Enron provided much of the motivation to re-examine business combinations in general and SPEs in particular. Businesses likely have a number of incentives for wanting to leave promulgations as they are, chief among those being (in my estimation): the off-balance sheet financing advantages of SPEs as they are currently accounted for; the administrative headache associated with significant accounting changes of any kind; and the extensive disclosures new rules could require about significant investments - especially stock positions - that an entity may hold in other corporations upstream or downstream of the supply chain, or even in competing corporations.
This is a more complicated issue than one might think at first blush, as one can often only see the many negatives associated with SPEs from an investor's standpoint; the more I think about expanding the definition of SPEs, however, the more I can see how an unintentional impact of expanding this definition could include in its sweep all sorts of investments that a reasonable person would not expect significant background information on, e.g., such as that currently only required for segment reporting. I try to imagine a businessperson's perspective: if, for strategic reasons, I buy a significant amount of stock in one of my suppliers, I could easily become trapped in an absurd situation through more extensive reporting requirements and a broader definition for SPEs - I would have to report financial information I am not in the least bit responsible for! It is rather like asking an investor to do segment reporting on each company in his or her diversified portfolio: completely impractical. So many companies hold stock in other companies nowadays that sharing this volume of information in time to meet SEC reporting dates would be a disaster. As it stands now, such investments are reported at market value, and that portion of the balance sheet is done. Not so if extensive background information has to be gathered, formatted, and reported.
Even less restrictive requirements, such as those that would only require consolidation but not segment reporting, would prove to all but eliminate the advantages of SPEs, as well as painting a possibly misleading picture of the divesting parent. If the SPE is structured such that the original owner truly has relinquished control and the associated liabilities, then to saddle the previous owner with the reporting of those liabilities would serve only to injure its credit - a sobering prospect with considerable economic repercussions on a nationwide scale.
At first even I couldn't understand why the FASB couldn't simply poop or get off the pot, but thinking on the many variables involved, their seemingly constipated nature is a great deal easier to sympathize with.
Friday, January 30, 2009
Thursday, January 29, 2009
Special-Purpose Entities Explained: A Short Analysis of Consolidation Avoidance and SPEs in Accounting
According to Schroeder, Clark, and Cathey, "the primary motive for most SPEs is off-balance sheet accounting, often to avoid reporting capital leases under SFAS No. 13" (2005). Thus companies can avoid reporting long-term liabilities, improving their financial appearance by transferring these liabilities to SPEs à la Enron. I hasten to add that such arrangements are not necessarily nefarious by nature; they often have a quite legitimate purpose.
For those involved in small business transactions, writing-in inflation indices into lease contracts is rare because most small enterprises do not sign long-term leases; instead, a fixed percentage is usually used. This is a good opportunity to explore where an exception occurs for specialized operations, such as a manufacturer or a hospital looking for a home. If the organization in question finds it better to enter into a lease arrangement than to finance construction on its own, you can bet your sweet bippy that the lessor isn't going to be the tiniest bit happy with a short-term lease - such buildings offer the lessor little in the way of options if the lessee moves out. This is not a big issue for an operation (such as a hospital or a manufacturing firm) that doesn't up and move stakes in the normal course of business anyway, so long-term leases are the norm in these situations. Satellite operations are, of course, a different matter, so many of these enterprises will have a variety of arrangements for their various operating segments; here I examine a sole operation or primary operating segment for purposes of discussion.
So let's say I finance my own building for a hospital. Eventually I need to raise cash to expand operations elsewhere or catch up with some expensive technology on an operation-wide scale. One way to obtain capital is to sell off my building and make the sale contingent on a lease agreement with the buyer. Now I've got cash, and as a bonus, my financial statements look better to potential creditors and IPO investors - it is suddenly easier and cheaper for me to raise even more capital if I need it.
I might not be terribly comfortable with relinquishing 100 percent control of a building I have to have for my enterprise, and that's where consolidation kicks in. If I want to keep the SPE off of my books, I cannot retain a majority voting interest, and at least 10 percent of the capital for the investment in the SPE must come from a third-party investor. If I meet these minimum guidelines, my portion of the SPE that was created to lease my building back to me appears only as an investment on my books; SFAS No. 140 has been satisfied for purposes of the sale and the housekeeping I have to do to eliminate the liability on my books, and SFAS No. 94 has been satisfied with respect to my lack of control over the SPE (Shroeder et al., 2005).
FASB. (2008, November 13). Emerging issues task force (EITF): Issues grouped by type. Retrieved January 27, 2009, from http://www.fasb.org/eitf/1108STATS.pdf.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2005). Financial accounting theory and analysis: Text readings and cases (8th ed.). Hoboken, NJ: John Wiley & Sons, Inc.
For those involved in small business transactions, writing-in inflation indices into lease contracts is rare because most small enterprises do not sign long-term leases; instead, a fixed percentage is usually used. This is a good opportunity to explore where an exception occurs for specialized operations, such as a manufacturer or a hospital looking for a home. If the organization in question finds it better to enter into a lease arrangement than to finance construction on its own, you can bet your sweet bippy that the lessor isn't going to be the tiniest bit happy with a short-term lease - such buildings offer the lessor little in the way of options if the lessee moves out. This is not a big issue for an operation (such as a hospital or a manufacturing firm) that doesn't up and move stakes in the normal course of business anyway, so long-term leases are the norm in these situations. Satellite operations are, of course, a different matter, so many of these enterprises will have a variety of arrangements for their various operating segments; here I examine a sole operation or primary operating segment for purposes of discussion.
So let's say I finance my own building for a hospital. Eventually I need to raise cash to expand operations elsewhere or catch up with some expensive technology on an operation-wide scale. One way to obtain capital is to sell off my building and make the sale contingent on a lease agreement with the buyer. Now I've got cash, and as a bonus, my financial statements look better to potential creditors and IPO investors - it is suddenly easier and cheaper for me to raise even more capital if I need it.
I might not be terribly comfortable with relinquishing 100 percent control of a building I have to have for my enterprise, and that's where consolidation kicks in. If I want to keep the SPE off of my books, I cannot retain a majority voting interest, and at least 10 percent of the capital for the investment in the SPE must come from a third-party investor. If I meet these minimum guidelines, my portion of the SPE that was created to lease my building back to me appears only as an investment on my books; SFAS No. 140 has been satisfied for purposes of the sale and the housekeeping I have to do to eliminate the liability on my books, and SFAS No. 94 has been satisfied with respect to my lack of control over the SPE (Shroeder et al., 2005).
But come on now - I only have to give up ten percent? Ten percent sounds awfully small to me, and the FASB has been sufficiently troubled by majority financial control even in the absence of majority voting rights to explore the issue in an exposure draft entitled "Consolidation of Certain Special Purpose Entities," released in 2002 (Schroeder et al., 2005). Some six years later, this issue shows no signs of resolution; the EITF has identified sixteen areas that will be impacted by changes to the reporting requirements under consolidation theory, yet still there is no sign of an official SFAS proclamation that directly mentions special purpose entities (FASB, 2008). I'm genuinely surprised that the Enron debacle did not inspire the urgency to push through finalization of the draft on this issue. (Note that SFAS No. 160, issued antecedent to the publication of our textbook, amends SFAS No. 94, paragraph 4, as well as significantly changing ARB 51 - but SFAS No. 160 does not explicitly address SPEs. However, it does speak to consolidation and deconsolidation issues, as well as "financial controlling interests," so I am left thinking that its provisions should apply where the divesting parent has an incestuous relationship with the SPE due to a majority financial interest. After retrieving and reading Comment Letter No. 3 (Draft Abstract) for [EITF] Issue 08-10, "Selected Statement 160 Implementation Questions," from FARS, I am no clearer on the subject; but it does appear that I am in good company in this regard.)
References
FASB. (2008, November 13). Emerging issues task force (EITF): Issues grouped by type. Retrieved January 27, 2009, from http://www.fasb.org/eitf/1108STATS.pdf.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2005). Financial accounting theory and analysis: Text readings and cases (8th ed.). Hoboken, NJ: John Wiley & Sons, Inc.
Tuesday, January 27, 2009
Don't Close Gitmo
Obama has signed a widely celebrated order to close the Guantánamo Bay detention facility within one year. Gitmo has tarnished the reputation of the United States worldwide, setting the global community back decades and undoing the basic principles of justice we worked so hard for in the aftermath of World War II. In a country that already has problems with faulty convinctions of its own citizens later being cleared with advances in DNA testing, one might think that simply taking the word of the military and the CIA about the putative guilt of any detainee would be beneath even the most credulous supporter of the war on terror. The deterioration of due process is a battle that the terrorists have won due to an own goal on our part.
But I say this: keep it open. Throw in miscreants like Henry Paulson, who helped engineer the largest ripoff in United States history with the EESA/TARP bailout legislation, carefully including language in his original proposal that put him many levels above you and I: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
Wow. I had no idea Paulson was so much better than you and I. Good thing he told us, or we would never have known.
Let's include John Thain, who quite deliberately doled out billions of dollars in premature bonuses to his cronies within Merrill Lynch a month before Bank of America officially acquired the company, necessitating another $20 billion in taxpayer money to repair the damage he created.
As punishment, Thain was encouraged to retire early on his millions.
Lastly, fill up the remaining seats on the paddy wagon with the many other bankers who treated our taxpayer dollars like so much executive toilet paper. These buffoons have only fed their endless greed while untold numbers of Americans suffered the financial distress of wrecked retirements, lost jobs, and underwater mortgages.
Treason sounds like a good charge to level at these grade-AAA bastards. Treason should be like homicide: even reckless behavior will result in a charge, maybe not of capital murder, but at least of manslaughter. The intent isn't important here; what matters is that through their reckless actions, these money-hungry Wall Street players have injured their nation, meeting at least the definition of treason in Oran's Dictionary of the Law.
But the United States doesn't use Oran's definition, nor does it acknowledge constructive treason. So we need a crack team of imaginative prosecutors. Or maybe we can just declare these top-level financial con men enemy combatants and forget due process; we've done pretty well with that approach so far.
We could begin recovering our wasted dollars by charging admission at Gitmo, with spitting and dunking priveleges granted for a premium.
Hey, stop shoving - I want my turn at operating the waterboard!
But I say this: keep it open. Throw in miscreants like Henry Paulson, who helped engineer the largest ripoff in United States history with the EESA/TARP bailout legislation, carefully including language in his original proposal that put him many levels above you and I: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
Wow. I had no idea Paulson was so much better than you and I. Good thing he told us, or we would never have known.
Let's include John Thain, who quite deliberately doled out billions of dollars in premature bonuses to his cronies within Merrill Lynch a month before Bank of America officially acquired the company, necessitating another $20 billion in taxpayer money to repair the damage he created.
As punishment, Thain was encouraged to retire early on his millions.
Lastly, fill up the remaining seats on the paddy wagon with the many other bankers who treated our taxpayer dollars like so much executive toilet paper. These buffoons have only fed their endless greed while untold numbers of Americans suffered the financial distress of wrecked retirements, lost jobs, and underwater mortgages.
Treason sounds like a good charge to level at these grade-AAA bastards. Treason should be like homicide: even reckless behavior will result in a charge, maybe not of capital murder, but at least of manslaughter. The intent isn't important here; what matters is that through their reckless actions, these money-hungry Wall Street players have injured their nation, meeting at least the definition of treason in Oran's Dictionary of the Law.
But the United States doesn't use Oran's definition, nor does it acknowledge constructive treason. So we need a crack team of imaginative prosecutors. Or maybe we can just declare these top-level financial con men enemy combatants and forget due process; we've done pretty well with that approach so far.
We could begin recovering our wasted dollars by charging admission at Gitmo, with spitting and dunking priveleges granted for a premium.
Hey, stop shoving - I want my turn at operating the waterboard!
Monday, January 26, 2009
We Aren't Bottle-Fed Anymore
Social Security was a topic of considerable debate during the election. I have every sympathy for those that spent their lives paying into the plan, as well as those who watched their pensions disappear as the sponsoring companies went bankrupt or raided their pension funds, but I think we need to take a lesson from all this: depending upon a bureaucracy or a single company for our well-being in our old age is forseeable folly. By all means, let's take care of those that we need to, but let's transition out of mandatory participation in Social Security and educate people about the fact that they can invest a dollar as well as anybody else can - let's turn those tax or benefit dollars into salary dollars and start acting like adults.
The financial future of retired employees, who may have serious medical problems and other issues at a time in their life when they may not be able to provide for themselves through gainful employment, is of grave importance. The question of retirement plans and the economy is a more complicated issue. Many have attacked companies for ousting defined benefit plans (traditional pensions) in favor of defined contribution plans (such as SIMPLE IRAs), but the latter is actually in everybody's best interest. Even assuming every company could come through on its pension promises in the many unforseeable decades ahead, at best it's six of one or a half dozen of the other.
First I'd like to explore the trend from defined benefit plans to defined contribution plans. I'm inferring an underlying assumption from many commentaries that defined contribution plans are more risky than defined benefit plans, but I just don't see how. All the available evidence indicates the opposite case. Traditional pension plans (defined benefit plans) are rife with a history of abuse and failure, but defined contribution plans, such as IRAs invested in mutual funds, diversify risks across many investments, thus experiencing market swings but never catastrophic and irreparable losses. And nobody is stopping us from putting $100 in an IRA on our own instead of throwing it away on half-caf lattes every month - and that's assuming our employer doesn't offer a defined contribution plan, which is a benefit that is rapidly growing in popularity and quite easy to set up.
I look at things this way: if I am relying on the company I work for to provide for my old age via contributions to a traditional pension plan fund, I am putting all of my eggs in one basket - and the folks administering the plan aren't necessarily financial planning professionals or investors! I'm betting that ONE company out of thousands will remain solvent and financially robust until the day I die. This seems a naive hope at best.
Most companies now invest these pension funds, thus providing more assurance than a directly funded liability. In this case, the services of an investment professional may be retained. This is no different than an employee choosing a mutual fund IRA to invest in via a defined contribution plan, which is managed by - you guessed it - an investment professional. How is this any different from a risk perspective? The only differences I see are: 1) in the first case, I am trusting the company not to abandon the investment professional so they can raid the fund, and 2) I can choose the mutual fund to invest in in the latter case, so if I am especially risk-averse, I can choose a fund that invests only in government bonds or a similarly conservative strategy.
The only instance where the risk can be said to be entirely on the employee is if the employee chooses to have his or her contributions placed in a self-directed IRA, which is completely voluntary and quite uncommon. The history of defined benefit plans, and even Social Security, tend to indicate that placing complete trust in one entity is a very, very poor idea indeed.
The economic cost of failed pensions and even our failing Social Security system are self-evident: taxes are likely to be passed to help care for the financially needy. I never have any objection to caring for the genuinely needy. Caring for the irresponsible is altogether another story. I cannot stomach any argument that says that people should be forced to participate in any plan as unsustainable as Social Security, that people should rely on the financial future of one sole enterprise, or that we are collectively responsible for those that spent their entire adult lives not planning for the entirely foreseeable event of their retirement. The difference between taking home, for example, $2,500 per month and having the discipline to invest $500 of that in my IRA, versus taking home $2,000, watching $200 disappear down the bureaucratic black hole of the Social Security system, and fearfully watching the remaining $300 as the company I work for flirts with bankruptcy, is one single factor: personal discipline. I freely admit that some will not have the discipline to save. Perhaps many; the collective governmental and consumer debt that is weighing down our economy is ample evidence of this. But it is profoundly unethical to suggest that the fiscally responsible should be held accountable for the free-wheeling spenders. We've already watched the unsuccessfulness of this approach as $350 billion of our taxes was used by wealthy bankers to wipe their collective backsides. Merrill Lynch's CEO was just given the boot last Thursday for distributing TARP funds as premature bonuses before Bank of America's acquisition became complete; another $20 billion was distributed to Bank of America to assist with the mess that remained after his departure.
Please, let's crawl out of the crib and throw away the pacifier. We need to start holding everybody accountable - beginning first with ourselves. It is time to start acting like adults and take control of our own destinies.
The financial future of retired employees, who may have serious medical problems and other issues at a time in their life when they may not be able to provide for themselves through gainful employment, is of grave importance. The question of retirement plans and the economy is a more complicated issue. Many have attacked companies for ousting defined benefit plans (traditional pensions) in favor of defined contribution plans (such as SIMPLE IRAs), but the latter is actually in everybody's best interest. Even assuming every company could come through on its pension promises in the many unforseeable decades ahead, at best it's six of one or a half dozen of the other.
First I'd like to explore the trend from defined benefit plans to defined contribution plans. I'm inferring an underlying assumption from many commentaries that defined contribution plans are more risky than defined benefit plans, but I just don't see how. All the available evidence indicates the opposite case. Traditional pension plans (defined benefit plans) are rife with a history of abuse and failure, but defined contribution plans, such as IRAs invested in mutual funds, diversify risks across many investments, thus experiencing market swings but never catastrophic and irreparable losses. And nobody is stopping us from putting $100 in an IRA on our own instead of throwing it away on half-caf lattes every month - and that's assuming our employer doesn't offer a defined contribution plan, which is a benefit that is rapidly growing in popularity and quite easy to set up.
I look at things this way: if I am relying on the company I work for to provide for my old age via contributions to a traditional pension plan fund, I am putting all of my eggs in one basket - and the folks administering the plan aren't necessarily financial planning professionals or investors! I'm betting that ONE company out of thousands will remain solvent and financially robust until the day I die. This seems a naive hope at best.
Most companies now invest these pension funds, thus providing more assurance than a directly funded liability. In this case, the services of an investment professional may be retained. This is no different than an employee choosing a mutual fund IRA to invest in via a defined contribution plan, which is managed by - you guessed it - an investment professional. How is this any different from a risk perspective? The only differences I see are: 1) in the first case, I am trusting the company not to abandon the investment professional so they can raid the fund, and 2) I can choose the mutual fund to invest in in the latter case, so if I am especially risk-averse, I can choose a fund that invests only in government bonds or a similarly conservative strategy.
The only instance where the risk can be said to be entirely on the employee is if the employee chooses to have his or her contributions placed in a self-directed IRA, which is completely voluntary and quite uncommon. The history of defined benefit plans, and even Social Security, tend to indicate that placing complete trust in one entity is a very, very poor idea indeed.
The economic cost of failed pensions and even our failing Social Security system are self-evident: taxes are likely to be passed to help care for the financially needy. I never have any objection to caring for the genuinely needy. Caring for the irresponsible is altogether another story. I cannot stomach any argument that says that people should be forced to participate in any plan as unsustainable as Social Security, that people should rely on the financial future of one sole enterprise, or that we are collectively responsible for those that spent their entire adult lives not planning for the entirely foreseeable event of their retirement. The difference between taking home, for example, $2,500 per month and having the discipline to invest $500 of that in my IRA, versus taking home $2,000, watching $200 disappear down the bureaucratic black hole of the Social Security system, and fearfully watching the remaining $300 as the company I work for flirts with bankruptcy, is one single factor: personal discipline. I freely admit that some will not have the discipline to save. Perhaps many; the collective governmental and consumer debt that is weighing down our economy is ample evidence of this. But it is profoundly unethical to suggest that the fiscally responsible should be held accountable for the free-wheeling spenders. We've already watched the unsuccessfulness of this approach as $350 billion of our taxes was used by wealthy bankers to wipe their collective backsides. Merrill Lynch's CEO was just given the boot last Thursday for distributing TARP funds as premature bonuses before Bank of America's acquisition became complete; another $20 billion was distributed to Bank of America to assist with the mess that remained after his departure.
Please, let's crawl out of the crib and throw away the pacifier. We need to start holding everybody accountable - beginning first with ourselves. It is time to start acting like adults and take control of our own destinies.
Sunday, January 25, 2009
Traditional pension funds are going by the wayside. The headaches derived from accounting for these plans is just one of many reasons that this is so. Some have pointed out that there is a lack of comparability between actuarial models, and my general feeling is that a significant part of the problem with pension accounting is that no reasonable person can expect financial forecasting that must look decades into the future to be any more accurate than a weather forecast that does the same. Leaving retirement funds in the hands of employers via defined benefit plans also leads to the temptation to raid the pension fund for support in lean times, or merely to raise cheap capital. Raids started in earnest late in the last century, carrying into the 21st century; creative methods included the following, according to Business Week's Robert Kuttner:
The complexity of accounting for defined benefit plans, combined with the dawning realization that putting all of one's eggs in one basket was foolhardy, let to the increased popularity of defined contribution plans from the 1980s onward; the use of DC plans nearly doubled in just over ten years when 401(K) plans became available.
Employee Benefit Research Institute. (2002). An evolving pension system: Trends in defined benefit and defined contribution plans. Executive summary retrieved January 24, 2009, from: http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=166.Kuttner, R. (2003, September 8).
The great American pension-fund robbery. BusinessWeek online. Retrieved January 24, 2009, from http://www.ibmemployee.com/PDFs/BW%20Online%20_%20September%208,%202003%20_%20The%20Great%20American%20Pension-Fund%20Robbery.pdf.
- Project an unrealistically high rate of return and claim that the plan is overfunded.
- Convert from conventional plans to "cash-balance plans."
- Redefine employees as independent contractors.
- Sell off units that have older employees, who then lose their pension benefits.
- Declare bankruptcy, but set up a special bankrupcty-proof pension plan for top executives as an off-the-books trust.
The complexity of accounting for defined benefit plans, combined with the dawning realization that putting all of one's eggs in one basket was foolhardy, let to the increased popularity of defined contribution plans from the 1980s onward; the use of DC plans nearly doubled in just over ten years when 401(K) plans became available.
Sources
Employee Benefit Research Institute. (2002). An evolving pension system: Trends in defined benefit and defined contribution plans. Executive summary retrieved January 24, 2009, from: http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=166.Kuttner, R. (2003, September 8).
The great American pension-fund robbery. BusinessWeek online. Retrieved January 24, 2009, from http://www.ibmemployee.com/PDFs/BW%20Online%20_%20September%208,%202003%20_%20The%20Great%20American%20Pension-Fund%20Robbery.pdf.
Saturday, January 24, 2009
You Say Tomato, I Say Managerial Accounting
A question came up in one of my master's-level accounting classes about whether managerial accounting and segment reporting were the same. A semantical battle promptly erupted between myself and the students that couldn't see the forest for the trees.
As one student put it:
I agree that a manager makes decisions based on segment financials but frequently acts as the interpreter, not the creator, of this information. However, if "the manager uses the same financials to inform others," I'm a little confused how they aren't, well, "the same." Thus my contention that the differences are largely semantical.
There are aspects of managerial accounting that stray significantly from the financial reporting attributed to segments, such as throughput analysis, but I think such aspects tend to stray from the whole idea of accounting, which is generally accepted to be financial in nature. Attributing other performance measures to accounting only confuses the sense of the word - if I report certain performance information on a specific production line machine to management (units produced, operating temperature, energy consumption), that data is of considerable import, but is it all accounting information? Or should it properly be called something else? Thanks to the work of folks like Eliyahu M. Goldratt, we have new means to measