Jensen's threads on goodwill accounting are at http://www.trinity.edu/rjensen/theory01.htm#Impairment

IFRS 3 on Business Combinations

Contents paragraphs Introduction IN1–IN16 International Financial Reporting Standard 3 Business Combinations Objective 1 Scope 2–13 Identifying a business combination 4–9 Business combinations involving entities under common control 10–13 Method of accounting 14–15 Application of the purchase method 16–65 Identifying the acquirer 17–23 Cost of a business combination 24–35 Adjustments to the cost of a business combination contingent on future events 32–35 Allocating the cost of a business combination to the assets acquired and liabilities and contingent liabilities assumed 36–60 Acquiree's identifiable assets and liabilities 41–44 Acquiree's intangible assets 45–46 Acquiree's contingent liabilities 47–50 Goodwill 51–55 Excess of acquirer's interest in the net fair value of acquiree's identifiable assets, liabilities and contingent liabilities over cost 56–57 Business combination achieved in stages 58–60 Initial accounting determined provisionally 61–65 Adjustments after the initial accounting is complete 63–64 Recognition of deferred tax assets after the initial accounting is complete 65 Disclosure 66–77 Transitional provisions and Effective date 78–85 Previously recognised goodwill 79–80 Previously recognised negative goodwill 81 Previously recognised intangible assets 82 Equity accounted investments 83–84 Limited retrospective application 85 Withdrawal of Other Pronouncements 86–87 Appendices A Defined terms B Application supplement C Amendments to other IFRSs Approval of IFRS 3 by the Board Basis for Conclusions Dissenting opinions on IFRS 3 Illustrative Examples [Extracted from IFRS 3, Business Combinations. © IASC Foundation.]

Update on the AACSB's Bridge Program for Wannabe Accounting Professors
I'm sure glad the American Medical Association does not have a bridging program where accounting PhDs can become medical doctors by taking four courses in medicine.

Students who get doctorates in fields other than accounting can typically get a doctoral degree in less than 9.5 years of full-time college. For example, an economics PhD can realistically spend only 7.5 years in college. He or she can then enter a bridge program to become a business, finance, or even an accounting professor under the AACSB's new Bridge Program, but that program may take two or more years part time. There just does not appear to be a short track into accounting tenure track positions. But the added years may be worth it since accounting faculty salaries are extremely high relative to most other academic disciplines. The high salaries, in part, are do to the enormous shortage of accounting doctoral graduates relative to the number of tenure-track openings in major colleges and universities --- http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

Only four United States Universities currently participate in the AACSB's Bridge program and one European business school whose doctoral programs I have doubts about because of truly absurd faculty-to-student ratios in the doctoral program.

The AACSB's domestic alternatives are as follows http://snipurl.com/aacsbbridge  
Also see http://snipurl.com/aacsbbridge2

• The University of Florida (USA)

• Tulane University (USA)

• Virginia Polytechnic Institute and State University (USA).

• University of Toledo

When I mentioned the Bridge Program last year on the AECM, Virginia Tech responded by saying they were participating but not for accounting bridges.

The University of Toledo does not offer accounting bridges --- http://www.utoledo.edu/business/aacsbbridge/curriculum.html

Tulane only lists one full professor of accounting in my Hasselback Directory such that I doubt that Tulane is a major player in an accounting Bridge Program (Tulane may be more viable in management, marketing, and finance).

The University of Florida does apparently have an accounting bridge --- http://www.cba.ufl.edu/academics/pdbp/
But this strangely does not appear to be affiliated with the well known Fisher School of Accountancy at the University of Florida.

From what I can tell, Florida is bridging with only four courses. Can four courses alone turn an economics or history professor into an accounting professor?
The Bridge Program says yes! I think the Bridge Program has little to do with it, although a person's prior background such as years of professional work as a CPA may make all the difference in the world along with the type of doctoral degree earned outside accounting.

June 20 message from Saeed Roohani [sroohani@COX.NET]

AACSB Announces May 2008 Bridge Program Graduates, there are many AACSB certified PQ accounting faculty for hire, see

visit AACSB's online database

 Saeed Roohani
Bryant University

June 20, 2008 reply from Bob Jensen

There is a surprisingly high proportion of the 78 candidates who want to teach accounting and auditing given than most of the bridge programs like Virginia Tech opted out of teaching accounting but do bridge business and finance studies. However, 20 bridged candidates who want to teach accounting and auditing will not make a big dent in the market where the number of accounting faculty openings exceeds the new doctoral graduate supply (less than 100 graduates) by over 1,000 openings.

The big question now is whether those bridged candidates can get tenure track positions and make tenure with sufficient research publications in accounting. The leading schools willingly hire adjunct, non-tenure-track, accounting instructors, but they’re pretty snooty when it comes to tenure tracks.

In my opinion the bridge program is absurd. Can four-courses in a typical bridge program is tantamount to a “90-day Wonder Program” for college graduates to become military officers --- http://en.wiktionary.org/wiki/90-day_wonder

There were great military officers that emerged from the 90-Day Wonder officers' candidate programs. There will also be great accounting, finance, and business professors that emerge from the AACSB bridging program. However, the programs do not deserve much of the credit, since the criteria for success are the credentials and personal qualities of the persons who entered the program. In accounting there's almost no chance of success unless the candidate was a good accountant before entering the bridge program. There's just too much too accounting that cannot be covered in less than about three years of full-time study in accountancy modules alone. In most states it takes five years of college as an accounting major just to sit for the CPA examination.

I'm sure glad the American Medical Association does not have a bridging program where accounting PhDs can become medical doctors.

Bob Jensen

June 20, 2008 reply from David Albrecht [albrecht@PROFALBRECHT.COM]

I still do not understand why a practitioner with no experience in teaching (and no real training, despite what the AACSB says), is more qualified to be a teaching faculty member than a long-term professor that is no longer AQ.

The cases I've seen have been that a practitioner coming in to teach a college classroom bombs much of the time (at least they bomb in the eyes of the students).

The rationale is that PQ faculty will be better teachers than non-AQ doctoral faculty. I simply don't see how this must be so. Becoming a good teacher takes experience in academe and training. Most doctorally-trained non-AQ faculty at least have had years of academic experience (and admittedly no training), and some are great teachers.

I think that the B-school quest for credibility is like the emperor with no clothes on.

David Albrecht

June 20, 2008 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

There are always exceptions, and at UConn we have at least two of them. One of our auditing instructors is a retired PwC partner, and the BAP teaching award went to him. As for being a great colleague, we couldn’t be luckier! He makes great comments in our research workshops. One of our tax instructors is also a retired PwC partner, and he keeps us on our toes when it comes to new tax legislation and WSJ articles. His sense of humor is great, and he handles the tax challenge team for our department, as well as other student activities. Maybe the difference is that we bring the retired partners on as full-time instructors, and they are part of the team. I don’t know our part-time adjuncts so maybe the story is different there.

Amy Dunbar

UConn

June 20, 2008 reply from Anders, Susan [SANDERS@SBU.EDU]

We owe it to our students to be teaching them current knowledge—especially in an applied field like accounting. With AQ faculty, the assumption is that we will stay current through our research activities. Staying current just from reading a textbook is not acceptable. However, for my school, the AACSB is also expecting some “professional” activities from AQ faculty, which makes sense to me. The AQ faculty in my accounting dept. are engaging in professional activities anyway (for example, Volunteer Income Tax Assistance and Students in Free Enterprise—which are also service activities), in addition to publishing.

Our PQ faculty are also expected to stay current—with a reverse emphasis from the AQs. Professional activities have more emphasis, but we need some publication activity as well.

Faculty can be out of date and lousy teachers whether they are AQ or PQ. PhD programs prepare us to engage in research, not necessarily to teach. PQ faculty can learn to teach the same way that we AQs do—trial and error.

I have noticed major shifts in the “culture” of students every three or four years, so even if I was a good teacher four years ago, I have to modify my approaches to fit the students in front of me today, in addition to staying up with changes in technology, tax law, and accounting pronouncements.

Hopefully, any new faculty that we hire at my school are committed to being good teachers, whether they are AQ or PQ.

My colleagues at St. Bonaventure invested both their time and confidence in me to help me become both a good teacher and an active publisher. [Thank you Carol Fischer!!!] As members of academia, we should be reaching out to new (and old) colleagues to provide mentoring in both teaching and research.

Thank you.

Susan B. Anders, Ph.D., CPA
Professor of Accounting
St. Bonaventure University
School of Business
St. Bonaventure, NY 14778
Office: (716) 375-2063
Cell: (716) 378-7765
Fax: (716) 375-2191
e-mail: sanders@sbu.edu 

June 20, 2008 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

To pile on just a bit, I'd like to think that my now eleven years at the University of Georgia have been reasonably successful. It is certainly true that I received virtually no training to teach and had to figure it out for myself over the years. In fact, I shudder to think how hard I worked my first MAcc classes as compared to what I now consider a challenging but reasonable workload.

Being able to share experiences from both the auditing world and standard setting helps bring the issues to life for the students, I believe. In thinking back many years, one of the best accounting classes I had was taught by the partner in charge of the tax department of Price Waterhouse in Los Angeles. Rather than the extremely dry Internal Revenue Code that passed for a textbook at that time, he could tell us about actual applications of the things we were learning. It probably helped that he was also the person who handed out the Academy Awards and was very personable.

My challenge is to avoid using too much class time to tell war stories. Getting the right balance between the theoretical and the practical is important for me, but I assume it is just as important for all of you PhD trained instructors. And I also think it's important to not rely on experiences that are too old as the world changes and some of those observations about "how the real world works" (based on, for example, two years in public accounting twenty years ago) are simply incorrect today. On the other hand, having the opportunity to serve on three large corporate boards and keeping involved with a number of professional activities on a national basis allows me to share with the students many of the insights that are behind the news in the Wall Street Journal and makes the accounting standards and other things the students are learning more relevant.

This past semester one of my students complained because he thought we had been spending too much time on fair value accounting and international accounting convergence. He thought those topics had little to do with what he had learned in other classes and probably wouldn't be on the CPA exam. Fortunately, most of the other students understood the benefit of getting in on the ground floor of some of the most important developments in accounting in history.

My experiences are very unique and I give thanks every day that I've had these opportunities. But I sincerely believe that there are many other retired CPA firm partners and CFOs who would do a great job in the classroom and bring other benefits to an accounting program. I've even had some of my colleagues say that they appreciate it when I attend a research workshop as my comments are both relevant and practical (at least a few of them!).

By the way, my academic credentials ended with a B.S.

Denny Beresford

June 20, 2008 reply from Bob Jensen

Hi Denny,

Your reply is wonderfully stated.

I might add that NASBA’s problems with building more and more IFRS into the CPA examination are not trivial. For nearly a century, the CPA examination has been based upon a lot of bright lines in U.S. GAAP. Bright lines are especially preferred because it’s so much easier to distinguish correct answers from incorrect answers. Much of the infrastructure of our accounting education programs in terms of curricula and teachers is rooted in US GAAP and especially the CPA examination.

Accounting education programs in the U.S. will have a very difficult time changing infrastructure and most certainly do so at different rates of change. Probably the best way to speed things up will be a quick introduction of IFRS on the CPA examination. But there are tremendous problems in making this transition. For example, something as fundamental as a “derivative financial instrument” that’s become part and parcel to risk management is defined differently in IAS 39 versus FAS 133. If the underlying definitions differ, think of the problems that will arise in changing curricula, textbooks, teaching notes, reading materials, and teachers themselves!

Another problem will be to change the content of the examination in terms of bright lines. Wrong versus right answers will have to become more conceptualized since IFRS has so few bright lines. Perhaps this is a good thing that will penalize the best memorizers. But it will be harder to design exam questions and most certainly harder to grade them when there are fewer definitive answers to accounting for transactions. A principles-based CPA examination will probably be chaotic in the transitioning period.

What a great feeling to be retired from teaching at this stage of turmoil. So why am I spending most of my time doing research in IAS 39 versus FAS 133?

Dahh!

Bob Jensen

June 20, 2008 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

Teaching requires tremendous dedication and discipline. On the other hand, a good teacher is one who makes the students think.

My own experience is that doctorally qualified faculty, because of their reward structure, very often do not show teaching the same dedication they show for "research", whatever it means in the accounting academia.

My experience is also that those who have never experienced the professional world are often lacking, in spite of their exalted status as PhDs, crucial skills is public speaking, leadership, problem definition and solving, organisation skills and also often reduce the rich professional landscape to a set of rote-learning exercises by regurgitating what is in the books.

They also, often, do not give students sufficient time in the class to think, and usually act like machines that spew information. This of course precludes the students asking penetrating questions for which the practice-challenged PhD faculty may not have answers. The losers are the poor students.

On the other hand, my experience, as a faculty member and recently as department chair, has been that the PQ faculty are more often than not good in class, very organised, very dedicated, bring the richness of the profession in the classroom, make the students think, make the students write and take time to read them and help the students,

It is quite possible that our experience at Albany is accidental, and our ability to get outstanding PQ faculty serendipitous.

Our PQ faculty are usually partners at small/medium/regional accounting firms, CFOs and senior managers at large corporations, partners at law firms. Most of them are CPAs, many are JDs and LLMs.

I want to end with three famous quotes from Rabindranath Tagore, a literature Nobel laureate and a poet, on education. He refers to children, but are as applicable to adult education:

1. "The highest education is that which does not merely give us information but makes our life in harmony with all existence. But we find that this education of sympathy is not only systematically ignored in schools, but it is severely repressed. From our very childhood habits are formed and knowledge is imparted in such a manner that our life is weaned away from nature and our mind and the world are set in opposition from the beginning of our days. Thus the greatest of educations for which we came prepared is neglected, and we are made to lose our world to find a bagful of information instead. We rob the child of his earth to teach him geography, of language to teach him grammar. His hunger is for the Epic, but he is supplied with chronicles of facts and dates...Child-nature protests against such calamity with all its power of suffering, subdued at last into silence by punishment.

2. The child learns so easily because he has a natural gift, but adults, because they are tyrants, ignore natural gifts and say that children must learn through the same process that they learned by. We insist upon forced mental feeding and our lessons become a form of torture. This is one of man's most cruel and wasteful mistakes.

3. A mind all logic is like a knife all blade. It makes the hand bleed that uses it.

Jagdish

June 20, 2008 reply from Bob Jensen

Hi Jagdish,

On the battlefield, probably the most important soldiers are the sergeants who lead in the actual face-to-face operations.

I have the same feelings about full-time adjuncts and PQ faculty and view them somewhat as our sergeants in the field. Of course there are some good officers in the field as well.

But sergeants aren't admitted to the officer's clubs and cannot rise to the highest-paying ranks. Is this the same for your adjuncts and PQ faculty?

When performance rewards, endowed chairs, travel budgets, and leaves of absence are doled out, it's most likely the research faculty who get the best deals unattainable by those with lesser commissions. I was on the faculty of several universities, for example, where sabbatical leaves were based upon research proposals and a research/publication record. A world class teacher with sparse publications need not apply as a rule. I nominated and failed in this regard to get one of my "teaching" sergeants a sabbatical leave at Trinity University. He'd taught full time at Trinity for over 30 years and never had one sabbatical leave. Over the course of 40 years I applied for and got a sabbatical leave on a regular basis even though I think some of my "teaching" sergeants were more deserving. They just did not have their publishing gold bars.

Very few accounting programs have high-paying endowed chairs that are given to sergeants so to speak. The University of Georgia was given one such chair where a research and publication record is not a criterion. The chair by the way was funded by Herb Miller. This is, however, a rare endowed chair in accounting "education" programs.

Bob Jensen

From The Wall Street Journal Accounting Weekly Review on June 20, 2008

"Honda Says Fuel-Cell Cars Face Hurdles Prices Have to Fall For Autos to Reach The Mass Market," by Yoshio Takahashi, The Wall Street Journal, June 17, 2008; Page B4 --- http://online.wsj.com/article/SB121364017994578203.html?mod=djem_jiewr_AC

TOCHIGI, Japan -- Honda Motor Co. President Takeo Fukui said prices have to fall further for fuel-cell cars to reach the mass market, even as the Japanese car maker unveiled the latest generation of fuel-cell vehicle.

Fuel-cell cars are considered the most promising pollution-free vehicles, as they are powered through a chemical reaction between hydrogen and oxygen, and emit only water as a byproduct.

But low-emission cars such as gasoline-electric hybrids and diesel vehicles are more popular now. A lack of hydrogen service stations, among other factors, is limiting demand for the cars, and therefore car makers can't mass produce them, keeping production costs high.

Honda said Monday that it will begin leasing the third generation of a fuel-cell model called FCX Clarity in the U.S. in July. The company plans to lease the new zero-emission car in Japan this autumn.

Mr. Fukui said the new fuel-cell car costs tens of millions of yen, significantly less than the several hundred million yen it cost to make previous models. The price would need to fall to below 10 million yen, or about $92,000, for fuel-cell cars to be a mass-market product, he said.

"I think it wouldn't take 10 years" for his company to slash the price of its fuel-cell car to this level, he said.

To cut the price, the company especially needs to reduce the use of expensive precious metals and address the costliness of the hydrogen fuel tank, he said.

Honda, Japan's second-biggest car maker by sales volume, aims for combined lease sales of 200 vehicles of the latest fuel-cell model for the U.S. and Japan within three years. The lease fee is $600 a month in the U.S. The company hasn't disclosed the fee in Japan.

Honda, which obtained the world's first certification for fuel-cell cars in the U.S. in 2002, is a leading maker of such vehicles and has been competing in the development of the advanced car with rivals such as Toyota Motor Corp. and General Motors Corp.

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/Theory01.htm
Especially note the module on accrual and estimation --- http://www.trinity.edu/rjensen/Theory01.htm#AccrualAccounting

The Lure of an Executive MBA Program in China

From The Wall Street Journal Accounting Weekly Review on June 20, 2008

China Beckons for M.B.A. Trips by Samar Srivastava The Wall Street Journal Jun 17, 2008 Page: D7 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB121364686908778517.html?mod=djem_jiewr_AC   TOPICS: Accounting SUMMARY: David Gannaway is a "44-year-old director of forensic accounting at KPMG LLP" who holds an MBA from Fordham University. He says that "the school's offering of a capstone trip to China helped seal his decision" to enter the Executive M.B.A. program there. CLASSROOM APPLICATION: Career options for accountants beyond the CPA and domestic borders can be discussed with this article QUESTIONS:  1. (Introductory) In general, what career options are available to accountants beyond the CPA and beyond domestic borders? List all that you can. 2. (Advanced) What is a forensic accountant? Why do you think the KPMG LLP director of forensic accounting entered an MBA program? 3. (Introductory) What is the importance today of international experience? Is it limited only to accountants practicing in large firms? 4. (Advanced) Summarize, citing one or two themes, students' reasoning for entering into programs with international study available. Are those reasons necessarily the same as the benefits students identify after completing the programs?   Reviewed By: Judy Beckman, University of Rhode Island

"China Beckons for M.B.A. Trips Tours Offer Chance To Make Contacts, Learn Lay of Land," by Samar Srivastava, The Wall Street Journal,  June 17, 2008 ---
http://online.wsj.com/article/SB121364686908778517.html?mod=djem_jiewr_AC 

When David Gannaway was looking for an executive M.B.A. program, he wasn't interested only in a school's reputation. The 44-year-old director of forensic accounting at KPMG LLP wanted details on the schools' destination for E.M.B.A. international-study trips.

International trips have been a staple feature of E.M.B.A. programs -- fast-track M.B.A. programs typically held every other weekend and geared toward managers with several years of experience -- for the past two decades. These trips, which typically span two weeks, are designed to give students a broader understanding of global business.

Over the years, Argentina, Hungary, Russia and Singapore had dotted the trip lists. Now, E.M.B.A. candidates are increasingly demanding to go to China, as more managers -- and prospective E.M.B.A. students -- say they see themselves doing business there. Some say they are able to use the trips to suggest changes in the ways their companies do business in China.

Ahead of India

In 2007, 49% of such trips were to China, according to the Executive MBA Council, an industry association. In distant second place: India, with 11% of study trips outside the U.S.

The impetus for growth goes to the heart of the challenges of a global economy. Managers and executives regularly complain about the difficulty they have in understanding China. They cite a vastly different culture, a language that doesn't use the Roman alphabet and a different socioeconomic structure from the West's. And, executives say, getting to know China and its business climate is now critical to a career.

Mr. Gannaway, who graduated last month from Fordham University, says the school's offering of a capstone trip to China helped seal his decision.

School administrators say they hear that a lot. It "is one of the first questions the students ask," says Jaki Sitterle, managing director of executive programs at New York University's Stern School of Business. Two years ago, when the University of Arizona's Eller College of Management proposed an international trip to South Africa, its administrators were compelled to go to China after students complained.

Continued in article

Bob Jensen's threads on careers are at http://www.trinity.edu/rjensen/Bookbob1.htm#careers

EIR Method Controversies

This is a rather strong position taken by Deloitte (and Webmaster Paul Pacter) on IASPlus on June 17, 2008 --- http://www.iasplus.com/index.htm

June 17, 2008: We disagree with IFRIC's draft decision on effective interest rate

In a letter to IFRIC, Deloitte Touche Tohmatsu disagree with the IFRIC's tentative decision not to take onto the IFRIC's agenda a request for an interpretation on the application of the effective interest rate (EIR) method. Click for our Letter to IFRIC (PDF 136k). Here is an excerpt:

In summary, we believe the tentative agenda decision wording does not provide sufficient clarity and that additional interpretive guidance is needed. We believe there are three important interpretative issues that need to be addressed: (i) how to apply the effective interest rate to debt instruments with a market-based reset; (ii) when should an entity apply AG7 compared to AG8; and (iii) for inflation linked debt, is it possible to analogise with IAS 29 in the case when an entity is not applying that standard. The application of the EIR is critical in determining the balance sheet carrying amount and the impact on profit or loss for debt instruments held at amortised cost, as well as the income recognition for those debt instruments classified as available-for-sale. The EIR has widespread application for both vanilla and complex debt instruments, yet the standard is not clear as to how the EIR method applies for instruments with variable cash flows.

Our past comment letters to IASB, IFRIC, IASC, and SIC are Here.

Bob Jensen's threads on valuation are at http://www.trinity.edu/rjensen/roi.htm

June 14, 2008 agemda on EITF issues, IASPlus --- http://www.iasplus.com/index.htm

This EITF Snapshot covers six issues discussed by the EITF at the meeting: Issue 07-5 Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock – consensus reached Issue 08-1 Revenue Recognition for a Single Unit of Accounting – no decision reached Issue 08-2 Lessor Revenue Recognition for Maintenance Services – recommended for removal from the EITF's agenda. Issue 08-3 Accounting by Lessees for Maintenance Deposits Under Lease Arrangements – consensus reached Issue 08-4 Transition Guidance for Conforming Changes to Issue No. 98-5 – consensus reached Issue 08-5 Issuer's Accounting for Liabilities Measured at Fair Value With a Third-Party Guarantee – consensus for exposure

EITF documents and announcements are available at http://www.fasb.org/eitf/agenda.shtml

Many accounting educators teach FAS 123(R) stock option valuation using Black-Scholes calculators. These are easy to use, but unfortunately the Black-Scholes Model is not a very good way to value employee stock options.

Now I've discovered an update article to my threads on FAS 123(R) --- http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

"Valuing Options While Running the Compliance Guantlet, Part I of II" by Edward E. Pratesi,, Two Step Software, March 15, 2008, 2008 --- http://www.twostep.com/assets/documents/papers_articles/Soft_Letter_Compliance_Gauntlet.pdf

"Options and the Deferred Tax Bite: Just when you thought it couldn’t get any more complicated," by Nancy Nichols and Luis Betancourt, Journal of Accountancy, March 2006 --- http://www.aicpa.org/pubs/jofa/mar2006/nichols.htm

Now I've discovered an update article to my threads on FAS 123(R) --- http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

"Valuing Options While Running the Compliance Guantlet, Part I of II" by Edward E. Pratesi,, Two Step Software, March 15, 2008, 2008 --- http://www.twostep.com/assets/documents/papers_articles/Soft_Letter_Compliance_Gauntlet.pdf

Damocles sword waiting to fall:  The next big financial crisis!
CDS = Credit Default Swap (or is the Credit Default Sword?)

"Hedge Funds in Swaps Face Peril With Rising Junk Bond Defaults," by David Evans, Bloomberg, May 20, 2008 ---
http://www.bloomberg.com/apps/news?pid=20601109&sid=aCFGw7GYxY14&refer=home

Backshall and his clients aren't the only ones spooked by the prospect of a CDS catastrophe. Billionaire investor George Soros says a chain reaction of failures in the swaps market could trigger the next global financial crisis.

CDSs, which were devised by J.P. Morgan & Co. bankers in the early 1990s to hedge their loan risks, now constitute a sprawling, rapidly growing market that includes contracts protecting $62 trillion in debt.

The market is unregulated, and there are no public records showing whether sellers have the assets to pay out if a bond defaults. This so-called counterparty risk is a ticking time bomb.

``It is a Damocles sword waiting to fall,'' says Soros, 77, whose new book is called ``The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means'' (PublicAffairs).

``To allow a market of that size to develop without regulatory supervision is really unacceptable,'' Soros says.

`Lumpy Exposures'

The Fed bailout of Bear Stearns on March 17 was motivated, in part, by a desire to keep that sword from falling, says Joseph Mason, a former U.S. Treasury Department economist who's now chair of the banking department at Louisiana State University's E.J. Ourso College of Business.

The Fed was concerned that banks might not have the money to pay CDS counterparties if there were large debt defaults, Mason says.

``The Fed's fear was that they didn't adequately monitor counterparty risk in credit-default swaps -- so they had no idea of where to lend nor where significant lumpy exposures may lie,'' he says.

Those counterparties include none other than JPMorgan itself, the largest seller and buyer of CDSs known to the Office of the Comptroller of the Currency, or OCC.

The Fed negotiated the deal to bail out Bear Stearns by allowing JPMorgan to buy it for $10 a share. The Fed pledged $29 billion to JPMorgan to cover any Bear debts.

`Cast Doubt'

``The sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets,'' Fed Chairman Ben S. Bernanke told Congress on April 2. ``It could also have cast doubt on the financial positions of some of Bear Stearns's thousands of counterparties.''

The Fed was worried about the biggest players in the CDS market, Mason says. ``It was a JPMorgan bailout, not a bailout of Bear,'' he says.

JPMorgan spokesman Brian Marchiony declined to comment for this article.

Credit-default swaps are derivatives, meaning they're financial contracts that don't contain any actual assets. Their value is based on the worth of underlying loans and bonds. Swaps are similar to insurance policies -- with two key differences.

Unlike with traditional insurance, no agency monitors the seller of a swap contract to be certain it has the money to cover debt defaults. In addition, swap buyers don't need to actually own the asset they want to protect.

It's as if many investors could buy insurance on the same multimillion-dollar home they didn't own and then collect on its full value if the house burned down.

Bigger Than NYSE

When traders buy swap protection, they're speculating a loan or bond will fail; when they sell swaps, they're betting that a borrower's ability to pay will improve.

The market, which has doubled in size every year since 2000 and is larger in dollar value than the New York Stock Exchange, is controlled by banks like JPMorgan, which act as dealers for buyers and sellers. Swap prices and trade volume aren't publicly posted, so investors have to rely on bids and offers by banks.

Most of the traders are banks; hedge funds, which are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall; and insurance companies. Mutual and pension funds also buy and sell the swaps.

Proponents of CDSs say the devices have been successful because they allow banks to spread the risk of default and enable hedge funds to efficiently speculate on the creditworthiness of companies.

`Seeing the Logic'

The market has grown so large so fast because swaps are often based on an index that includes the debt of scores of companies, says Robert Pickel, chief executive officer of the International Swaps and Derivatives Association.

``Whether you're a hedge fund, bank or some other user, you're increasingly seeing the logic of using these instruments,'' Pickel says, adding he doesn't worry about counterparty risk because banks carefully monitor the strength of investors. ``There have been a very limited number of disputes. The parties understand these products and know how to use them.''

Banks are the largest buyers and sellers of CDSs. New York- based JPMorgan trades the most, with swaps betting on future credit quality of $7.9 trillion in debt, according to the OCC. Citigroup Inc., also in New York, is second, with $3.2 trillion in CDSs.

Goldman Sachs Group Inc. and Morgan Stanley, two New York- based firms whose swap trading isn't tracked by the OCC because they're not commercial banks, are the largest swap counterparties, according to New York-based Fitch Ratings, which doesn't provide dollar amounts.

Untested Until Now

The credit-default-swap market has been untested until now because there's been a steady decline in global default rates in high-yield debt since 2002. The default rate in January 2002, when the swap market was valued at $1.5 trillion, was 10.7 percent, according to Moody's Investors Service.

Since then, defaults globally have dropped to 1.5 percent, as of March. The rating companies say the tide is turning on defaults.

Fitch Ratings reported in July 2007 that 40 percent of CDS protection sold worldwide is on companies or securities that are rated below investment grade, up from 8 percent in 2002. On May 7, Moody's wrote that as the economy weakened, high-yield-debt defaults by companies worldwide would increase fourfold in one year to 6.1 percent by April 2009.

The pressure is building. On May 5, for example, Tropicana Entertainment LLC filed for bankruptcy after the casino owner defaulted on $1.32 billion in debt.

`Complicate the Crisis'

A surge in corporate defaults may leave swap buyers scrambling, many unsuccessfully, to collect hundreds of billions of dollars from their counterparties, says Satyajit Das, a former Citigroup derivatives trader and author of ``Credit Derivatives: CDOs & Structured Credit Products'' (Wiley Finance, 2005).

``This is going to complicate the financial crisis,'' Das says. He expects numerous disputes and lawsuits, as protection buyers battle sellers over the technical definition of default - - this requires proving which bond or loan holders weren't paid -- and the amount of payments due.

``It's going to become extremely messy,'' he says. ``I'm really scared this is going to freeze up the financial system.''

Andrea Cicione, a London-based senior credit strategist at BNP Paribas SA, has researched counterparty risk and says it's only a matter of time before the sword begins falling. He says the crisis will likely start with hedge funds that will be unable to pay banks for contracts tied to at least $35 billion in defaults.

$150 Billion Loss Estimate

``That's a very conservative estimate,'' he says, adding that his study finds that losses resulting from hedge funds that can't pay their counterparties for defaults could exceed $150 billion.

Hedge funds have sold 31 percent of all CDS protection, according to a February 2007 report by Charlotte, North Carolina-based Bank of America Corp.

Cicione says banks will try to pre-empt this default disaster by demanding hedge funds put up more collateral for potential losses. That may not work, he says. Many of the funds won't have the cash to meet the banks' requests, he says.

Sellers of protection aren't required by law to set aside reserves in the CDS market. While banks ask protection sellers to put up some money when making the trade, there are no industry standards, Cicione says.

JPMorgan, in its annual report released in February, said it held $22 billion of credit swap counterparty risk not protected by collateral as of Dec. 31.

`A Major Risk'

``I think there's a major risk of counterparty default from hedge funds,'' Cicione says. ``It's inconceivable that the Fed or any central bank will bail out the hedge funds. If you have a systemic crisis in the hedge fund industry, then of course their banks will take the hit.''

The Joint Forum of the Basel Committee on Banking Supervision, an international group of banking, insurance and securities regulators, wrote in April that the trillions of dollars in swaps traded by hedge funds pose a threat to financial markets around the world.

``It is difficult to develop a clear picture of which institutions are the ultimate holders of some of the credit risk transferred,'' the report said. ``It can be difficult even to quantify the amount of risk that has been transferred.''

Counterparty risk can become complicated in a hurry, Das says. In a typical CDS deal, a hedge fund will sell protection to a bank, which will then resell the same protection to another bank, and such dealing will continue, sometimes in a circle, Das says.

`Daisy Chain Vortex'

The original purpose of swaps -- to spread a bank's loan risk among a large group of companies -- may be circumvented, he says.

``It creates a huge concentration of risk,'' Das says. ``The risk keeps spinning around and around in this daisy chain like a vortex. There are only six to 10 dealers who sit in the middle of all this. I don't think the regulators have the information that they need to work that out.''

And traders, even the banks that serve as dealers, don't always know exactly what is covered by a credit-default-swap contract. There are numerous types of CDSs, some far more complex than others.

More than half of all CDSs cover indexes of companies and debt securities, such as asset-backed securities, the Basel committee says. The rest include coverage of a single company's debt or collateralized debt obligations.

A CDO is an opaque bundle of debt that can be filled with junk bonds, auto loans, credit card liabilities and home mortgages, including subprime debt. Some swaps are made up of even murkier bank inventions -- so-called synthetic CDOs, which are packages of credit-default swaps.

AIG $9.1 Billion Writedown

On May 8, American International Group Inc. wrote down $9.1 billion on the value of its CDS holdings. The world's largest insurer by assets sold credit protection on CDOs that declined in value. In 2007, New York-based AIG reported $11.5 billion in writedowns on CDO credit default swaps.

Michael Greenberger, director of trading and markets at the Commodity Futures Trading Commission from 1997 to 1999, says the Fed is fully aware of the risk banks and the global economy face if CDS holders can't cover their losses.

``Oh, absolutely, there's no doubt about it,'' says Greenberger, who's now a professor at the University of Maryland School of Law in Baltimore. He says swaps were very much on the Fed's mind when Bear Stearns started sliding toward bankruptcy.

``People who were relying on Bear for their own solvency would've started defaulting,'' he says. ``That would've triggered a series of counterparty failures. It was a house of cards.''

Risk Nightmare

It's concerns about that house of cards that have kept Backshall, the California fund adviser, up at night. His worries about a nightmare scenario started in early March. The details of what happened are still fresh in his mind.

It's Monday, March 10, and the market is rife with rumors that Bear Stearns will run out of cash. Some of Backshall's clients have pulled their accounts from Bear; others are considering leaving the bank. Backshall's clients are exposed to Bear in multiple ways: They keep their cash and other accounts at the firm, and they use the bank as their broker for trades. Backshall advises them to spread their assets among various banks.

That same day, Bear CEO Alan Schwartz says publicly, ``There is absolutely no truth to the rumors of liquidity problems.''

Backshall's clients are suspicious. They see other hedge funds pulling their accounts from Bear. In the afternoon after Schwartz's remarks, the cost of protection soars past 600 basis points from 450 before Schwartz's statement.

CEO Didn't Calm Fears

Swaps are priced in basis points, or hundredths of a percentage point. At 600 basis points, a trader would pay $6,000 a year to insure $100,000 of Bear Stearns bonds.

``I don't think his comments did anything to calm fears,'' Backshall says.

The next day, March 11, Securities and Exchange Commission Chairman Christopher Cox says his agency is monitoring Bear Stearns and other securities firms.

``We have a good deal of comfort about the capital cushions at these firms at the moment,'' he says.

Cox's comments are overshadowed by rumors that European financial firms had stopped doing fixed-income trades with Bear, Backshall says.

``Nobody has a clue what's going on,'' he says. Bear swap costs are gyrating between 540 and 665.

For most investors, just getting default-swap prices is a chore. Unlike stock prices, which are readily available because they trade on a public exchange, swap prices are hard to find. Traders looking up prices on the Internet or on private trading systems see information that is hours or days old.

`Terribly Primitive'

Banks send hedge funds, insurance companies and other institutional investors e-mails throughout the day with bid and offer prices, Backshall says. For many investors, this system is a headache.

To find the price of a swap on Ford Motor Co. debt, for example, even sophisticated investors might have to search through all of their daily e-mails, he says.

``It's terribly primitive,'' Backshall says. ``The only way you and I could get a level of prices is searching for Ford in our inbox. This is no joke.''

In the past three years, at least two companies have developed software programs that automatically parse an investor's incoming messages, yank out CDS prices and build them into real-time price displays.

The charts show the highest bids and lowest offering prices for hundreds of swaps. Backshall tracks prices he gets from banks using the new software.

`It's Very Hard'

Backshall has been talking with hedge fund managers in New York all week.

``We'd quite frankly been warning them and giving them advice on how to hedge,'' he says of the Bear Stearns crisis and banks overall. ``It's very hard to hedge the counterparty risk. These institutions are thinly capitalized in the best of times.''

The night of Thursday, March 13, Backshall can't sleep. He lies awake worrying about Bear and counterparty risk. The next morning, he arrives at work at 5 a.m., two and a half hours before sunrise.

Through the window of his ninth-floor corner office, he takes a moment to watch the distant flickers of light in the rolling foothills of Mount Diablo. Across the street, he sees the still-dark Walnut Creek train station, about 30 miles (48 kilometers) east of San Francisco.

Backshall, wearing jeans and a blue, button-down shirt, sits at his desk, staring at a pair of the 27-inch (68.6- centimeter) monitors that display swap costs. CDS prices jumped by more than 10-fold in just a year. The numbers show rising fear, he says.

Until early in 2007, the typical price of a credit-default swap tied to the debt of an investment bank like Merrill Lynch & Co., Bear Stearns or Morgan Stanley was 25 basis points.

`Unknowns Are Out There'

If a swap buyer wanted to protect $10 million of assets in the event of a company default, the contract would cost about 0.25 percent of $10 million, or $25,000 a year for a five-year protection contract.

Backshall's screens tell him the cost of buying protection on Bear Stearns debt in the past 24 hours has been moving in a range between 680 and 755 basis points.

``The unknowns are out there,'' Backshall says.

He advises his clients not to buy CDS protection on Bear because the price is too high and the time is wrong. It's too late to buy swaps now, he says.

At 9:13 Friday morning in New York, JPMorgan announces it will loan money to Bear using funds provided by the Federal Reserve. The JPMorgan statement doesn't say how much it will lend; it says it will ``provide secured funding to Bear Stearns, as necessary.''

`Significantly Deteriorated'

Bear CEO Schwartz says his firm's liquidity has ``significantly deteriorated'' during the past 24 hours. Protection quotes drop immediately into the low 500s, as some dealers think a rescue has begun.

That doesn't last long.

``Very quickly, the trading action is swinging violently wider,'' Backshall says. Bear's swap cost jumps to 850 basis points that afternoon, his screen shows. ``When fear gets hold, fundamental analysis goes out the window,'' he says.

In the calmest of times, making reasoned decisions about swap prices is a challenge. Now, it's impossible. Traders don't have access to any company data more recent than Bear's February annual report. Sharp-eyed investors looking through that filing might have spotted a paragraph that's strangely prescient.

``As a result of the global credit crises and the increasingly large numbers of credit defaults, there is a risk that counterparties could fail, shut down, file for bankruptcy or be unable to pay out contracts,'' Bear wrote.

`Material Adverse Effect'

``The failure of a significant number of counterparties or a counterparty that holds a significant amount of credit-default swaps could have a material adverse effect on the broader financial markets,'' the bank wrote.

Even after JPMorgan's Friday morning announcement, the market is alive with rumors. Backshall's clients tell him they've heard some investment banks have stopped accepting trades with Bear Stearns and some money market funds have reduced their short-term holdings of Bear-issued debt.

On Sunday, March 16, the Federal Reserve effectively lifts the sellers of Bear Stearns protection out of their misery. JPMorgan agrees to buy Bear for $2 a share.

While that's devastating news for Bear shareholders -- the stock had traded at $62.30 just a week earlier -- it's the best news imaginable for owners of Bear debt. That's because JPMorgan agreed to cover Bear's liabilities, with the Fed pledging $29 billion to cover Bear's loan obligations.

Turned to Dust

For traders who sold protection on Bear's debt, the bailout is a godsend. Faced with the prospect of having to hand over untold millions to their counterparties just three days earlier, they now have to pay out nothing.

For traders who bought protection swaps just a few days earlier -- when prices were in the 600s to 800s -- the Fed bailout is crushing. Their investments have turned to dust.

On Monday morning, the cost of default protection on Bear plunges to 280. Backshall sits back in his chair and for the first time in two weeks, he can breathe easier.

``No wonder I look so tired all the time,'' he says, finally showing a bit of a smile.

When it bailed out Bear Stearns, the Federal Reserve effectively deputized JPMorgan to monitor the credit-default- swap market, says Edward Kane, a finance professor at Boston College. Because regulators don't know where the risks lie, they're helpless, Kane says.

Default swaps shift the risk from a company's credit to the possibility that a counterparty might fail, says Kane, who's a senior fellow at the Federal Deposit Insurance Corporation's Center for financial Research.

`Off Balance Sheet'

``You've really disguised traditional credit risk, pushed it off balance sheet to its counterparties,'' Kane says. ``And this is not visible to the regulators.''

BNP analyst Cicione says regulators will be hard-pressed to prevent the next potential breakdown in the swaps market.

``Apart from JPMorgan, there aren't many other banks out there capable of doing this,'' he says. ``That's what's worrying us. If there were to be more Bear Stearnses, who would step in and give a helping hand? You can't expect the Fed to run a broker, so someone has to take on assets and obligations.''

Banks have a vested interest in keeping the swaps market opaque, says Das, the former Citigroup banker. As dealers, the banks see a high volume of transactions, giving them an edge over other buyers and sellers.

``Dealers get higher profitability through lack of transparency,'' Das says. ``Since customers don't necessarily know where the market is, you can charge them much wider margins.''

Banks Try to Hedge

Banks try to balance the protection they've sold with credit-default swaps they purchase from others, either on the same companies or indexes. They can also create synthetic CDOs, which are packages of credit-default swaps the banks sell to investors to get themselves protection.

The idea for the banks is to make a profit on each trade and avoid taking on the swap's risk.

``Dealers are just like bookies,'' Kane says. ``Bookies don't want to bet on games. Bookies just want to balance their books. That's why they're called bookies.''

The banks played the role of dealers in the CDO market as well, and the breakdown in that market holds lessons for what could go wrong with CDSs. The CDO market zoomed to $500 billion in sales in 2006, up fivefold from 2001.

Banks found a hungry market for CDOs because they offered returns that were sometimes 2-3 percentage points higher than corporate bonds with the same credit rating.

CDO Market Dried Up

By the middle of 2007, mortgage defaults in the U.S. began reaching record highs each month. Banks and other companies realized they were holding hundreds of billions in toxic debt. By August 2007, no one would buy CDOs. That newly devised debt market dried up in a matter of months.

In the past year, banks have written off $323 billion from debt, mostly from investments they created.

Now, if corporate defaults increase, as Moody's predicts, another market recently invented by banks -- credit-default swaps -- could come unstuck. Arturo Cifuentes, managing director of R.W. Pressprich & Co., a New York firm that trades derivatives, says he expects a rash of counterparty failures resulting in losses and lawsuits.

``There's a high probability that many people who bought swap protection will wind up in court trying to get their payouts,'' he says. ``If things are collapsing left and right, people will use any trick they can.''

Frank Partnoy, a former derivatives trader and now a securities law professor at the University of San Diego School of Law, says it's high time for the market to let in some sunshine.

Continued in article

From The Wall Street Journal Accounting Weekly Review on June 13, 2008

"De-Departmentalizing the B-School," by James Heggen, Inside Higher Ed, June 2, 2008 --- http://www.insidehighered.com/news/2008/06/02/villanova

Today, you need to know a little bit of everything, But Villanova University’s undergraduate business school curriculum, starting this fall, is designed on the theory that you don’t need an individual course in everything.

James Danko, Villanova’s business dean, said the “fundamental root” of the new curriculum is to have a multidisciplinary perspective. Several courses that used to be taught stand alone will be integrated into one course. For example, the introductory courses in finance and in accounting, which used to be two separate courses, will become one. The new course, financial management and reporting, will be six credits and taught by two instructors.

Walter Tymon, associate professor of management, explained another new course, in business dynamics, will also be taught over two semesters. It was created by a team of professors from accounting, business law, finance, information systems, management and marketing. Faculty members from these areas will each teach a section. The first semester will focus on giving students a “context for studying business.” Questions the course will cover include: “What is business and how does a business create value? Who are the various stakeholders in a business and how do they, and should they, influence decision-making? How has business evolved, and what are the important issues associated with the global business environment, ethics, leadership, teams, communication, motivation, and the structure and culture of companies.”

The second semester will focus on concepts from “each functional area of business with an emphasis on integration and how each discipline is part of a total system to achieve a business mission.”

Building on the growing trend of colleges requiring new students to read a common book before they enroll, Villanova is having its new business majors read Pour Your Heart into It: How Starbucks Built a Company One Cup at a Time, over the summer prior to beginning the course. Students will discuss the book in the business dynamics course, and in small groups led by business executives who graduated from Villanova’s Executive M.B.A. program.

“That’s going to be taught from a broader perspective,” Danko said.

Also, instead of having separate courses about skills such as communication or technology, Danko said there will be an emphasis in these skills being taught throughout the curriculum.

The changes came about in attempt to respond to the current business world, Danko said. The current curriculum has not had a significant overhaul since the 1950s and is based on an economic model that is no longer applicable into today’s world, he said.

Tymon, who was on the faculty committee that looked at curriculum revision, said that one of the factors that led to the change was “the fact that we do have a global economy.” He also mentioned students need to be able to see the “big picture” and the intent behind it, which means they need to have knowledge across the disciplines of business. “Students really need to be able to integrate across functions,” he said.

Danko said 85 percent of the faculty voted in favor of the proposed changes.

John J. Fernandes, president and chief executive officer of AACSB International: The Association to Advance Collegiate Schools of Business, said an integrative curriculum like the one Villanova will be using is increasingly common.

“It’s definitely the wave of the future to build an integrated curriculum,” he said.

In addition to the new curriculum, there have also been changes in how the faculty and departments have been structured. When Danko became dean three years ago, he proposed a new organization, which included compressing some departments and opening new ones. Operations management was merged with management and strategy. The economics department became economics and statistics. Accounting and management information merged to make accounting and information systems. In addition, Danko said he made “trial departments” called strategic initiative groups. Professors were offered the chance to take a “leave of absence” from their own department to join these groups. Some of these groups have focused on course development while others have focused on research. He said he encouraged the faculty to work in a “multidisciplinary way.” This faculty reorganization became a precursor to the change in curriculum.

Although most business schools don’t follow this model, Fernandes said he thinks that will change in the future because the traditional model is not sustainable, and more business schools will rethink structures.

“They’re going to have to, personally I think they should, but they’re going to have to,” he said.

Johns Hopkins School of Business is going even further than Villanova in its approach to faculty organization. The school, which only opened in 2007, will have no departments, beginning July of this year, said Yash Gupta, the dean. All professors will be encouraged to be part of multidisciplinary centers for research. But Gupta said that departments aren’t needed.

“Business decisions are integrative,” he said.

Jensen Comment
Whatever will become of those "schools of accountancy" that, on paper at least, spun away from their umbrella college of business.

Like most everything else, much depends upon the curriculum as opposed to structure. For example, in Texas the curriculum just has to have specific and somewhat traditional and definitely rigorous modules in accounting studies if graduates are to be allowed to sit for the CPA examination, and all those modules just cannot be fit into the fifth year of study. I can't imagine that most business undergraduate business programs will forget about the CPA examination constraints on curriculum. Most of the proposed change is in the first year or two and is actually in conformance with the recommendation of the Accounting Education Change Commission.

The biggest impact may be on the basic accounting textbook market where either the books will have to change or the courses will drop those traditional accounting textbooks. My guess is that publishers will adapt if this trend continues.

June 2, 2008 reply from David Fordham, James Madison University [fordhadr@JMU.EDU]

Bob, this isn't a new concept. Almost ten years ago, James Madison University eliminated the five separate business core courses (junior level Marketing, Management, Operations, Finance, and Organizational Behavior, and consolidated them into one single course, team taught, with large section meetings one day a week, and small group meetings with the professors one day a week, all day long, with scheduled group work, group meetings, etc. two days per week. Because of the synergy, it is a twelve-credit course, with one number (COB 300), and stresses integration of the fields into a holistic business environment. Accounting is still a separate sequence (Principles I and II), as are the other freshmen/sophomore prereqs (stats, micro-econ, macro-econ, CIS, B-Law, etc.), but the integrated course is required of all business majors the first semester of their junior year.

The integrated core course culminates in each student team coming up with a formal business plan for their own hypothetical business. The teams compete by presenting their business plan to a panel of local business leaders, (yes it's a formal presentation) who then award prizes (scholarships) based on completeness, comprehensiveness, thoroughness, etc. This really gives meaning to the term "educational effectiveness".

This approach has been amazingly successful, and has opened up a new level of achievement for the business capstone (strategy) course taken the last semester of the senior year by all business majors. Plus, because the integrative course requires so much group work, group presentation, etc., we've noticed significant improvement in the accounting majors' skill in working with groups, getting along with people, organizing effective presentations, willingness to assume leadership roles, etc.

The only downside we see to it is that it postpones our students' experience in junior level accounting coursework from the first semester junior year to the second semester. Thus, our students are interviewing for internships before they've even spent one day in a junior level accounting course. Still, our grads have a good reputation among the firms, and the recruiters don't hesitate to make offers to dozens and dozens of interns.

This change was made concomitant with a reorg of the B-school to eliminate departments and replace them with "programs" based on degree major. The departmental secretaries were all replaced with "floor work center secretaries", etc., faculty were encouraged to undertake cross-disciplinary efforts, departmental faculty were moved to be distributed across all five floors of the business building, etc. Unlike the integrate course, however, the college reorg has gradually regressed imperceptibly over time, to where today we are back to where we were ten years ago in terms of formal table-of-organization and lines of authority. But the integrated core course concept remains... because it appears to be working quite well.

David Fordham
JMU

June 3, 2008 reply from Paul Williams [Paul_Williams@NCSU.EDU]

When the College of Management at NC State was created in 1992 there were too few people in each functional area other than accounting and economics that Dick Lewis decided to conduct the ultimate experiment and have a single department containing all of the functional areas, i.e., marketing, finance, human resources, management. Thus, we were a three department college: economics, accounting and business management. The latter department has now fissured into two departments. Academe is organized not by colleges or universities, but by disciplines. Each discipline has its own cutures and structures. Multi- disciplinary courses are one thing; muti-disciplinary departments are a much more difficult animal to tame.

Paul Williams
paul_williams@ncsu.edu 

January 3, 2008 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

Paul,

I agree. Disciplines organised into departments become territorial and budgetorially (my two cents to lexicography) fixated. I know, since I have been caught between a rock and a hard place in this for years.

I have held a position in the Department of Accounting & Law for years, and I also hold an appointment as Director of our campus-wide Interdisciplinary PhD Program housed in the Department of Informatics, College of Computing & Information or CCI (university administration wanted no administrative role over an academic program and CCI with an enlightened Dean happened to be the most attractive choice for housing it)

I have always been amazed at how departments get territorial and budgetarily fixated. Whenever I discuss any matter with a colleague in the School of Business, the first reaction is: what's in it for the school? what's in it for me? On the other hand, when I broach any resource-oriented issue in Informatics -- in which about 15 departments and research centers participate, the attitude is: how can we make this work? what can I do to help? This is rather unusual, since the participation is purely voluntary with no extra-ordinary compensation.

Inter-disciplinary departments and programs in general have failed (take the best known of all, the Hampshire College experiment in Massachusetts, some of the inter-disciplinary programs at MIT, and so one of the few classic successes is the Committee on Social Thought at the University of Chicago). I think that the fact that we have lasted 20 years is evidence that we have not failed.

Federal funding agencies as well as the academia crave for inter- disciplinary research, but the departmental structure certainly does not facilitate it. Business schools certainly are excellent places to start, since most research in our schools should be interdisciplinary; business world is not neatly wedged into functional areas. However, I am not sure there are leaders at business schools with gumption to swim against the departmental currents.

Jagdish

Enron Recovery Rate Hits 50 Percent
Enron Creditors Recovery Corp. said Monday that with the latest distributions, creditors of the former Enron Corp. had received 50.3 cents on the dollar and creditors of Enron North America Corp. had gotten back 50 cents on the dollar. Both figures excluded gains, interest and dividends. John J. Ray III, president and chairman of the recovery corporation, said creditors had received "significantly more than originally was anticipated under the plan." The recovery corporation said it made a distribution Monday totaling about $4.17 billion to holders of unsecured and guaranty claims and distributed $1.87 billion on May 13 to newly allowed unsecured and guaranty claims that resulted from a settlement with Citigroup.
SmartPros, June 3, 2008 --- http://accounting.smartpros.com/x62107.xml

Bob Jensen's threads on the Enron/Worldcom/Andersen scandal (including a timeline of major events) are at
http://www.trinity.edu/rjensen/FraudEnron.htm

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Question
Is it really true that "lawyer ethics" is an oxymoron?

Milberg Loves to Sue CPA Firms and Their Corporate Clients

"Milberg Settles With Government:  Law Firm Admits It Paid Kickbacks; Fine of $75 Million,"  by Ashby Jones and Nathan Koppel, The Wall Street Journal, June 17, 2008; Page B2 --- http://online.wsj.com/article/SB121364029145878199.html?mod=hps_us_whats_news

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Here's another one of those accounting tempered misdeed confessions "without admitting or denying the allegations"
I wonder if Dennis the Menace got away with these confessions as often as accounting firms and their corporate clients?
I also wonder how KPMG made Citigroup account for this swap under FAS 133?

June 17, 2008 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

Bob,

The full text of the SEC's Accounting and Auditing Enforcement Release is available at: http://www.sec.gov/litigation/admin/2008/34-57970.pdf .
It's an interesting case that is a little more complicated than may be implied by the short report below.

Denny Beresford

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's threads on KPMG are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

PayPal Auditors?

Question
If auditing firms commence to warrant that audited financial statements are prepared according to GAAP, it might be a bit like the following warranty for eBay transactions. I wonder if that day will ever come for financial audit services?
There is one difference. PayPal and eBay are providing warranties against various kinds of fraud whereas financial auditors only warrant against fraudulent and material departures from GAAP and not other types of financial fraud. But even in the case of departures from GAAP, auditors do not offer to reimburse investors and creditors that are misled by GAAP departures. Injured investors and creditors now have to bring costly lawsuits against auditors and their clients.

Wow! It's hard to believer PayPal will go this far in protecting eBay customers
Can PayPal continue to afford this kind of protection?
On June 20, eBay announced that it will fully reimburse buyers and sellers when transaction problems arise, providing they use eBay’s PayPal payment service. That means eBay will foot the bill when, say, a buyer purchases an item that was misrepresented on the site or not sent. So, if that too-good-to-be-true bargain Gucci bag turns out to be a cheap knockoff, eBay will give the buyer a refund. The additional protections will go into effect this fall. “We’re combining the power of eBay and PayPal to give all buyers and sellers more confidence and trust,” said Lorrie Norrington, eBay’s president of Marketplace Operations in a statement. “Buyers who pay with PayPal on eBay will be covered, with no limits, on most transactions.”
Catherine Holahan, Business Week, June 19, 2008 --- http://www.businessweek.com/the_thread/techbeat/archives/2008/06/post_7.html?link_position=link3

Bob Jensen's threads on consumer fraud are at http://www.trinity.edu/rjensen/FraudReporting.htm

Bob Jensen's threads on audit litigation and professionalism are at http://www.trinity.edu/rjensen/Fraud001.htm

One of the earliest and probably the most famous accounting and investment scandal was the South Sea Bubble in 1720
From the Harvard University Business School
Sunk in Lucre's Sordid Charms: South Sea Bubble Resources in the Kress Collection at Baker Library --- http://www.library.hbs.edu/hc/ssb/

Bob Jensen's threads on accounting history --- http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory

Free online textbooks, cases, and tutorials in accounting, finance, economics, and statistics --- http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

Another Illustration of Round Trip Trading Fraud

Round Trip Trading --- http://www.investopedia.com/terms/r/round-triptrades.asp

An action that attempts to inflate transaction volumes through the continuous and frequent purchase and sale of a particular security, commodity or asset. Round-trip trading can be used to refer to the practice of a business selling an unused asset to another company while agreeing to buy back the same asset for about the same price (which has been seen in the energy and telecom business). 

This is a market-manipulation practice used to misrepresent the number of transactions occurring on any given day. Round-trip trading artificially inflates volume and revenues, but in reality adds no profit. Enron was a company that engaged in round-trip trading, and, by doing so, was able to increase revenues (and expenses) without changing its net income.

From the Securities Law Professor Blog on June 17, 2008 --- http://lawprofessors.typepad.com/securities/

CMS Energy Officer Settles SEC Charges

The SEC settled administrative charges against Tamela Pallas.  Its Order finds that Pallas participated in and approved of the decision to do round trip energy trades while she was (a) Senior Vice President of Reliant Energy Services, Inc., a subsidiary of Reliant Energy, Inc. (Reliant), that was a part of Reliant's Wholesale Group and as the Chief Operating Officer and later (b) Chief Executive Officer of CMS Marketing Services & Trading, a subsidiary of CMS Energy Corp. (CMS). The inclusion of those transactions caused Reliant's and CMS's financial statements to present materially misleading pictures of their actual business activity. Although Pallas neither participated in discussions or decisions regarding how to account for the transactions nor participated in drafting earnings releases or Commission filings at either Reliant or CMS, according to the SEC, Pallas should have known that the revenues and expenses associated with the round trip trades would be included in each company's financial statements, including filings made with the Commission. The Order finds that Pallas's conduct with respect to the round trip trades was negligent and, as such, was a cause of the filing of reports, including offering materials, which included revenues and expenses related to round trip trades. Respondent's negligent conduct was also therefore a cause of the related misstatement of the transactions in each company's books, records and accounts.

 

Another common accounting fraud is round tripping or bogus swapping to inflate revenues --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#RoundTripping

Question
What famous retailer is known for abusing accounts payable to vendors?

Hint:
In this mart, the buyer puts vendors to the “Wal.”

If textbook vendors were smart, they'd just use Scott Adams for most of their illustrations.
"Stretching Accounts Payables." Financial Rounds, June 14, 2008 --- http://financialrounds.blogspot.com/
Also enjoy the Dilbert cartoons!

Another Backdating Fine

From The Wall Street Journal Accounting Weekly Review on June 13, 2008

Bob Jensen's threads on options backdating scandals are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

Bob Jensen's fraud updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

RBI releases guidelines for Off-Balance Sheet Financing (OBSF) exposures

Draft Guidelines on Prudential Norms for Off-balance Sheet Exposures of Banks – Capital

Adequacy, Exposure,

Asset Classification and Provisioning Norms

At present, paragraphs 2.4.3 and 2.4.4 of the ‘Master Circular on Prudential Norms on Capital Adequacy’, DBOD.No.BP.BC.4/21.01.002/2007-08 dated July 2, 2007, stipulate the applicable credit conversion factors (CCF) for the foreign exchange and interest-rate related contracts under Basel-I framework. Likewise, paragraph 5.15.4 of our circular on ‘Guidelines for Implementation of the New Capital Adequacy Framework’ DBOD.No.BP.BC. 90/20.06.0001/2006-07 dated April 27, 2007, prescribes the CCFs for these contracts under the Basel-II framework. Further, in terms of paragraph 2.3.2 of the ‘Master Circular on Exposure Norms’, DBOD.No.Dir.BC.11/ 13.03.000/2007-08 dated July 2, 2007, the banks have the option of measuring the credit exposure of derivative products either through the ‘Original Exposure Method’ or ‘Current Exposure Method’.

2. In accordance with the proposal contained in the paragraph 165 (reproduced in Annex 1) of the Annual Policy Statement for the year 2008-09, released on April 29, 2008, it is proposed to effect the following modifications to the existing instructions on the above aspects:

2.1 Credit Exposure – Method of computing the credit exposure
For the purpose of exposure norms, banks shall compute their credit exposures, arising on account of the interest rate & foreign exchange derivative transactions and gold, using the ‘Current Exposure Method’, as detailed in Annex 2.

2.2 Capital Adequacy – Computation of the credit equivalent amount
For the purpose of capital adequacy also, all banks, both under Basel-I as well as under Basel-II
framework, shall use the ‘Current Exposure Method’, as detailed in Annex 2, to compute the credit
equivalent amount of the interest rate & foreign exchange derivative transactions and gold.

2.3 Provisioning requirements for derivative exposures
Credit exposures computed as per the ‘current exposure method’, arising on account of the interest rate &
foreign exchange derivative transactions, and gold, shall also attract provisioning requirement as
applicable to the loan assets in the ‘standard’ category, of the concerned counterparties. All conditions
applicable for treatment of the provisions for standard assets would also apply to the aforesaid provisions
for derivative and gold exposures.

2.4 Asset Classification of the receivables under the derivatives transactions
It is reiterated that, in respect of derivative transactions, any amount receivable by the bank, which
remains unpaid for a period of 90 days from the specified due date for payment, will be classified as nonperforming
assets as per the ‘Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to the Advances Portfolio’, contained in our Master Circular DBOD. No. BP.BC.12/ 21.04.048/2007-08 dated July 2, 2007.

2.5 Cash settlement of derivatives contracts
Any restructuring of the derivatives contracts, including the foreign exchange contracts, shall be carried out only on cash settlement basis.

3. The foregoing modifications will come into effect from the financial year 2008-09. The banks will, however, have the option of complying with the additional capital and provisioning requirements, arising from these modifications, in a phased manner, over a period of four quarters, ending March 31, 2009.

Continued in article

Bob Jensen's threads on OBSF are at http://www.trinity.edu/rjensen/Theory01.htm#OBSF2

XBRL Video

"'XBRL in Plain English' on YouTube," SmartPros, May 23, 2008 --- http://accounting.smartpros.com/x61948.xml

YouTube Link --- http://www.youtube.com/watch?v=5F1E-2LkhW8

June 3, 2008 reply from James Richards [jdrozwa@IINET.NET.AU]

Hi,

Charlie Hoffman has another on his blog – http://xbrl.squarespace.com/journal/?currentPage=2 .

Cheers.

Jim Richards 

Some XBRL Blogs and Networks

Financial Reporting Using XBRL (maintained by Charles Hoffman) --- http://xbrl.squarespace.com/journal/?currentPage=2

XBRL Canada Blog (maintained by Jerry Trites) --- http://www.zorba.ca/xbrlblog.html

XBRL Networking --- http://xbrlnetwork.ning.com/

June 5, 2008 message from Saeed Roohani [sroohani@COX.NET]

Video of David Blaszkowsky, Director of Interactive Disclosure office at the U.S. Securities and Exchange Commission speaking at XBRL Research Opportunities Forum Volume 2 No 2 May 30, 2008 is now available at WWW.XBRLeducation.com 

Saeed Roohani

Bob Jensen's threads on XBRL are at http://www.trinity.edu/rjensen/XBRLandOLAP.htm

Bob Jensen's older videos on XBRL --- http://www.cs.trinity.edu/~rjensen/video/Tutorials/

June 4, 2008 message from sunitha palakurthy [sunithaicfai@gmail.com]

Greetings!        

         

It gives me immense pleasure to introduce myself as Dr. S Vijayalakshmi, Professor of Finance and Accounting, ICFAI Business School , ICFAI University , India .

 

The ICFAI (Institute of Charted Financial Analysts of India) University is a non-profit organization, primarily in imparting quality education in the areas of Management and Finance. ICFAI Press, one of the wings of the ICFAI University , is involved in publishing "The Accounting World".

 

 I am the Consulting Editor for "The Accounting World", This Magazine serves as a primary outlet for finance professionals, bankers, academicians, economists, corporate executives and students. This magazine focuses on the areas of

 

Financial Accounting, Human Resource Accounting, Mergers and Acquisitions Accounting, Creative Accounting, Forensic Accounting, Financial Reporting,

Technology in Accounting, Auditing, Environmental Accounting, Regulatory Issues in Accounting, Accounting Standards, Corporate Governance, Fraud, Business environment, and other Emerging Issues.

 

Many academicians and professors from renowned universities, and Indian Institute of Management, Asian Development Bank and many more from Dubai, Australia, Philippines, and Malaysia have chosen this as a platform to disseminate knowledge and information of their articles.

 

I, therefore invite you to contribute articles for our magazine and share valuable experiences with us. Time is always a constraint; therefore send your articles at the earliest.

 

With Warm regards

 

S.Vijayalakshmi

Consulting Editor—The Accounting World

Mail id: sedidi@rediffmail.com, sedidi@gmail.com

sunithaicfai@gmail.com

Sunitha Palakurthy
Research Associate -The Accounting World

The Icfai University Press
6-3-354/1, 2nd floor
Stellar sphinx
road no 1, Banjara Hills
Panjagutta, Hyderabad
pin 500082

Ph: 040 23430448-451
Fax: 040 23430447

Mail id: sunithaicfai@yahoo.co.in
             sedidi@rediffmail.com

 

The Worldwide Oligopoly of Audit Firms
Question:  How much have audit fees allegedly increased since auditors put on their SOX?

"On with the show? The auditing business, concentrated in the hands of just a few companies, is far too cosy to operate with consumers' best interests in mind," by Prim Sikka, The Guardian, June 3, 2008 --- http://commentisfree.guardian.co.uk/prem_sikka_/2008/06/on_with_the_show.html

Never mind showbusiness, there's no business like the accountancy business. Accountancy firms have a licence to print money because they enjoy access to a state-guaranteed market for auditing. Companies, hospitals, schools, charities, universities, trade unions and housing associations have to submit to an audit, even though the auditor might issue duff reports. Anyone refusing their services faces a prison sentence.

Major company audits are the most lucrative and that market is dominated by just four global auditing firms. PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young have global revenues of over $80 billion (£41bn) a year, which is exceeded by the gross domestic product of only 54 nation states. These firms dominate the structures that make accounting and auditing rules.

Following the Enron and WorldCom debacles and the demise of Arthur Andersen, the auditing market has become further concentrated in those four firms. Many major companies looking for global coverage find that the auditor choice is very restricted.

In the US, the big four audit 95% of public companies with market capitalisations of over $750m. A US study focusing on 1,300 companies, showed that the fees charged by the big auditing firms have increased by 345% in the five years to 2006. Median total auditor costs rose to $2.7m, from $1.4m in 2001. A major reason for the increase is said to be the (SOX) Sarbanes-Oxley Act (pdf) 2002, which was introduced after audit failures at Enron and WorldCom.

In the UK, the big four firms audit 97% of FTSE 350 companies. In 2001, the average FTSE 100 company audit fee was £1.89m. By 2006, the figure had increased to £3.7m. The rise in audit fees continues to exceed the rates of inflation. For example, Northern Rock's fees have increased from £1.8m in 2006 to £2.4m in 2007.

The firms cite the Sarbanes-Oxley Act and international accounting and auditing standards to justify higher fees. They are silent on the fact that their own audits of Enron and WorldCom arguably prompted the Sarbanes-Oxley Act, or that the big four firms finance and dominate the setting of international accounting and auditing standards. These standards rarely say anything about the public accountability of auditing firms. Most firms refuse to reveal their profits.

The massive hike in audit fees has not given us better audits. Carlyle Capital Corporation collapsed within days of receiving a clean bill of health form its auditors. Bear Stearns was bailed out within a few days of receiving another clean bill of health. In the current financial crisis, all major banks received a clean bill of health even though they engaged in massive off balance sheet accounting and around $1.2tn of toxic debts may have been hidden. But perhaps ineffective auditors suit the corporate barons.

In market economies, producers of shoddy goods and services are allowed to go to the wall. Governments impose higher standards of care on them to improve quality. But entirely the opposite has happened in the auditing industry. Auditing firms have secured liability concessions (pdf) to shield them from the consequences of own their failures. Charlie McCreevy, the EU commissioner for the internal market and services, an accountant, is keen to give them more. He favours an artificial "cap" on auditor liability. The commissioner has failed to provide any evidence to show that the liability shield provided to producers of poor quality goods and services somehow encourages them to improve the quality of their products.

Accountancy firms, EU commissioners and regulators routinely preach competition to everyone else, but go soft when it comes to dealing with auditing firms. They could restrict the number of FTSE companies that any auditing firm can audit and thus create for space for medium-sized firms to advance. They could insist that some quoted companies should have joint audits and thus again create space for medium-sized firms. They could insist on compulsory retendering or company audits and rotation of auditors. They could invite new players to the audit market. The Securities Exchange Commission or the Financial Services Authority could take charge of audits of banks and financial institutions. None of these proposals are on the radar of the corporate dominated UK accounting regulator, the Financial Reporting Council. It advocates market led solutions, which raises the question of why the markets have not resolved the problems already, and exerted pressures for better audits.

As a society, we continue to give auditing firms state-guaranteed markets, monopolies, lucrative fees and liability concessions. None of it has given us, or is likely to give us better audits, company accounts, corporate governance or freedom from frauds and fiddles. Without effective independent regulation, public accountability and demanding liability laws, the industry cannot provide value for money.

Jensen Comment
You can access a fairly good summary of the Big Four at http://en.wikipedia.org/wiki/Big_Four_auditors

Bob Jensen's threads on auditing firm scandals and professionalism are at http://www.trinity.edu/rjensen/Fraud001.htm

"Indian Universities Create Free Collection of Lecture Videos That Rivals MIT's," by Jeffrey R. Young, Chronicle of Higher Education, May 28, 2008 --- http://chronicle.com/wiredcampus/index.php?id=3038&utm_source=wc&utm_medium=en

A group of seven technical universities in India have teamed up to create a free YouTube library of engineering courses. There are more than 50 courses online already—with all of the lectures delivered in English.

The Open Culture blog notes that the collection rivals that of the Massachusetts Institute of Technology, which for years has been creating free collections of its course materials. “Suddenly MIT is not the only tech powerhouse getting into the business of providing free educational resources,” says the blog’s author Dan Colman, director and associate dean of Stanford University’s continuing-studies program. The project is called the National Programme on Technology Enhanced Learning, and it is a joint effort of campuses of the Indian Institute of Technology and the Indian Institute of Science.

MIT’s collection features far more courses—about 1,800 of them. But many of MIT’s course Web sites provide only written lecture notes, rather than video recordings of lectures.

So far the most popular lecture in the Indian YouTube collection is one on basic electronics, which has been viewed more than 32,000 times.

Video available from other universities --- http://www.oculture.com/2008/03/youtubesmartvideos.html

Bob Jensen's threads on open-sharing courses and videos are at http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
(including accounting education videos)

Bob Jensen's threads on free online tutorials and videos (including accounting) --- http://www.trinity.edu/rjensen/ElectronicLiterature.htm#OnlineBooks

Bob Jensen's threads on free online tutorials in other various disciplines --- http://www.trinity.edu/rjensen/Bookbob2.htm#tutorials

Questions About Fair Value (Mark-to-Market) Accounting

June 21, 2008 message from Gerald Trites [gtrites@ZORBA.CA]

I have felt that mark to market is the wrong approach since it began. It removes all substance from accounting measurements and introduces volatility and unreliability. Accordingly I was interested to see this quote from Frank McKenna, a highly respected Canadian Businessman and Vice Chair of the Toronto Dominion Bank (Also former Canadian ambassador to the US):

"There's going to be a very serious look at accounting rules, particularly mark-to-market rules in the United States," Mr. McKenna said. "A lot of people feel that the crisis has been accelerated by mark-to-market accounting, and that when there's no real market - because the market has seized up - using mark-to-market creates a false impression."

The article is at
http://www.reportonbusiness.com/servlet/story/RTGAM.20080620.wmckennabanks0620/BNStory/Business/home 

Jerry

June 21, 2008 reply from Neal Hannon [nhannon@GMAIL.COM]

Oh please.  Why is it wrong to tell the financial markets what is the current value of your assets/liabilities?  I understand that this approach is subject to the will of management, but doesn't honesty and transparency count for something in the marketplace?  Business is volatile. Accountants have .. for too long.. facilitated the smoothing of earnings.  It's time to put some honesty into financial reporting.

Neal

June 21, 2008 message from Gerald Trites [gtrites@ZORBA.CA]

Hi Neal,

There's a big difference between disclosure and measurement. I don't have a big problem with disclosure, provided it is well explained. My big problem is with measurement. Use of "market values" can be misleading when the markets are thin or virtually non-existent. They are unduly affected by short term panic selling, and extraneous events with no real economic substance. If such markets were true indicators of economic value, I would agree with you. However, they often are not.

Jerry

June 22, 2008 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

Neal,

Sure, Neal. I firmly believe that the market should be told what the current "value" (I prefer the term "current replacement cost", since at least in the United States, with the "Theory" of price replacing the theory of value, "value" has as an economic concept has been replaced by "price").

My objection is only to the contamination of the books by all sorts of "events" and executory transactions that have been de-fictionalised in the financial reports.

That was the reason I compared disclosure with measurement.

We have been on this slippery slope towards measurement at the expense of integrity and reliability for a long time, but in my opinion, the watershed event was the pseudo-accounting for inflation under SFAS 33. It did two things: First it showed that academic accountants could push the standards around (I remember Sandy Burton, then the Chief Accountant of the SEC, deriding it as pooh-pooh --in retrospect he probably meant poo-poo -- accounting; he preferred footnote DISCLOSURES regarding current replacement cost (CRC) of Plant and Equipment). I think the compromise was poo poo accounting for the balance sheet/income statement and CRC disclosures in the footnotes. FASB's ridiculous tome bit the dust later, disappointing the "empirical" academic accountants who thereby had been deprived of precious SFAS 33 disclosures.

Secondly, it showed that economic conditions rather than sound "accounting theory" (which in my opinion is still to be invented), could dictate what the standards would be (SFAS for inflationary times followed by its dumping when inflation abates). This is as close as it gets to "anything-goes" theory of accounting.

In my humble opinion, disclosures with "safe harbour" provisions to protect the accounting profession (so long as there is due diligence and good faith) is far more meaningful than a ride on the slippery slope to experimentation to satisfy unsupported academic curiosity.

When I was an undergraduate eons ago, books came close to be regarded sacred and fiddling with them was not the rule. Accounting then had sound basis in law as Ijiri (and the early Paton) would agree. Integrity and reliability were paramount, "decision usefulness" was the icing on the cake.

Now, half way along the slippery slope, "decision usefulness", what ever it means, thanks to the thoughtless adoption of neo-classical economic ideas, seems paramount; reliability and integrity the icing on a stale cake.

My hunch is that this remarkable flexibility in defining income may have contributed to the short-sightedness of American corporate management, and its obsession with earnings announcements.

With Regards,

Jagdish

June 22, 2008 reply from Henry Collier [henrycollier@aapt.net.au]

There have been some recent contributions reflecting on the ‘mark to market’ rules and principles for financial accounting and reporting. While there may be many ‘alternative’ measurement schemes to implement a ‘mark to market’ method, what is or are the alternatives to using some sort of ‘current value’ accounting measurement scheme. Do we insist that the ‘other’ is historical (or as I have described it for years, hysterical) cost accounting? It seems as though our ‘profession’ deliberately goes out of its way to obfuscate measures of risk and volatility in places where measures of these very characteristics are one of the essential requirements of users of F/S. Is conservatism the driving characteristic? Do materiality judgments give the accountant the right to decide what is important to users of F/S? For after all, don’t materiality judgments say to the user of F/S, this transaction doesn’t affect YOUR decision making so I will allow the managers to enter this transaction into the accounting system in any way that they wish?

We’ve fooled around and fiddled and futzed with alternatives to historical cost virtually forever in accounting measurement and reporting. Writers like MacNeal, Scott, Sweeney, Gilman, and Hatfield, seem to be long forgotten and almost entirely ignored in today’s developments in both accounting practice and development of accounting principles and theory. The work of Beaver, Kennelly and Voss in their October 1968 A/R paper on predictive ability is systematically ignored. All in all we’ve seen more than 70 years of controversy and yet we still rely on the construct of historical cost in our financial statements. We have a resistance to change in our ‘profession’ a relentless pursuit of objective measures that can be verified. Measurement constructs of reliability and conservatism seem to over-ride constructs of representational faithfulness and timeliness and usefulness. One of my ‘pet peeves’ with accounting and accounting education is a failure to question whether financial statements are prepared for the accountants / preparers or for the users. We don’t even bother to consider that users of F/S may have different objectives. Well, maybe we do consider the user, but then dismiss their goals and objectives by saying that we prepare ‘general purpose’ financial statements (whatever those are). However that question is, IMO, subsumed by my previous question.

While accountants appear to insist on quantitative certainty, the qualitative aspects of accounting and finance appear to be swept under the rug. We take a piecemeal approach to what might be termed ‘current cost accounting’ reveling in our inconsistency about treatment of research and development, ignoring human assets in our valuation schemes, and spending huge amount of time and effort in determining the ‘value’ of speculative derivatives. We attach much importance to the “E” in A – L = E, when E is based on flawed and inconsistent values for both A and L … so much for our mathematic certainty and consistency of measures. Perhaps incorrectly I have always thought that E was what we had left for the owners after we subtracted what we owe from what we own. Simplistic? Yes! … and quite probably too simplistic.

If we believe that one of the purposes of financial reporting is to assist decision makers in making whatever kinds of decisions they want of need to make about the company, then I believe that we must demonstrate a degree of ‘predictive ability’ in the financial reporting process, and in the resulting financial reports prepared by the firm, independently audited, and readily available to those who wish to use them in whatever decision making process they wish.

All that said, the old question from the chief senior mechanic to his go-fer … “bring me a spanner” … the go-fer responds, “what kind of spanner you want, chief?” … chief says, “I don’t care, I’m going to use it as a hammer anyway”. I’d suggest that historical cost based financial statements are the universal spanner in the story.

I’m also of the view that no manager worth his or her salt would use historical cost based financial based information for internal decision making. It seems that what internal managers want for decision making is predictions of the ‘future costs’, predictions of future demands, predictions of future market conditions. Do we expect historical costs to yield this information? I suspect not.

While managers continue to manipulate earnings and values in order to maximize their earnings of bonuses and perquisites, others who delegate agency power and authority to managers watch as some managers systematically loot the firm. How many more ‘unexpected’ company failures do we need to have? How many more Enrons and Equity Fundings and Compass Airlines and HIH’s and on and on and on do we need to endure before we find solutions to the financial reporting problems.

Will IFRS resolve the problems? Maybe the adoption of IFRS will shift the power structure. Nevertheless, accounting ‘professionals’ appear to be very resistant to change. I’m stirring the pot again. I continue to ask the questions, from whence come you; and what come ye here to do?

Groucho Marx might have had it right. Any questions? Any answers? Any rags, any bones, any bottles today?

Regards from the land down under

Henry

 

Reply from Bob Jensen on June 22, 2008
A Lesson in Simplifying Financial Instrument Reporting
Can a single "fair value" number such as the "fair price" of a used car be a surrogate for all the risks under the hood?

In a 2008 exposure draft the International Accounting Standards Board (IASB) argues that "fair value is the only measure appropriate for all types of financial instruments" --- http://snipurl.com/ias39simplification
The argument does not apply to non-financial items that presumably are to be accounted for based upon more traditional generally accepted accounting principles (GAAP).

The huge problems that I find most disturbing about fair value accounting are as follows:

• The problem of mixing realized earnings with unrealized ups and downs of fair values is an age-old problem that is either ignored (as in FAS 159) or allocated in a confusing way to Other Comprehensive Income (OCI) as in FAS 115/130 and cash flow/FX hedging under FAS 133, or posting to a "Firm Commitment" equity account that almost nobody understands in FAS 133. IAS 39 buys into the same hedge accounting alternatives but differs (for the better) in terms of basis adjustment back to realized earnings. Issues with unrealized value changes of derivatives are mostly newer problems in the 21st Century after FAS 133 and IAS 39 required fair value accounting for nearly all derivative financial instruments. However, the theoretical problem of unrealized value changes dates way back to Kenneth McNeal, John Canning, and DR Scott in history as later extended by Bob Sterling, Edwards and Bell, and especially Ray Chambers who leaned toward exit value relative to current (replacement) cost alternatives --- http://www.trinity.edu/rjensen/Theory01.htm#UnderlyingBases
   
• Exit (fair) value, however, is no panacea. "Value in use" generally differs greatly from exit (liquidation) values.  Exit values can be highly misleading in terms of value of assets in going concerns. Exit value accounting properly should be relegated to personal estates and assets/liabilities approaching a liquidation state except possibly for financial assets where exit values are usually much closer to value in use. For operating assets it is quite another matter. For example a huge farm tractor costing $250,000 new may lose almost half its exit value in the first 500 hours of use because it is then reclassified as a "used tractor" even though it might have 30,000 or more hours of usage life remaining. One problem with exit values is that the "new" market is often restricted to dealers such that buyers of equipment must sell in a "used" market where products each unique are no longer fungible commodities like they are in "new" markets. Another problem with exit values is that they're often very difficult to estimate and appraisals are prone to fraud as witnessed in real estate appraisals during the Savings and Loan scandals of the 1980s and the subprime mortgage scandals in the early part of the 21st Century.
   
• A related problem of exit values is that "transactions costs" are sometimes enormous. New robotics machines may cost $10 million to buy and another $10 million to install. If they're to be valued for reporting purposes in the used robots market, the entire $10 million of installation cost must be viewed as down the drain and cannot be recovered in exit values. Investors are misled if all installation costs are expensed immediately when new robots are installed in going concerns. Can you imagine what it actually cost to dismantle the London Bridge, transport it to its new location in Arizona, and reassemble the bridge? What would be the cost of taking it back to London at fuel prices today? Also the selling costs of some types of equipment and real estate can be enormous such that exit values are distorted when estimates of selling costs are netted out for going concerns. What would it cost for Arizona just to negotiate a sale of the London Bridge, apart from all other relocation costs, back to investors in London?
   
• Exit values are costly to obtain on an annual basis. In 1987, when Cecil Day's family was considering an IPO, their Days Inns of America company incurred an enormous expense to have all of their nationwide properties appraised with the appraisals each being independently reviewed by Landhauer Associates. Reported appraised values in the 1987 annual report were $194,812,000 versus book values of $87,356,000. If its reliable such exit value reporting might be useful information even though it tells little about value of this real estate in use as Days Inn motels. But obtaining subsequent real estate appraisals reliably on an annual basis was much too expensive. Days Inns of America did not, to my knowledge, report exit values in the ensuing years. Incidentally, the 1987 Days Inn Annual Report is interesting for some other pedagogical reasons  (I still have my prized copy). In addition to the exit value reporting, the Price Waterhouse auditing firm also did a PW-signed "Review of Forecasts" which was and still is allowed by the AICPA but has not been a popular service of CPA firms since the AICPA, in the 1980s, approved CPA firm reviews of forecasts. Over the years I had my students contemplate why this proposed CPA firm "review of forecasts" airplane never really took off. Of course it would've taken off if the SEC had required such reviews to be signed by CPA firms.
   
• Reporting of current (replacement) costs and price-level adjustments was required in FAS 33 beginning in 1979, for very large U.S. companies. The unrealized changes in current cost, however, were not mixed in with traditional GAAP financial statements. Instead footnote schedules were required in FAS 33 where current cost and price-level adjustment data were summarized. This supplementary information purportedly was ignored by analysts and the investing public, even though some of the adjustments were enormous. In 1981 United States Steel, for example, wiped out nearly a billion dollars of earnings with such adjustments --- http://www.trinity.edu/rjensen/Theory01.htm#UnderlyingBases
  The FASB ultimately decided that FAS 33 did not meet the cost-benefit test. The FASB rescinded FAS 33 when it issued FAS 89 in 1986. No companies are now required to report balance sheet and income statements on a replacement cost basis.
   
• Renewed interest in fair value (actually exit value) reporting of financial instruments got new life when something had to be done about derivative financial instruments exploding in popularity in the 1980s (when interest rate swaps were invented) that were not even being disclosed let alone booked. For example, forward contracts and interest rate swaps were not even being disclosed and were becoming the off-balance-sheet financing contracts of choice. The history of derivatives scandals and ensuing accounting standards can be found in a timeline at http://www.trinity.edu/rjensen/FraudRotten.htm
  Derivatives financial instruments, unlike other types of financial instruments, are unique in that they either have zero historical cost (as in forward, futures, and swap contracts) or only a nominal historical cost (as in options premiums) relative to enormous risks and potential rewards. Traditional amortized historical cost is nonsense for derivatives such that fair value was the only logical choice. For financial instruments in general such is not the case, and now firms worldwide may choose from the new and controversial "Fair Value Options" of the FASB and IASB.
   
• Exit value reporting of financial assets and liabilities is where the IASB, FASB, and most national accounting standard setters are now leaning for financial items as opposed to operating items. This is largely because there is less or a problem between value in use versus value in liquidation for financial items as opposed to operating items. The financial securities markets are also better organized with more value information for both listed and unlisted items in financial markets. For example, interest-rate-indexed (called underlyings) forward contracts and swaps tend to be unique private contracts, but valuation is somewhat reliable because of the depth of yield curve data provided by futures and options trading markets. Both the the IASB and the FASB now have a Fair Value Option (FVO) that allows firms to cherry pick what financial assets and liabilities, aside from derivatives, will be carried at fair value and what items will be carried at traditional amortized cost. Fair value reporting of financial items is not required, other than for derivatives, by standard setters largely for political reasons. Corporations worldwide would actively lobby to "carve out" fair value reporting requirements just like the banks in Europe succeeded in legislating carve outs of two parts of IAS 39.

So where to we go from here
(in June 2008 when I'm writing these remarks)?

All financial accountants should pay close attention to the exposure draft "Reducing Complexity in Reporting Financial Instruments" that for a very limited time may be downloaded without charge from the International Accounting Standards Board (IASB) --- http://snipurl.com/ias39simplification  [www_iasb_org] . This exposure draft should be viewed as both an IASB and a FASB document since both standard setting bodies, along with the standard setting bodies of many other nations, are working feverishly to simplify the accounting rules for financial instruments in general and derivative financial instruments in particular. This exposure draft really represents the current leanings of virtually all accounting standard setting bodies.

Be warned, however, that proposed alternatives for simplifying complexity are really trade-offs in complexity since exit value reporting has many controversies and complexities. Huge and complicated financial risks of contracts are proposed, in the exposure draft, to be broad-brush simplified with "fair value accounting." This is a little like relying on the price of a used car to serve as a single index of all the risks that lie under the hood (the British say bonnet) of the used car. The analogy to a used car is appropriate since in many instances a financial instrument is unique, like a particular used car, and cannot be valued reliably from either active trading markets or extrapolations of past valuations of the item following events that may seriously alter the value of an item.

Although the above exposure draft is intended to "reduce complexity" with fair value accounting for financial instrument reporting, the exposure draft is very honest in admitting that fair value accounting by itself cannot eliminate many complexities, especially many complexities in hedge accounting.

The bottom line in the IASB's exposure draft is that fair value accounting is no panacea for reducing financial reporting complexity, especially in reducing much of the complexity of hedge accounting using derivative financial instruments.

The exposure draft then launches into, beginning in Paragraph 2.55, alternatives to simplifying hedge accounting other than to attempting fair value accounting alternatives that hit the wall when hedging with derivative financial instruments.

With respect to hedge accounting, the IASB in the exposure draft seeks your input regarding the following:

Having noted all the problems with fair value accounting when hedging for derivative financial instruments in Section 2 of the exposure draft, the exposure draft in Section 3 tries to nevertheless make a case that fair value accounting is the best of all the bad alternatives for accounting for financial instruments in general, including derivative financial instruments. No attempt is made to advocate fair value accounting for non-financial instruments such as operating assets where value in use versus exit values present enormous problems for exit (fair value) accounting.

Section 3 is quite good about mentioning the problems of fair value accounting as well as the reasons the IASB (and the FASB) is leaning in theory and in practice for requiring fair value accounting of all financial instruments be they assets or liabilities or both in the case of some compound instruments.

Jensen Commentary

Without doubt the most complicated, confusing, and hated accounting standards are those concerning new rules for booking and carrying deivative financial instruments, particularly FAS 133 in the U.S. and IAS 39 internationally along with their even more complicating amendments and implementation guidelines. Companies, with the blessings of international auditing firms, have made many blunders in implementing these particular standards, and these errors have led to more revisions to previously published financial statements than any other standards. Probably the best known revisions are those of Fannie Mae that led to the firing of KPMG as the external auditor, to over a million correcting journal entries, and to millions of dollars spent in finding and correcting FAS 133 implementation errors that took over a year to correct using over 600 accounting and finance specialists. But virtually every other company that uses derivative financial instruments to hedge price, interest rate, and credit risk has encountered numerous and costly troubles trying to get the accounting right under the complex 133/39 standards.

The FAS 133 and IAS 39 complex standards were necessary to counter a rising tide of derivative instruments frauds and inadvertent deception in financial statements that exploded exponentially with newer types of derivatives speculations and hedging strategies commencing in the 1980s and 1990s. A timeline of the scandals and revisions of accounting standards can be found at http://www.trinity.edu/rjensen/FraudRotten.htm
For example, interest rate swaps now used for hundreds of trillions of dollars of interest rate risk hedging were not even invented until the 1980s. Prior to 1994, companies did not even have to disclose their forward contracts and interest rate or commodity swaps even when the financial risks of those undisclosed contracts greatly exceeded all the booked liabilities of companies. FAS 133 beginning in Year 2000 required booking nearly all derivatives contracts as assets or liabilities and adjusting the carrying values to fair values at least every three months and on all reporting dates. IAS 39 followed internationally soon afterwards.

If the preparers of financial statements, along with their auditors, are confused by the newer accounting rules for derivative financial instruments, imagine how hopeless it is for users of financial instruments to evaluate returns and risks after such added complexity appeared in financial statements. In addition to the confusing booked numbers such as hedge accounting accumulations in the Other Comprehensive Income (OCI) account, there are paragraphs full of technical hedging strategy jargon contained in nearly unreadable, albeit required, footnote disclosures that supplement the booked numbers in financial statements.

Definitions of derivative financial instruments and other related terms can be found a http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
FAS 133 and its key amending standards FAS 138, 149, 155, and 159 plus implications of 141, 142, 155, 157 and 159 can be downloaded free from http://www.fasb.org/st/index.shtml
Also note Section 815 of the FASB's new Accounting Standards Codification (ASC) online database --- http://asc.fasb.org/home

The derivative financial instrument contracts are usually purchased options (market exchanged), written options (market exchanged), futures contracts (market exchanged), forward contracts (privately exchanged) and swaps (portfolios of privately acquired forward contracts). Most derivatives have zero historical cost except for options where a relatively small premium is passed from the option purchaser to the option writer. As speculations, only purchased options have bounded risk limited to the premium paid. Other derivatives can have unbounded risk unless risk is bounded by other items (hedged items) by the hedging process.

The Concern is How to Get Hedge Accounting (read that relief from earnings volatility caused by unrealized changes in derivatives' fair value)
The FASB originally intended FAS 133 to be a simple standard in which derivative financial instruments, many of which were previously unbooked and undisclosed, be booked at cost (usually zero except for options) and than adjusted for often wildly fluctuating fair value until the options are settled or otherwise derecognized. The simple intended standard would've simply offset all changes in fair value of derivatives to current earnings. The theoretical and practical problem for derivatives used as hedges is that interim earnings, before derivatives are settled, typically fluctuates for unrealized changes in value that usually wash out when the derivatives are finally settled. Companies, particularly banks, objected wildly to such interim earnings fluctuations when hedges were intended to reduce financial risk. The FASB responded by adding over 1,000 highly technical pages to FAS 133 and its amendments dictating how and when companies could use special "hedge accounting" to essentially reduce or eliminate earnings volatility to the extent that the hedges meet "hedge effectiveness tests."

Not all economic hedges entered into by management qualify for hedge accounting in cash flow, fair value, or foreign exchange (FX) hedges. Not all qualifying hedges fully qualify for hedge accounting throughout the life of the hedge if hedging ineffectiveness arises. Hedging ineffectiveness may arise at interim points in time for hedges that are assured of being perfect hedges when settled at maturity. This, in particular, confuses management until it is explained those "perfect" hedges can be risky if settled before maturity. For example, a year-long hedging forward contract that locks in a fuel purchase price of $5 per gallon on ten million gallons on December 31 may shift in value wildly between January 1 and December 31, On March 31 the forward contract could be an enormous asset (when spot prices of fuel are soaring) and on June 30 it could become an enormous liability (with drastically plunging spot prices). Those "perfect cash flow hedges" at the December 31 maturity may not be perfect in terms of value and risk changes before maturity. Before Year 2000 and FAS 133, a company might have $100 million in undisclosed forward contract and swap exposures relative to $10 million in booked debt on the balance sheet. This is no longer the case due to FAS 133 and IAS 39.

Unbooked Purchase Contracts and Loan Obligations are Particularly Problematic
Companies often hedge firm commitments and forecasted transactions that are not yet booked in ledge accounts. In Accounting 101 and again in Accounting 301 courses, instructors repeatedly explain why executory purchase and sales contracts are not booked. Loan obligations are somewhat similar. For example, a firm commitment on January 1 for Airline A to buy 10 million gallons of fuel from Refiner R is not booked as an asset or liability by Airline A. It is also not booked as deferred revenue (a liability) by Refiner R until the purchase transaction actually transpires. However, both Airline A and Refiner R may enter into a derivative contract, such as a forward contract, to hedge this unbooked firm commitment contract for fair value risk. FAS 133 and IAS 39 require that the hedging contract be booked and carried at fair value even if the hedged item (the purchase/sale) contract is unbooked. Without hedge accounting relief, reported earnings will fluctuate due to value shifts in the booked derivative contract that are not offset by unbooked value shifts in the purchase/sale contract (the hedged item). This is why companies fought so hard to build hedge accounting relief into FAS 133 and IAS 39. Hedge accounting in this fair value risk situation allows changes in derivative contract value to be offset by debits or credits to a special equity account called "Firm Commitment"  rather than current earnings, thereby not corrupting earnings per share with unrealized fluctuations in hedging contract fair values.

The above purchase/sale contract is a firm commitment since the $5 price per gallon was contracted a year in advance. If the price was instead contracted as the December 31 spot price, the purchase/sale contract no longer has fair value risk, but it does have cash flow risk since neither Refiner R nor Airline A know what will be paid for the 10 million gallons of fuel until December 31. This change in the contract changes it from a "firm commitment" purchase/sale contract to a "forecasted transaction" purchase sale contract. Airline A might hedge such a forecasted transaction even without a written contract to purchase 10 million gallons of fuel from any supplier. Both Airline A and Refiner R may enter into a derivative contract, such as a forward contract, to hedge this unbooked forecasted tranaction contract for cash flow risk. FAS 133 and IAS 39 require that the hedging contract be booked and carried at fair value even if the hedged item (the purchase/sale) contract is unbooked. Without hedge accounting relief, reported earnings will fluctuate due to value shifts in the booked derivative contract that are not offset by unbooked value shifts in the purchase/sale contract (the hedged item). This is why companies fought so hard to build hedge accounting relief into FAS 133 and IAS 39. Hedge accounting in this cash flow risk situation allows changes in derivative contract value to be offset by debits or credits to a special equity account called "Other Comprehensive Income (OCI)" rather than current earnings, thereby not corrupting earnings per share with unrealized fluctuations in hedging contract fair values.

Loan obligations may be similar to unbooked purchase/sale contracts if they do not net settle. For example, suppose a bank is obligated to loan $1 million at 14% in three months. This firm commitment was signed when the spot rate of interest was 12%. If interest rates soar, the bank is still obligated to make the full loan at 14% unless there is a net settlement clause that allows the bank to instead provide a net settlement in cash in lieu of making the full loan. If the loan obligation has such a net settlement clause it has to be booked as a derivative financial instrument under either FAS 133 or IAS 39. If it does not net settle, then it might remain unbooked if certain other conditions are met.

Where the FVO Succeeds and Fails to Simplify Hedge Accounting
Both the FASB and the IASB are looking toward fair value accounting (now called the financial instrument Fair Value Option (FVO) now available in both the U.S. and International GAAP) to make it unnecessary to go through the complexities of qualifying for hedge accounting and continually testing for hedge hedging ineffectiveness that disqualifies some or all the hedge accounting at certain interim points of time. The FVO works pretty well for booked hedged items such as booked investments and booked liabilities for which changes in fair value under the FVO automatically offset changes of value in their hedging derivatives. It is no longer necessary to seek out special hedge accounting if the FVO is applied to such hedged items. Since the FVO is not available for non-financial hedged items such as operating assets (e.g., inventories, vehicles, factory machines, land, and buildings), the FVO only simplifies hedge accounting for hedged items that are booked financial assets or liabilities.

But unbooked hedged items create greater problems since the FVO cannot be applied to a hedged item that is not even booked, e.g., an unbooked loan obligation. The IASB exposure draft cited above recognizes this problem in the following quotation from the IASB exposure draft:

Also recall that the FVO only applies to financial assets and liabilities. Even though it will simplify hedge accounting for booked financial items, it does nothing to simplify hedge accounting for booked and unbooked non-financial items. Below is a section of the exposure draft regarding fair value hedging for items that are not permitted to be accounted for at fair value such as custom furniture inventory:

The bottom line is that fair value accounting is no panacea for reducing financial reporting complexity, especially in reducing much of the complexity of hedge accounting using derivative financial instruments.

The exposure draft then launches into, beginning in Paragraph 2.55, alternatives to simplifying hedge accounting other than to attempting fair value accounting alternatives that hit the wall when hedging with derivative financial instruments.

Having noted all the problems with fair value accounting when hedging for derivative financial instruments in Section 2 of the exposure draft, the exposure draft in Section 3 tries to nevertheless make a case that fair value accounting is the best of all the bad alternatives for accounting for financial instruments in general, including derivative financial instruments. No attempt is made to advocate fair value accounting for non-financial instruments such as operating assets where value in use versus exit values present enormous problems for exit (fair value) accounting.

Section 3 in the IASB's exposure draft is quite good about mentioning the problems of fair value accounting as well as the reasons the IASB (and the FASB) is leaning in theory and in practice for requiring fair value accounting of all financial instruments be they assets or liabilities or both in the case of some compound instruments.

In Section 3 of the exposure draft, the IASB's arguments for fair value accounting are very compelling. I applaud this effort. However, some underlying and unmentioned assumptions disturb me. Implicitly the IASB assumes that "value in use" and exit (fair) value are perfectly correlated for financial instruments. This is admittedly not true for non-financial assets such as farm tractors where the correlation between recently-purchased tractors and value in use has negligible correlation because of kinks between markets for new versus used tractors. The additional problem is that new tractors are fungible commodities whereas used tractors are entirely unique. No two used tractors are exactly alike in terms of quality and expected life. In addition the markets for new versus used tractors are entirely different even for pre-owned tractors that have never been used or were only used for little old farm ladies to get to and from church.

Now consider the IASB's assumption there's no difference between a customized derivative financial instrument and a similar instrument traded in exchange markets. There is in fact a huge unmentioned problem for financial instruments like customized interest rate swaps for which there is no external market. Interest rate swaps are generally unique, customized, and cannot be sold by parties and counterparties without prohibitive transactions costs. The FASB and the IASB require that they be "marked-to-market" without providing guidance on how to do so without a market. You can read about how such valuation takes place in a complicated manner at http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm
But is this supposedly "fair valuation" process really reflective of value in use of interest rate swaps?

Clearly historical cost (zero) is not relevant for a customized $10 million interest rate swap that XYZ Company acquired in Example 5 of Appendix B in FAS 133 commencing in Paragraph 131. Jensen and Hubbard explain how such a swap is valued by banks using a Bloomberg database of forward exchange transactions --- http://www.cs.trinity.edu/~rjensen/133ex05.htm .
The illustrative Excel workbook can be downloaded from http://www.cs.trinity.edu/~rjensen/133ex05a.xls

But is this "fair value" derived from market transactions really the fair value of XYZ's unique and customized interest rate swap? Probably not! It might be better to simply assume that value changes in the swap are perfectly and negatively correlated with value changes in the hedged item which in this example are $10 million in corporate variable rate bonds. But in order to assign a fair value to the interest rate swap an elaborate estimation process is required to derive the swap value estimates shown (but not explained) in Paragraph 137 of FAS 133. It is not clear that these fair values clearly reflect "value in use" of this unique customized swap that most likely cannot be sold or terminated with the swap's counter party without huge transactions penalties. This is an example of a financial instrument whose value in use may be entirely different from its true and totally unknown exit (fair) value.

The way firms must derive fair values for many financial instruments is truly fanciful for unique financial instruments that are not like any other market traded instruments and cannot be disposed of without enormous transactions costs. In the case of Example 5, the values given by the FASB (and never explained) and flip flop between positive and negative are probably widely divergent from value in use of this swap by XYZ Company.

The implicit assumption in fair value accounting that value in use is equal to extrapolated market valuations is not usually true in reality. This does not make fair value accounting necessarily worse than other alternatives, but it might unduly complicate hedge accounting. For example, the IASB does not permit the Shortcut Method for hedge effectiveness testing of interest rate swaps that is explained for XYZ Company in Paragraph 132 of FAS 133. The FASB allows the Shortcut Method, but the IASB refuses to allow it, and all sorts of anomalies might arise in hedge effectiveness testing that can be avoided by the Shortcut Method.

Advanced Derivatives Accounting Question
On June 27, 2001 the FASB's Derivatives Implementation Group (DIG) issued Statement FAS 133 Implementation Issue No. G20
Title: "Cash Flow Hedges: Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge Paragraph"
References FAS 133 Paragraphs 28(b), 30, 63, and 140
Date cleared by Board: June 27, 2001 Date posted to website: August 10, 2001
Do you think the IASB exposure draft is in direct conflict with G20, and if so, why?

Bob Jensen's threads on alternatives to fair value accounting --- http://www.trinity.edu/rjensen/Theory01.htm#UnderlyingBases

Question
Are these just dirty tricks to keep some generic drugs off the market?

Pharmaceutical makers go to great lengths to protect their exclusive marketing rights to best-selling brand-name drugs. But a pair of lawsuits and a government antitrust investigation involving a drug made by Abbott Laboratories could help define how far those companies can legally go to fend off copycat rivals.
Shirley S. Wang

From The Wall Street Journal Accounting Weekly Review on June 6, 2008

From The Wall Street Journal Accounting Weekly Review on October 14, 2005

TITLE: In R&D, Brains Beat Spending in Boosting Profit
REPORTER: Gary McWilliams
DATE: Oct 11, 2005
PAGE: A2
LINK: http://online.wsj.com/article/SB112898917962665021.html 
TOPICS: Financial Accounting, Financial Analysis, Financial Statement Analysis, Research & Development

SUMMARY: The article reports on a study by management consultants Booz Allen Hamilton on firms� levels of R&D spending and related performance metrics.

QUESTIONS:

1.) How must U.S. firms account for Research and Development expenditures? What is the major reasoning behind the FASB's requirement to treat these costs in this way? In your answer, reference the authoritative accounting literature promulgating this treatment and the FASB's supporting reasoning.

2.) How does the U.S. treatment differ from the treatment of R&D costs under accounting standards in effect in most countries of the world?

3.) Describe the study undertake by Booz Allen Hamilton as reported in the article. In your answer, define each of the terms for variables used in the analysis. Why would a management consulting firm undertake such a study?

4.) What were the major findings of the study? How does this finding support the FASB�s reasoning as described in answer to question 1 above?

5.) As far as you can glean from the description in the article, what are the potential weaknesses to the study? Do these weaknesses have any bearing on your opinion about the support that the results give to the current R&D accounting requirements in the U.S.? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

"In R&D, Brains Beat Spending in Boosting Profit," by Gary McWilliams, The Wall Street Journal, October 11, 2005, Page A2 --- http://online.wsj.com/article/SB112898917962665021.html 

Booz Allen concluded that once a minimum level of research and development spending is achieved, better oversight and culture were more significant factors in determining financial results. The study calculated the percentage of a company's revenue spent on R&D and compared it with sales growth, gross profit, operating profit, market capitalization and total shareholder result.

It found "no statistically significant difference" when comparing the financial results of middle-of-the-pack companies with those in the top 10% of their industry, said Barry Jaruzelski, Booz Allen's vice president of Global Technology Practice. The result was the same when viewed within 10 industry groups or across all industries evaluated.

"It is the culture, the skills and the process more than the absolute amount of money available," he said. "It says tremendous results can be achieved with relatively modest amounts" of spending.

He points to Toyota Motor Corp., which spent 4.1% of revenue on R&D last year, but consistently has outperformed rivals such as Ford Motor Co., which spent 4.3% of sales on research and development. Toyota's success with hybrid, gasoline-electric cars resulted from better spending, not more spending, Mr. Jaruzelski says.

The study rankles some. Allan C. Eberhart, a professor of finance at Georgetown University, says the time period examined is too short to catch companies whose results might have benefited from past R&D spending. He co-authored a paper that found "economically significant" increases in R&D spending did benefit operating profits. The paper, which examined R&D spending at 8,000 companies over a 50-year period, found 1% to 2% increased operating profit at companies that increased R&D spending by 5% or more in a single year.

Mr. Jaruzelski said less isn't always better. The study found that companies that ranked among the bottom 10% of R&D spenders performed worse than average or top spenders. The result suggests there is a base level of research and development needed to remain healthy but that spending above a certain level doesn't confer additional benefits.

R&D spending was positively associated with one performance measure: gross margins. Median gross margins of the top half of companies measured by R&D to sales spending were 40% higher than those in the bottom half.

Bob Jensen's threads on FAS 2 are at http://www.trinity.edu/rjensen/theory01.htm#FAS02

Free Video Lectures from London's Global University

June 4, 2008 message from Gerald Trites [gtrites@ZORBA.CA]

This was an interesting item:

http://www.timesonline.co.uk/tol/news/uk/education/article4058158.ece 

Jerry

Bob Jensen's threads on open sharing of university videos and course materials --- http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

"8 Accused of Kickbacks, Fraud at Wall Street Brokerage Firms," SmartPros, May 23, 2008 --- http://accounting.smartpros.com/x61954.xml

Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

FASB Issues FAS 163 "Accounting for Financial Guarantee Insurance Contracts --- http://www.fasb.org/pdf/fas163.pdf

From the AccountingWeb on May 27, 2008 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=105224

Last week The Financial Accounting Standards Board (FASB) issued FASB Statement No. 163, Accounting for Financial Guarantee Insurance Contracts. The new standard clarifies how FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts. The Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise's risk-management activities. Disclosures about the insurance enterprise's risk-management activities are effective the first period beginning after issuance of the Statement. "By issuing Statement 163, the FASB has taken a major step toward ending inconsistencies in practice that have made it difficult for investors to receive comparable information about an insurance enterprise's claim liabilities," stated FASB Project Manager Mark Trench. "Its issuance is particularly timely in light of recent concerns about the financial health of financial guarantee insurers, and will help bring about much needed transparency and comparability to financial statements."

The accounting and disclosure requirements of Statement 163 are intended to improve the comparability and quality of information provided to users of financial statements by creating consistency, for example, in the measurement and recognition of claim liabilities. Statement 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations and (b) the insurance enterprise's surveillance or watch list.

Bob Jensen's threads on standard setting are at http://www.trinity.edu/rjensen/Theory01.htm

More Reasons Why Tom and I Hate Principles-Based Accounting Standards

"Contingent Liabilities: A Troubling Signpost on the Winding Road to a Single Global Accounting Standard," by Tom Selling, The Accounting Onion, May 26, 2008 --- Click Here

By the logic of others, which I can’t explain, fuzzy lines in accounting standards have come to be exalted as “principles-based” and bright lines are disparaged as “rules-based.” One of my favorite examples (actually a pet peeve) of this phenomenon is the difference in the accounting for leases between IFRS and U.S. GAAP. The objective of the financial reporting game is to capture as much of the economic benefits of an asset as possible, while keeping the contractual liability for future lease payments off the balance sheet; a win is scored an “operating lease,” and a loss is scored a “capital lease.” As in tennis, If the present value of the minimum lease payments turns out to be even a hair over the 90% line of the leased asset’s fair value, your shot is out and you lose the point.

The counterpart to FAS 13 in IFRS is IAS 17, a putative principles-based standard. It’s more a less a carbon copy of FAS 13 in its major provisions, except that bright lines are replaced with fuzzy lines: if the present value of the minimum lease payments is a “substantial portion” (whatever that means) of the leased asset’s fair value, you lose operating lease accounting. If FAS 13 is tennis, then IAS 17 is tennis-without-lines. Either way, the accounting game has another twist: the players call the balls landing on their side of the net; and the only job of the umpire—chosen and compensated by each player—is to opine on the reasonableness of their player's call. So, one would confidently expect that the players of tennis-without- lines have a much lower risk of being overruled by their auditors… whoops, I meant umpires.

Although lease accounting is one example for which GAAP is bright-lined and IFRS is the fuzzy one, the opposite is sometimes the case, with accounting for contingencies under FAS 5 or IAS 37 being a prime exaple. FAS 5 requires recognition of a contingent liability when it is “probable” that a future event will result in the occurrence of a liability. What does “probable” mean? According to FAS 5, it means “likely to occur.” Wow, that sure clears things up. With a recognition threshold as solid as Jell-o nailed to a tree and boilerplate footnote disclosures to keep up appearances, there should be little problem persuading one’s handpicked independent auditor of the “reasonableness” of any in or out call.

IAS 37 has a similar recognition threshold for a contingent liability (Note: I am adopting U.S. terminology throughout, even though "contingent liabilities" are referred to as "provisions" in IAS 37). But in refreshing contrast to FAS 5, IAS 37 unambiguously nails down the definition of “probable” to be “more likely than not” —i.e., just a hair north of 50%. Naively assuming that companies actually comply with the letter and spirit of IAS 37, then more liabilities should find their way onto the balance sheet under IFRS than GAAP. And, IAS 37 also has more principled rules for measuring a liability, once recognized. But, I won’t get into that here. Just please take my word for it that IAS 37 is to FAS 5 as steak is to chopped liver.

The Global Accounting Race to the Bottom

And so we have the IASB’s ineffable ongoing six-year project to make a hairball out of IAS 37. If these two standards, IAS 37 and FAS 5, are to be brought closer together as the ballyhooed Memorandum of Understanding between IASB and FASB should portend, it would make much more sense for the FASB to revise FAS 5 to make it more like IAS 37. After all, convergence isn’t supposed to take forever; even if you don’t think IAS 37 is perfect, there are a lot more serious problems IASB could be working harder on: leases, pensions, revenue recognition, securitizations, related party transactions, just to name a few off the top of my head. But, the stakeholders in IFRS are evidently telling the IASB that they get their jollies from tennis without lines. And, the IASB, dependent on the big boys for funding, is listening real close.

Basically, the IASB has concluded that all present obligations – not just those that are more likely than not to result in an outflow of assets – should be recognized. It sounds admirably principled and ambitious, but there’s a catch. In place of the bright-line probability threshold in IAS 37, there would be the fuzziest line criteria one could possibly devise: the liability must be capable of “reliable” measurement. We know that "probable" without further guidance must at least lie between 0 and 1, but what amount of measurement error is within range of “reliable”? The answer, it seems, would be left to the whim of the issuer followed by the inevitable wave-your-hands-in-the-air rubber stamp of the auditor.

It’s not as if the IASB doesn’t have history from which to learn. Where the IASB is trying to go in revising IAS 37, we’ve already been in the U.S. The result was all too often not a pretty sight as unrecognized liabilities suddenly slammed into balance sheets like freight trains. As I discussed in an earlier post, retiree health care liabilities were kept off balance sheets until they were about to break unionized industrial companies. Post-retirement benefits were doled out by earlier generations of management, long departed with their generous termination benefits, in order to persuade obstreperous unions to return to the assembly lines. GM and Ford are now on the verge of settling faustian bargains of their forbearers with huge cash outlays: yet for decades the amount recognized on the balance sheet was precisely nil. The accounting for these liabilities had been conveniently ignored, with only boilerplate disclosures in their stead, out of supposed concern for reliable measurement. Yet, everyone knew that zero as the answer was as far from correct as Detroit is from Tokyo – where, as in most developed countries, health care costs of retirees are the responsibility of government.

Holding the recognition of a liability hostage to “reliable” measurement is bad accounting. There is just no other way I can put it. If this is the way the IASB is going to spend its time as we are supposed to be moving to a single global standard, then let the race to the bottom begin.

Bob Jensen's threads on principles-based standards versus rules-based standards --- http://www.trinity.edu/rjensen/Theory01.htm#Principles-Based

Bob Jensen's threads on lease accounting are at http://www.trinity.edu/rjensen/Theory01.htm#Leases

Bob Jensen's threads on synthetic leases --- http://www.trinity.edu/rjensen/theory/00overview/speOverview.htm

Bob Jensen's threads on intangibles and contingencies --- http://www.trinity.edu/rjensen/Theory01.htm#TheoryDisputes

"FAS 157: The FASB's Prelude and Fugue on Fair Value of Liabilities," by Tom Selling, The Accounting Onion, May 4, 2008 --- http://accountingonion.typepad.com/theaccountingonion/2008/05/fas-157-the-fas.html

FAS 157 on fair value measurements was supposed to provide comprehensive guidance for determining the fair value of pretty much any asset or liability.  Yet, almost two years after its initial publication, and well after companies have had to apply the standard to certain accounts, CFO.com reports that the FASB is still making up some of its rules on the fly, and having a tough slog to boot.  The problem described in the article has immediate consequences for derivative financial instruments that are classified as liabilities, but it could eventually affect the measurement of many other liability accounts as fair value measurement becomes more broadly applied:

"At an unusually heated FASB meeting last week [no minutes published on the FASB's website yet], for instance, the members debated how companies should estimate the market value of liabilities when there's no actual market on which to base the estimate.

During one point in the discussion, which concerned a proposed guidance by FASB's staff on how to mark liabilities to market under 157, chairman Robert Herz seemed, to member Leslie Seidman, to be contemplating an overhaul of the brand-new standard itself. Matters got so confusing that the board ordered its staff to go back and summarize the members' positions so that they could understand what they themselves had said.

At issue was the question of how to measure the fair value of a liability for "which there is little, if any, market activity," according to 157. The standard defines fair value as "the price that would be received ... to transfer a liability in an orderly transaction between market participants at the measurement date." The question that FASB struggled with was: How do you determine the fair value of a liability that can only be settled, rather than sold?

...Often, for instance, when a company borrows money, it can't transfer its obligation to another party without an agreement from the bank. Or a market may not exist for transferring such liabilities."

It's a mess that the FASB has gotten itself into for two related reasons.  The first is that the problems now being addressed are significant, and they were known long before FAS 157 was let out the door. The second is that FAS 157 is fundamentally flawed in its approach to fair value measurement of liabilities.  The solution, as I am about to describe, seems to me to be surprisingly simple. 

This particular flaw in FAS 157 (see my previous post on many others) occurs in paragraph 5:

"Fair value is the price that would be received to sell an asset or paid to transfer a liability [italics supplied] in an orderly transaction between market participants at the measurement date." 

For every liability there is a counter party that holds an asset, and the economic value of the liability must be equal to the economic value of the asset. These are basic economic principles, which are not acknowledged in FAS 157.    If they were acknowledged, there would be no need for the phrase "or paid to transfer a liability."  That's because the value of any liability -- even one that cannot be transferred --must equal the value of the counter party's asset, which, perforce, can always be transferred.  Even though the evidence directly available to value the liability may be scant, the asset value might even be quoted in the newspaper; the non-transferability restriction on the debtor is just one more valuation parameter from the viewpoint of the creditor. 

If you need further convincing that the solution to the problem of valuing any liability is to value the counter party's asset, let's consider an even thornier non-transferable liability that the FASB briefly considered and then dropped like a hot potato:  contingent environmental liabilities.  My understanding of federal environmental law is that the cleanup liability of a "potentially responsible party" is joint and several.  No other party can assume the liability, so the only way out from under it is to settle with the government.  Although I am not aware that the government has done this, it is theoretically possible for the government to transfer its contingent receivable to a third party.  Is the contingent receivable difficult to value?  Yes, but certainly no harder than many of the complex, illiquid derivatives that are roiling the global economy.  (And by the way, I recall seeing the issue of the fair value of contingent environmental liabilities posted on the FASB's website during the project phase of FAS 157.  The Board expressed a tentative conclusion, but it soon disappeared mysteriously, and without explanation.  I have searched Board minutes, and have come up with nothing.  If anyone has any further information on this that they would like to share, please contact me!)

Because my solution to liability valuation is so simple (attention: CIFiR - SEC Advisory Committee on Improvements to Financial Reporting) and obvious, I can't help but fear I have overlooked something.  If that is indeed the case, I hope a reader of this post will take the time to point it out, and I will gladly issue a mea culpa forthwith.  Yet, I derive some measure of comfort (and optimism) by an entry in the minutes of an FASB meeting (11/14/07) where Bob Herz stated that he disagrees with the measurement principles for liabilities in SFAS 157. 

Who knows, maybe Bob and I are thinking along the same lines?  That gives me hope for the future.  But, I have to express my disappointment that liabilities were not dealt with in a comprehensive way before SFAS 157 was issued. There is much to be said for getting it right the first time.

Jensen Comment

Tom wrote the following:

For every liability there is a counter party that holds an asset, and the economic value of the liability must be equal to the economic value of the asset. These are basic economic principles, which are not acknowledged in FAS 157.    If they were acknowledged, there would be no need for the phrase "or paid to transfer a liability."  That's because the value of any liability -- even one that cannot be transferred --must equal the value of the counter party's asset, which, perforce, can always be transferred.  Even though the evidence directly available to value the liability may be scant, the asset value might even be quoted in the newspaper; the non-transferability restriction on the debtor is just one more valuation parameter from the viewpoint of the creditor. 

For one party the Pacioli equation A=L+E is tautological since E is the sink hole makes everything balance. But it does it necessarily hold that A(Bank) = L(Homeowner) for 30 years after Bank loaned Homeowner $1 million in cash in a jumbo 30-year mortgage for a home on June 16, 2006. In fact it may well be that A(Bank) = L(Homeowner) did not even hold on the June 16, 2006 since Bank and Homeowner probably had different opportunity costs of capital. Most likely Bank charged for a risk premium and holds the asset (the mortgage note) with values that vary from day-to-day with Homeowner's credit rating and with resale value of the home itself that is the collateral on the loan.

In conventional mortgages the Bank can transfer the asset (mortgage note) wholesale to another buyer such as Fannie Mae. But Homeowner cannot transfer the liability since most conventional mortgages now have a clause that says the mortgage must be prepaid if Homeowner sells the house. What Fannie will pay Bank for the asset (mortgage note) wholesale varies with market conditions in the wholesale market for mortgages.

At some point in time Homeowner can go back to Bank and ask to refinance the mortgage (which is tantamount to prepaying the original mortgage), but Homeowner must refinance in the retail market. Bank can deal in both the wholesale and retail markets for mortgages whereas Homeowner is confined to the retail market. The two markets are highly correlated like they are in blue book car markets, but they are not perfectly correlated. Hence I don't think Tom can assume that Bank's transferable asset is equal in value to Homeowner's non-transferrable liability. Homeowner does not have access to all the buyers and sellers in the wholesale market.

Then there is the other problem that exploded in both the Savings & Loan crisis of the 1980s and the subprime crisis of 2008. In both scandals crooked appraisers overstated the lending value of real estate way beyond realistic selling prices. Suppose Homeowner got the $1 million mortgage on a house that realistically only had a $500,000 value on June 16, 2006 and has sunk to a fair value of only $200,000 on June 16, 2008. How would FAS 157 be applied to a non-transferrable mortgage liability? What is the value of L(Homeowner) on June 16, 2008? Is it necessarily the same as the A(Bank) or A(Fannie) value of the asset held by the current holder of the mortgage investment?

The fair value of the L(Homeowner) liability to Homeowner is affected by many factors, one of which is the cost of having a lower credit rating simply by turning the property over the Bank. Homeowner may have troubles even getting another loan for several years, and Former Homeowner may have to pay premium rates to get another loan. But the value of the collateral (the house now valued at only $200,000) is far less than the unpaid balance on the loan of nearly $1 million since the( principal amount owing does not decline much in the first two years of a 30-year mortgage). In this instance I don't think Professor Selling can assume that L(Homeowner) = A(Bank) on June 16, 2008. In fact I think the two values are vastly different.

And Bank (or Fannie Mae) is very sad since what they paid out for homeowners' mortgages is still way in excess of what the combined collateral is really worth in 2008. Fortunately many homeowners are still making payments even though their property is now probably worth less than the discounted cash flows of their remaining mortgage payments.

The problem with FAS 157 is that it cannot make a silk purse out a sow's ear when valuing assets and liabilities for which markets are non-existent, including surrogate markets. There is also a problem of dynamics of markets. FAS 157 wants reported values of L(Homeowner) and A(Bank) on June 16, 2008. Homeowner may continue to make payments on a $1 million 30-year mortgage for property that is now worth only $200,000 because of transactions costs (including adverse credit ratings) today of walking away from the mortgage and because of hope that this is only a market bleep before the value rises back up in value to more than $1 million in anticipation of soaring inflation.

There is always the feeling that markets will bounce back. And there are what the mathematicians call non-convexities caused by transactions costs that are real but undeterminable when the cost of lowered credit ratings are factored into transactions costs. For years, accounting theorists criticized economists for unrealistic assumptions of rationality and non-convexities in their models. Economic value was deemed by accountants as unrealistic due to unknown future cash flows, unknown future market conditions at affect prices and interest rates, and unknown future legislative actions and taxes. Now FAS 157 and 159 along with IAS 39 on the international scene wants to turn accountants into economists.

Valuation is an art rather than a science. Accountants and economists who are teaching free cash flow and residual income valuation models might as well be teaching astrology to FAS 157 implementers. It all boils down to attaching precise-looking number tags to cloud movements that are beyond anybody's control.

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

From The Wall Street Journal Accounting Weekly Review on May 9, 2008

"FASB Signals Stricter Rules For Banks' Loan Vehicles," by David Reilly,  The Wall Street Journal, May 2, 2008; Page C1 --- http://online.wsj.com/article/SB120969084241961495.html?mod=djem_jiewr_AC

Possible accounting rule changes spurred by the subprime-mortgage crisis would make it harder and costlier for banks to package and sell off loans. That could make borrowing more expensive for consumers and companies but prevent the abuses that led to billions in losses over the past year.

The changes come at a time of scrutiny of how financial institutions packaged mortgages and other loans into securities, shifting the risk of bad loans from their own balance sheets to investors. The changes will "be a little bit like taking the punch bowl away," said Robert Herz, chairman of the Financial Accounting Standards Board, which sets U.S. accounting rules.

Outlining the possible shape of these new rules during an accounting conference Thursday, Mr. Herz indicated that banks might have to keep on their books loans they previously packaged and sold off, or securitized.

Under current rules banks create securitization vehicles that hold the loans off their balance sheets. The Securities and Exchange Commission earlier this year asked the accounting board to create rules for these vehicles by year's end.

The FASB last month tentatively voted to do away with the special securitization vehicles, although it didn't signal how banks would have to account for them. In his remarks, Mr. Herz indicated banks will have to use other rules governing off-balance-sheet vehicles. These rules are likely to be tightened as well.

Any change in the rules surrounding securitization vehicles and other off-balance-sheet entities could have widespread implications for banks. At the end of 2007, J.P. Morgan Chase & Co. and Citigroup Inc. had nearly $1 trillion in assets held off their books in special securitization vehicles. J.P. Morgan generated nearly $3.5 billion in revenue, or about 6% of total 2007 net revenue, from administering special securitization vehicles.

In a statement, Citigroup said, "We are actively engaged in industrywide discussions on the development of the proposal." J.P. Morgan declined to comment.

Mr. Herz didn't push the possibility that banks would be allowed to show the combined effect of these vehicles' assets and liabilities on their books. Such a linked presentation could prevent a ballooning of bank balance sheets. He also said banks likely will face stiffer tests overall for what can stay off their books and may have to take into account emergency-funding arrangements they often offer to off-balance-sheet vehicles.

What's Right and What's Wrong With (SPEs), SPVs, and VIEs --- 
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Event Studies:  A Significant Extension of a 1991 Accounting Horizons Paper by Katherine Schipper and a 1993 InternationalJournal of Forecasting study by Larry Brown

"The Financial Analyst Forecasting Literature: A Taxonomy with Suggestions for Further Research," by Sundaresh Ramnath, Steve Rock, and Phlip B. Shane, SSRN, 2008 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1093405

This paper develops a taxonomy of research examining the role of financial analysts in capital markets. The paper builds on the perspectives provided by Schipper [Schipper, K. (1991). Analysts' forecasts. Accounting Horizons, 5, 105-131] and Brown [Brown, L. (1993). Earnings forecasting research: Its implications for capital markets research. International Journal of Forecasting, 9, 295-320]. We categorize papers published since 1992, describe the research questions addressed, and suggest avenues for further research in seven broad areas: (1) analysts' decision processes; (2) the nature of analyst expertise and the distributions of earnings forecasts; (3) the information content of analyst research; (4) analyst and market efficiency; (5) analysts' incentives and behavioral biases; (6) the effects of the institutional and regulatory environment (including cross-country comparisons); and (7) research design issues.

International Journal of Forecasting, Vol. 24, No. 1, 2008 

"Deloitte Puts IFRS in College Classrooms," SmartPros, May 19, 2008 --- http://accounting.smartpros.com/x61904.xml

Big Four accounting firm Deloitte & Touche has formed a consortium to accelerate integration of International Financial Reporting Standards (IFRS) into college curricula.

Through the IFRS University Consortium, Deloitte is contributing resources to Ohio State and Virginia Tech universities to assist the schools in developing IFRS curricula. The contributions to Ohio State and Virginia Tech include drafting course materials such as classroom guides and case studies and providing Deloitte professionals as lecturers. The classroom guides and course materials will be made available to other interested universities. The announcement was made at the Deloitte/Federation of Schools of Accountancy (FSA) Faculty Consortium meeting in Chicago, a curriculum development program for accounting educators that is sponsored annually by the Deloitte Foundation, the not-for-profit arm of Deloitte LLP. Participating schools can benefit by having input in the direction, goals and resources available from the consortium; participation in periodic webcasts; sharing of best practices used in the classroom; involvement in the development of materials; and access to the support and guidance from Deloitte professionals, as well as to Deloitte IFRS information resources, publications and training sessions. There is no cost for institutions to join the Deloitte IFRS University Consortium. Continued in article

Bob Jensen's threads on accounting standards controversies are at http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Barbara Black's Blog of the Corporate Law Center --- http://lawprofessors.typepad.com/securities/

Finance Clippings: A New Finance Blog --- http://financeclippings.blogspot.com/

From the Financial Rounds Blog on May 1, 2008 --- http://financialrounds.blogspot.com/

I think it's good practice to mention new blogs of note -- I got some mention by established bloggers early on, and it helped a lot. So, I try pass the favor along and mention new blogs as I come across them - particularly when they're finance or academic in nature.

In this case, here's one that's both: Finance Clippings, run by Richard Warr, a finance professor at North Carolina State University.

I've read Richard's work (and enjojed it) for years, and have even crossed paths with him at conferences on a number of occasions. He seems to have both the academic chops and personal characteristics necessary to make for a good blog. Based on his first few posts, he seems to be off to a good start, and is focusing on material that he'll use in his classes.

So welcome to the Blogosphere, Richard.

Jensen Comment
This looks like a pretty good blog. Here are some recent modules --- --- http://financeclippings.blogspot.com/

Thursday, May 1, 2008

Triple A Failure

Newmark's door has a great link to a piece by Roger Lowenstein on the role of bond rating agencies in the credit crisis.

It really is a must read article. In it, the finger is pointed at the bond raters - Moodys, S&P and Fitch for being too close to the banks issuing the mortgage backed debt.

Although this is a bigger question, I do sometimes wonder exactly what value bond rating agencies provide. Their business model seems to be not entirely dissimilar from that of running a protection racket. Consider the evidence:
1. You have to pay for the service. If you don't pay, you may not get as good a rating.
2. They will help you structure the product to get a better rating, but you may have to pay more.
3. The amount you can sell the bond for depends on the rating.
4. Bond rating changes usually lag changes in credit quality and thus have little predictive power.

 

Posted by gatorbrit at 2:41 PM 0 comments

Labels: banks credit market, bond ratings, newmarks door

Diane Rehm show on gas prices

 

I was riding in my car today and I was listening to Diane Rehm on NPR. Her show was about gas tax holidays as are being proposed by McCain and Clinton.

You can hear it here.

There was a fair amount of discussion from the panel about how a gas tax holiday was a bad idea - it encourages consumption, it reduces tax revenue for road building (and thus has an offsetting fiscal effect) etc.

Then Diane asked about the windfall tax that has been proposed. At this point Mark Cooper (director of research for the Consumer Federation of America) said something truly amazing. To paraphrase: he said that the oil companies don't really do anything with the excess profits - they just buy back stock or pay dividends. Then he said, and I quote "If you look at it from an economic point of view, taxing it away is not inefficient because they are not doing anything efficient with it"

What???? So the government should be able to step in and tax excess profits? This has to be one of the daftest things I have heard in a while. Those profits which are paid out as dividends are being used efficiently. Firms that do not have good investment projects are to be commended for paying out surplus cash to shareholders. Shareholders can then invest in other firms which need cash and have more productive growth opportunities.

It is one thing to make a policy decision to legislate a wealth transfer from one sector of the economy to another, but it makes no sense to argue that the government should tax more because it can put the money to a more efficient use.

 

Posted by gatorbrit at 1:55 PM 0 comments

Labels: diane rehm., oil companies, windfall tax

Jensen Comment
The only things the oil excess profits tax succeeded at in the past are creating huge shortages of fuel, high prices, decreased alternative fuels research, and increased dependency on imported oil from foreign companies not in U.S. tax jurisdiction. No wonder Hugo Chavez in strongly supporting Barack Obama's bid for the Presidency.

You can read a well written critique of the excess profits tax in a recent Wall Street Journal editorial.
"Windfall Profits for Dummies," The Wall Street Journal, May 3, 2008; Page A10 ---
http://online.wsj.com/article/SB120977019142563957.html?mod=djemEditorialPage

Financial Rounds

 

Just a quick "Hi" to the readers of the excellent blog financialrounds.blogspot.com. Unknown prof said some nice things about me and my blog here

 

Posted by gatorbrit at 1:42 PM 0 comments

Labels: blogs, financialrounds

 

Tuesday, April 29, 2008

Lure of City money too strong for young

 

Sometimes you just have to shake your head and wonder...this article in the Guardian quotes the Bank of England Governor and states that:
 

The governor of the Bank of England issued a stern rebuke to the City today, saying that too many of Britain's most talented young people are being lured into financial careers by the huge bonuses on offer.

What???? You'd think that the boss of the Bank of England would have some basic notion of supply and demand in labor (or labour) markets.

 

Posted by gatorbrit at 1:11 PM 0 comments

Labels: bank of england, compensation

 

Tuesday, April 8, 2008

What is the world equity risk premium?

John Campbell of Harvard has a nice paper published in a Canadian Econ Journal that estimates the equity risk premium. His conclusion: the world (and US) equity premium is around 4% currently.

The article isn't free, but if you are have access to a university library you can probably download it for free.

Given a 30 year bond rate of about 4.3%, this implies a long term return to stocks in the US of 8.3%. Why does this matter??? Well if you are assuming a 40 year investment horizon (someone who is, say 25 now) and you contribute $1,000 a month, 8.3% return will give you about $3.8M in your portfolio at age 65. But if you were using 11% (the long run historical return on equities) you would be expecting $8.6M. Given that most people are not saving enough, a lower return on stocks is not going to help.

 

Posted by gatorbrit at 9:26 AM 1 comments

Labels: equity premium, stock market

 

Living Yield Curve

A student of mine (thanks Craig) sent me this link. Its for a living yield curve. Basically it shows the shape of the yield curve throughout history (or recent history anyway). Very cool.

Living Yield Curve

Posted by gatorbrit at 9:17 AM 0 comments

Labels: yield curve

How good are analysts?

The Investor Insight website has an interesting study that shows that analyst earnings forecasts basically lag the actual forecasts.

This chart is particularly interesting:
See May 1, 2008 ---http://financeclippings.blogspot.com/ 

 

From The Wall Street Journal Weekly Accounting Review on May 2, 2008

Segment Accounting

Sara Lee's Coffee Sales Create Buzz by Karen Richardson The Wall Street Journal Apr 24, 2008 Page: C1 Click here to view the full article on WSJ.com   TOPICS: Accounting, Business Segmentation, Managerial Accounting, Segment Margins, Segmentation Analysis SUMMARY: Sara Lee is taking advantage of the strong euro by pushing its coffee products in Europe. The company's stock is down about 14% this year, but some investors think Sara Lee deserves a second look because of its push abroad. CLASSROOM APPLICATION: This is an excellent article showing how an American company has ventured into the global markets to expand and diversify its business. The markets are not recognizing the changes and positive future prospects of the company, although segmentation analysis of shows that Sara Lee has made great gains in its foreign markets and products. QUESTIONS:  1. (Advanced) How has Sara Lee's expansion benefited the company? Which of its business segments are doing well and which are struggling? 2. (Advanced) Why do you think that the stock market has not recognized Sara Lee's success in global markets? What indicators show that the market is not impressed? 3. (Introductory) How has Sara Lee used segment reporting and segment margins to make changes in the business? Have the results been positive or negative? 4. (Advanced) What are the statistics comparing Sara Lee's various segments? Based on the information offered in the article, what strategic decisions would you implement if you were a top executive at Sara Lee? What is the reasoning behind your recommendations?   Reviewed By: Linda Christiansen, Indiana University Southeast

"Einstein Letter on God Sells for $404,000," by Dennis Overbye, The New York Times, May 17, 2008 --- Click Here

What are the favorite links of Neal Boritz besides --- http://boortz.com/  ?

Neal's favorite links:
Nealz Nuze Archives
An Optical Illusion
The Constitution of the U.S.
The Bill of Rights
Declaration of Independence
Who Represents You in D.C.?
E-Mail your Congressman
Are you a Libertarian?
Neal's favorite quotes
Neal's Commencement Speech
Neal's Nuze: 9/11

Forwarded by Auntie Bev

'I Hope You Dance... '

This was written by an 83-year-old woman to her friend.

*The last line says it all. *

Dear Bertha,

I'm reading more and dusting less. I'm sitting in the yard and admiring the view without fussing about the weeds in the garden. I'm spending more time with my family and friends and less time working.

Whenever possible, life should be a pattern of experiences to savor, not to endure. I'm trying to recognize these moments now and cherish them.

I'm not "saving" anything; we use our good china and crystal for every special event such as losing a pound, getting the sink unstopped, or the first Amaryllis blossom.

I wear my good blazer to the market. My theory is if I look prosperous, I can shell out $28.49 for one small bag of groceries. I'm not saving my good perfume for special parties, but wearing it for clerks in the hardware store and tellers at the bank.

"Someday" and "one of these days" are losing their grip on my vocabulary. If it's worth seeing or hearing or doing, I want to see and hear and do it now

I'm not sure what others would've done had they known they wouldn't be here for the tomorrow that we all take for granted. I think they would have called family members and a few close friends. They might have called a few former friends to apologize and mend fences for past squabbles. I like to think they would have gone out for a Chinese dinner or for whatever their favorite food was.

I'm guessing; I'll never know.

It's those little things left undone that would make me angry if I knew my hours were limited. Angry because I hadn't written certain letters that I intended to write one of these days. Angry and sorry that I didn't tell my husband and parents often enough how much I truly love them. I'm trying very hard not to put off, hold back, or save anything that would add laughter and luster to our lives. And every morning when I open my eyes, tell myself that it is special.

Every day, every minute, every breath truly is a gift from God.

If you received this, it is because someone cares for you. If you're too busy to take the few minutes that it takes right now to forward this, would it be the first time you didn't do the little thing that would make a difference in your relationships? I can tell you it certainly won't be the last.

Take a few minutes to send this to a few people you care about, just to let them know that you're thinking of them.

"People say true friends must always hold hands, but true friends don't need to hold hands because they know the other hand will always be there." Life may not be the party we hoped for, but while we are here we might as well dance.

Humor Updates

Dennis Swanberg  (Bengy and the Zipper) --- http://www.youtube.com/watch?v=qWH-VToohro 

Maxine's Five Boyfriends --- http://goldengirls03.org/Maxine_BoyFriends.htm

Maxine on "Driver Safety" "I can't use the cell phone in the car. I have to keep my hands free for making gestures.".......

Maxine on "Lawn Care" "The key to a nice-looking lawn is a good mower. I recommend one who is muscular and shirtle ss."

Maxine on "The Perfect Man" "All I'm looking for is a guy who'll do what I want, when I want, for as long as I want, and then go away. Or wait nearby, like a Dust Buster, charged up and ready when needed."

Maxine on "Technology Revolution" "My idea of rebooting is kicking somebody in the butt twice."

Maxine on "Aging" "Take every birthday with a grain of salt. This works much better if the salt accompanies a Margarita."

Forwarded by Barb Hessel

Chocolate Dreams
http://www.foxnews.com/story/0,2933,356583,00.html 

This is the stuff that children's dreams are made of.

How to be a Good Wife --- http://www.snopes.com/language/document/goodwife.asp

Forwarded by an "old" friend

Forwarded by Eileen

WE BLINKED AND WE GOT OLD

By Bob Altman

When I was a child, I always said I would know when I was old. It would be when my boyhood hero Roy Rogers died. Roy outlived Trigger and died in 1998, the year I retired from the government. Surprise! I didn't feel as old as anticipated. Then I moved to Florida and in a blink, we got old. What has happened to us? Six years ago, we lived in Maryland , were working full time, and had one doctor, an internist, a dentist and a nutritionist. Ellen also had a gynecologist who she saw once a year for the traditional boob smashing test and a shmear. I always thought that was a bagel and cream cheese test but I've since learned it's a smear, not a shmear.

I saw my internist twice a year, my dentist when I was dragged to my appointment either by my wife or by severe pain. Admittedly, I was a phobic dental patient. I needed nitrous oxide to get my teeth cleaned! My dentist would come down to the parking lot with a portable tank of nitrous to uncurl my fingers from the steering wheel. Enough about that; it's too embarrassing.

We found an internist and a dentist. Then the parade of 'ists' began. My feet started to hurt so I went to a podiatrist. After several corn scrapings and toe surgery, my feet still hurt. Next, having some pain in my knees, I saw an orthopedist, who gave me a shot in one knee. Not being able to walk for days, I called the doc's office and his nurse said I would feel just fine on the 5th day after the shot. On the fifth day I woke up; the pain in my knee was gone! This guy is good. Too bad he isn't my dentist.

For about 10 years, I've had some nerve damage in my left leg. Therefore, when my drop foot made me trip all the time and I had trouble remembering things, I sought the aid of a neurologist. She told me my memory losses were normal, and I didn't have early onset Alzheimer's or dementia. I am just getting older. I will just keep on tripping and then forgetting about it.

Ok, where am I? If you haven't caught on yet, I'm working my way up my body. Ah, yes one of my favorite docs: my urologist! A little bleeding and my urologist promptly scheduled a cystascope, a really fun test. They had to peel me off the ceiling so I could go home. I guess if any doc should have a sense of humor, it would be a urologist. Who becomes a urologist? A masochist who likes sticking his finger in unnatural places! My greatest fear in going to the urologist is that I might enjoy the rectal exam. One good thing is that I get free samples of Viagra and Cialis. I haven't rolled out of bed in weeks!

Rodell thought we needed a check up by a dermatologist just to be on the safe side of being in the sun. As the doc waltzed into our exam room at 4:30 p.m., he announced that he was so happy because we were his first patients that day without any skin cancer. Whoopie! Give us a year or two!

Next up is the gastroenterologist. A couple colonoscopies just proved what everyone has always said.I'm a perfect ass-..!

A couple of years ago I thought I had bronchitis but it was really a congenital heart problem. My new best friend, my cardiologist, pulled me through that one with flying colors. I just have to get used to seeing him on a regular basis. He looks like he's 15 years old! Having Doogie Howser as your cardiologist would give anyone some concern. Next up is the otolaryngologyist for a runny nose. Gee, I can't wait for that exam! I also have an ophthalmologist who removed an early growing cataract.

One of the usual practices of Florida docs is that they always have you come back for follow-up visits, even when there is no need for it. Plus, they refer you for additional treatment all the time. My dentist just sent me to an oral surgeon and periodontist. My internist didn't like my blood test results and sent me to a hematologist. Luckily, the high red blood count was the result of not having a spleen. Who would've thought that not having a spleen would be good news?

What happened to us? These are supposed to be the 'golden years' which really means we should invest in gold so we can pay for insurance and all the doctors, and eventually assisted living. Maybe we should just invest in a couple of good psychiatrists who will just give enough 'happy pills' so we can deal with this horrible aging process. That would keep the list of 'ists' going.

Oops, I left one doc out. I may have hemorrhoids so I guess I'll be seeing a proctologist soon. I think he's my urologist's evil twin brother! Either a proctologist or a rubber band salesman --- same thing. And do you want to really feel old? Ali McGraw just turned 70!

Forwarded by Niki

DEAR ABBY ADMITTED SHE WAS AT A LOSS TO ANSWER THE FOLLOWING:

Dear Abby, A couple of women moved in across the hall from me. One is a middle-aged gym teacher and the other is a social worker in her mid twenties. These two women go everywhere together and I've never seen a man go into or leav e their apartment. Do you think they could be Lebanese ?

Dear Abby, What can I do about all the Sex, Nudity, Fowl Language, and Violence On My VCR?

Dear Abby, I have a man I can't trust. He cheats so much, I'm not even sure the baby I'm carrying is his.

Dear Abby, I am a twenty-three year old liberated woman who has been on the pill for two years. It's getting expensive and I think my boyfriend should share half the cost, but I don't know him well enough to discuss money with him.

Dear Abby, I've suspected that my husband has been fooling around, and when confronted with the evidence, he denied everything and said it would never happen again.

Dear Abby, Our son writes that he is taking Judo. Why would a boy who was raised in a good Christian home turn against his own ?

Dear Abby, I joined the Navy to see the world. I've seen it. Now how do I get out ?

Dear Abby, My forty year old son has been paying a psychiatrist $50.00 an hour every week for two and a half years. He must be crazy.

Dear Abby, I was married to Bill for three months and I didn't know he drank until one night he came home sober.

Dear Abby, My mother is mean and short tempered I think she is going through mental pause.

Dear Abby, You told some woman whose husband had lost all interest in sex to send him to a doctor. Well, my husband lost all interest in sex and he is a doctor. Now what do I do ?

Remember: these people walk among us, they breed, and they can vote, which probably explains the current situation in Washington, DC.

10 Potential Second Careers for Bill Gates --- http://www.pcworld.com/article/id,147036/article.html?tk=nl_wbxnws

Forwarded by Niki

Viva la difference

SUNDAY CLOTHES

A little boy was walking down a dirt road after church one Sunday afternoon when he came to a crossroads where he met a little girl coming from the other direction.

'Hello,' said the little boy

'Hi,' replied the little girl.

'Where are you going?' asked the little boy.

'I've been to church this morning and I'm on my way home,' answered the little girl.

'I'm also on my way home from church. Which church do you go to?' asked the little boy.

'I go to the Lutheran church back down the road,' replied the little girl. 'What about you? '

'I go to the Catholic church back at the top of the hill,' replied the little boy.

They discover that they are both going the same way so they decided that they'd walk together.

They came to a low spot in the road where spring rains had partially flooded the road, so there was no way that they could get across to the other side without getting wet.

'If I get my new Sunday dress wet, my Mom's going to skin me alive,' said the little girl.

'My Mom'll tan my hide, too, if I get my new Sunday suit wet,' replied the little boy.

'I tell you what I think I'll do,' said the little girl. 'I'm gonna pull off all my clothes and hold them over my head and wade across.'

'That's a good idea,'replied the little boy. 'I'm going to do the same thing with my suit.'

So they both undressed and waded across to the other side without getting their clothes wet. They were standing there in the sun waiting to drip dry before putting their clothes back on, when the little boy finally remarked .

'You know, I never realized before just how much difference there really is between a Lutheran and a Catholic!!!

Forwarded by Paula

Forwarded by a good neighbor

The buzzword of this election is 'CHANGE'.

        Candidates toss it around without saying what they want to
        change to.

        Years ago, there was an old tale in the Marine Corps about
        a  lieutenant who inspected his Marines and told the 'Gunny' that
        they smelled bad. The lieutenant suggested that they change their
        underwear. The Gunny responded, 'Aye,aye, sir, I'll see to it
        immediately' .
        He went into the tent and said, 'The lieutenant
        thinks you guys smell bad, and wants you to change your underwear.
        Smith, you change with Jones, McCarthy, you change with Witkowskie,
        Brown, you  change with Schultz. Get to it'.

        The moral: A candidate may promise change in Washington but don't
        count on things smelling any better.

        *Fight organized crime!........Don't re-elect anyone!*

 

Forwarded by Paula

Warning - When I Am an Old Woman I Shall Wear Purple
By Jenny Joseph

When I am an old woman, I shall wear purple with a red hat that doesn't go,
and doesn't suit me.

And I shall spend my pension on brandy and summer gloves
and satin candles,
and say we've no money for butter.

I shall sit down on the pavement when I am tired and gobble up samples in shops
and press alarm bells
and run my stick along the public railings
and make up for the sobriety of my youth.

I shall go out in my slippers in the rain
and pick the flowers in other people's gardens
and learn to spit.

You can wear terrible shirts and grow fatter
and eat three pounds of sausages at a go or only bread and pickles for a week
and hoard pens and pencils and beer nuts and things in boxes.

But now we must have clothes that keep us dry
and pay our rent and not swear in the street
and set a good example for the children.

We must have friends to dinner and read the papers.

But maybe I ought to practice a little now?

So people who know me are not too shocked and surprised

When suddenly I am old, and start to wear purple

Forwarded by Dick Haar

Gentle thoughts for today.

When I'm feeling down, I like to whistle. It makes the neighbor's dog run to the end of his chain and gag himself.

A penny saved is a government oversight.

The older you get, the tougher it is to lose weight, because by then your body and your fat have gotten to be really good friends.

The easiest way to find something lost around the house is to buy a replacement.

Did you ever notice: The Roman Numerals for forty (40) are " XL."

If you think there is good in everybody, you haven't met everybody. 

The sole purpose of a child's middle name is so he can tell when he's really in trouble.

There's always a lot to be thankful for if you take time to look for it. For example I am sitting here thinking how nice it is that wrinkles don't hurt.

Did you ever notice: When you put the 2 words "The" and "IRS" together it spells "Theirs?"

Aging: Eventually you will reach a point when you stop lying about your age and start bragging about it.

The older we get, the fewer things seem worth waiting in line for.

One of the many things no one tells you about aging is that it is such a nice change from being young.

First you forget names, then you forget faces. Then you forget to pull up your zipper. It's worse when you forget to pull it down.

Long ago when men cursed and beat the ground with sticks, it was called witchcraft. Today, it's called golf.

Lord, Keep your arm around my shoulder and your hand over my mouth...AMEN. .!!

Forwarded by Niki

I Don't Do Windows --- http://www.frontiernet.net/~shelby304/specials/dontdowindows/nowindows.htm

Forwarded by Niki

Thoughts for Today--

Birds of a feather flock together and crap on your car.

When I'm feeling down, I like to whistle. It makes the neighbor's dog run to the end of his chain and gag himself.

A penny saved is a government oversight.

The real art of conversation is not only to say the right thing at the right time, but also to leave unsaid the wrong thing at th e tempting moment.

The older you get, the tougher it is to lose weight, because by then your body and your fat have gotten to be really good friends.

The easiest way to find something lost around the house is to buy a replacement.

He who hesitates is probably right.

Did you ever notice: The Roman Numerals for forty (40) are " XL."

If you think there is good in everybody, you haven't met everybody.

I f you can smile when things go wrong, you have someone in mind to blame.

The sole purpose of a child's middle name is so he can tell when he's really in trouble.

There's always a lot to be thankful for if you take time to look for it. For example, I am sitting here thinking how nice it is that wrinkles don't hurt.

Did you ever notice: When you put the 2 words "The" and "IRS" together it spells "Theirs."

Aging: Eventually you will reach a point when you stop lying about your age and start bragging about it.

The older we get, the fewer things seem worth waiting in line for.

Some people try to turn back their odometers. Not me, I want people to know "why" I look this way. I've traveled a long way and some of the roads weren't paved.

When you are dissatisfied and would like to go back to youth, think of Algebra.

You know you are getting old when everything either dries up or leaks.

One of the many things no one tells you about aging is that it is such a nice change from being young.

Ah, being young is beautiful, but being old is comfortable.

First you forget names, then you forget faces. Then you forget to pull up your zipper.

It's worse when you forget to pull it down.

Forwarded by Auntie Bev

GREAT TRUTHS THAT LITTLE CHILDREN HAVE LEARNED:
1) No matter how hard you try, you can't baptize cats.
2) When your Mom is mad at your Dad, don't let her brush your hair.
3) If your sister hits you, don't hit her back. They always catch the second person.
4) Never ask your 3-year old brother to hold a tomato.
5) You can't trust dogs to watch your food.
6) Don't sneeze when someone is cutting your hair.
7) Never hold a Dust-Buster and a cat at the same time.
8) You can't hide a piece of broccoli in a glass of milk.
9) Don't wear polka-dot underwear under white shorts.
10) The best place to be when you're sad is Grandpa's lap.

GREAT TRUTHS THAT ADULTS HAVE LEARNED:
1) Raising teenagers is like nailing Jell-O to a tree.
2) Wrinkles don't hurt.
3) Families are like fudge...mostly sweet, with a few nuts.
4) Today's mighty oak is just yesterday's nut that held its ground.
5) Laughing is good exercise. It's like jogging on the inside.
6) Middle age is when you choose your cereal for the fiber, not the toy.

GREAT TRUTHS ABOUT GROWING OLD
1) Growing up is mandatory; growing old is optional.
2) Forget the health food. I need all the preservatives I can get.
3) When you fall down, you wonder what else you can do while you're down there.
4) You're getting old when you get the same sensation from a rocking chair that you once got from a roller coaster.
5) It's frustrating when you know all the answers but nobody bothers to ask you the questions.
6) Time may be a great healer, but it's a lousy beautician.
7) Wisdom comes with age, but sometimes age comes alone.

THE FOUR STAGES OF LIFE:

1) You believe in Santa Claus.
2) You don't believe in Santa Claus.
3) You are Santa Claus.
4) You look like Santa Claus.

SUCCESS:

At age 4 success is . not peeing in your pants.
At age 12 success is . having friends. At age 16 success is . having a drivers license.
At age 35 success is . having money.
At age 50 success is . . . having money. A
t age 70 success is . . . having a drivers license.
At age 75 success is . having friends.
At age 80 success is . not peeing in your pants.

Forwarded by Paula

Forwarded by Paula

An old, blind cowboy wanders into an all-girl biker bar by mistake. He finds his way to a bar stool and orders some coffee.

After sitting there for a while, he yells to the waiter: "Hey, you wanna hear a blonde joke?" The bar immediately falls absolutely silent.

In a very deep, husky voice, the woman next to him says, “Before you tell that joke, Cowboy, I think it is only fair, given that you are blind, that you should know five things:

1. The bartender is a blonde girl with a baseball bat.

2. The bouncer is a blonde girl.

3. I'm a 6-foot tall, 175-pound blonde woman with a black belt in karate.

4. The woman sitting next to me is blonde and a professional weightlifter.

5. The lady to your right is blonde and a professional wrestler.

"Now, think about it seriously, Mister. Do you still wanna tell that joke?"

The blind cowboy thinks for a second, shakes his head, and mutters: "No, not if I'm gonna have to explain it five times."

Forwarded by Lynn

LIFE IN THE 1500's-

The next time you are washing your hands and complain because the water temperature isn't just how you like it, think about how things used to be. Here are some facts about the1500s:

Most people got married in June because they took their yearly bath in May, and still smelled pretty good by June. However, they were starting to smell, so brides carried a bouquet of flowers to hide the body odor. Hence the custom today of carrying a bouquet when getting married.

Baths consisted of a big tub filled with hot water. The man of the house had the privilege of the nice clean water, then all the other sons and men, then the women and finally the children. Last of all the babies. By then the water was so dirty you could actually lose someone in it. Hence the saying, Don't throw the baby out with the Bath water.

Houses had thatched roofs-thick straw-piled high, with no wood underneath. It was the only place for animals to get warm, so all the cats and other small animals (mice, bugs) lived in the roof When it rained it became slippery and sometimes the animals would slip and fall off the roof. Hence the saying . It's raining cats and dogs.

There was nothing to stop things from falling into the house.. This posed a real problem in the bedroom where bugs and other droppings could mess up your nice clean bed. Hence, a bed with big posts and a sheet hung over the top afforded some protection. That's how canopy beds came into existence.

The floor was dirt. Only the wealthy had something other than dirt. Hence the saying, Dirt poor. The wealthy had slate floors that would get slippery in the winter when wet, so they spread thresh (straw) on floor to help keep their footing. As the winter wore on, they added more thresh until, when you opened the door, it would all start slipping outside. A piece of wood was placed in the entranceway. Hence the saying a thresh hold.

(Getting quite an education, aren't you?)

In those old days, they cooked in the kitchen with a big kettle that always hung over the fire. Every day they lit the fire and added things to the pot. They ate mostly vegetables and did not get much meat. They would eat the stew for dinner, leaving leftovers in the pot to get cold overnight and then start over the next day. Sometimes stew had food in it that had been there for quite a while. Hence the rhyme, Peas porridge hot, peas porridge cold, peas porridge in the pot nine days old. ((My father's favorite poem. Anu))

Sometimes they could obtain pork, which made them feel quite special. When visitors came over, they would hang up their bacon to show off. It was a sign of wealth that a man could, bring home the bacon. They would cut off a little to share with guests and would all sit around and chew the fat.

Those with money had plates made of pewter. Food with high acid content caused some of the lead to leach onto the food, causing lead poisoning death. This happened most often with tomatoes, so for the next 400 years or so, tomatoes were considered poisonous.

Bread was divided according to status. Workers got the burnt bottom of the loaf, the family got the middle, and guests got the top, or the upper crust.

Lead cups were used to drink ale or whisky. The combination would sometimes knock the imbibers out for a couple of days. Someone walking along the road would take them for dead and prepare them for burial. They were laid out on the kitchen table for a couple of days and the family would gather around and eat and drink and wait and see if they would wake up. Hence the custom of holding a wake.

England is old and small and the local folks started running out of places to bury people. So they would dig up coffins and would take the bones to a bone-house, and reuse the grave. When reopening these coffins, 1 out of 25 coffins were found to have scratch marks on the inside and they realized they had been burying people alive. So they would tie a string on the wrist of the corpse, lead it through the coffin and up through the ground and tie it to a bell. Someone would have to sit out in the graveyard all night (the graveyard shift) to listen for the bell; thus, someone could be, saved by the bell or was considered a ...dead ringer.

Forwarded by Auntie Bev

Forwarded by Gene and Joan

I was having trouble with my computer. So I called Eric, the 11 year old next door, whose bedroom looks like Mission Control and asked him to come over. Eric clicked a couple of buttons and solved the problem.

As he was walking away, I called after him, 'So, what was wrong? He replied, 'It was an ID ten T error.'

I didn't want to appear stupid, but nonetheless inquired, 'An, ID ten T error? What's that? In case I need to fix it again.'

Eric grinned.... 'Haven't you ever heard of an ID ten T error before?'

'No,' I replied. 'Write it down,' he said, 'and I think you'll figure it out.'

So I wrote down: I D 1 0 T

I used to like Eric

Forwarded by Dick Haar

Forwarded by Paula

Take the quiz and see how you score as a true 'Oldies Fan'. Write down

your answers and check them with the answers below.

1. When did 'Little Suzie' finally wake up?

a) The movie's over, it's 2 o'clock

b) The movie's over, it's 3 o'clock

c) The movie's over, it's 4 o'clock

2. 'Rock Around The Clock' was used in what movie?

a) Rebel Without A Cause

b) Blackboard Jungle

c) The Wild Ones

3. What's missing from a Rock & Roll standpoint? Earth_____

a) Angel

b) Mother

c) Worm

4. 'I found my thrill...' where?

a) Kansas City

b) Heartbreak Hotel

c) Blueberry Hill

5. 'Please turn on your magic beam, _____ _____ bring me a dream'

a) Mr. Sandman

b) Earth Angel

c) Dream Lover

6. For which label did Elvis Presley first record?

a) Atlantic

b) RCA

c) Sun

7. He asked, 'Why's everybody always pickin' on me? ' Who was he?

a) Bad Bad Leroy Brown

b) Charlie Brown

c) Buster Brown

8. Bobby Darin's 'Mack The Knife', the one with the knife, was named:

a) MacHeath

b) MacCloud

c) MacNamara

9. Name the song with 'A-wop bop a-loo bop a-lop bam boom'?

a) Good Golly Miss Molly

b) Be-Bop-A-Lula

c) Tutti Fruitti

10. Who is generally given credit for originating the term 'Rock And

Roll'?

a) Dick Clark

b) Wolfman Jack

c) Alan Freed

11. In 1957, he left the music business to become a preacher.

a) Little Richard

b) Frankie Lymon

c) Tony Orlando

12. Paul Anka's 'Puppy Love' is written to what star?

a) Brenda Lee

b) Connie Francis

c) Annette Funicello

13. The Everly Brothers are...

a) Pete and Dick

b) Don and Phil

c) Bob and Bill

14. The Big Bopper's real name was:

a) Jiles P. Richardson

b) Roy Harold Scherer Jr.

c) Marion Michael Morrison

15. In 1959, Berry Gordy Jr. started a small record company called...

a) Decca

b) Cameo

c) Motown

16. Edd Brynes had a hit with 'Kookie, Kookie, Lend Me Your Comb.

'What TV show was he on?

a) 77 Sunset Strip

b) Hawaiian Eye

c) Surfside Six

17. In 1960 Bobby Darin married:

a) Carol Lynley

b) Sandra Dee

c) Natalie Wood

18. They were a one hit wonder with 'Book Of Love.'

a) The Penguins

b) The Monotones

c) The Moonglows

19. The Everly Brothers sang a song called 'Till I ____________you.

a) Loved you

b) Kissed you

c) Met you

20. Chuck Berry sang 'Oh ________________ why can't you be true?'

a) Suzie Q

b) Peggy Sue

c) Maybelline

21. Wooly _______

a) Mammouth

b) Bully

c) Pully

22. 'I'm like a one-eyed cat ...

a) can't go into town no more.

b) sleepin' on a cold hard floor.

c) peepin' in a seafood store.

23) 'Sometimes I wonder what I'm gonna do ..

a) cause there ain't no answer for a life without booze.

b) cause there ain't no cure for the summertime blues.

c) cause my car's gassed up and I'm ready to cruise.

24) 'They often call me Speedo, but my real name is ...'

a) Mr. Earl.

b) Jackie Pearl.

c) Milton Berle.

25) 'You're my Fanny and nobody else's ...'

a) girl.

b) butt.

c) love.

26) 'I want you to play with my ...'

a) heart.

b) dreams.

c) ding a ling.

27) 'Be Bop A Lula ...

a) she's got the rabies.

b) she's my baby.

c) she loves me, maybe.

28. 'Fine Love, Fine Kissing, ...

a) right here.

b) fifty cents.

c) just for you.

29) 'He wore black denim trousers and ...

a) a pink carnation.

b) pink leotards.

c) motorcycle boots.

30) 'I got a gal named ...'

a) Jenny Zamboni.

b) Gerri Mahoney

c) Boney Maroney.

Answers below:

Scroll Down so you aren't tempted to cheat (as if cheating

were needed here).

1 c) The movie's over, it's 4 o'clock

2. b) Blackboard Jungle

3. a) Angel

4. c) Blueberry Hill

5. a) Mr. Sandman

6. c) Sun

7. b) Charlie Brown

8. a) Mac Heath

9. c) Tutti Fruitti

10. c) Alan Freed

11. a) Little Richard

12. c) Annette Funicello

13. b) Don and Phil

14. a) Jiles P. Richardson

15. c) Motown

16. a) 77 Sunset Strip

17. b) Sandra Dee

18. b) The Monotones

19. b) Kissed

20. c) Maybelline

21. b) Bully

22. c) peepin' in a seafood store.

23. b) cause there ain't no cure for the summertime blues.

24. a) Mr. Earl.

25. b) butt.

26. c) ding a ling.

27. b) she's my baby.

28. a) right here.

29. c) motorcycle boots

30. c) Boney Maroney.

Put the number you had correct in the heading and forward to everyone

of us lucky to be teenagers in the Doo Wop era......including the person who

sent it to you......

Canadian Billboards

Humor Between June 1 and June 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor063008

Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

Humor Between April 1 and April 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor043008

Humor Between March 1 and March 31, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor033108

Humor Between February 1 and February 29, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor022908   

Humor Between January 1 and January 31, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor013108  

Tidbits Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm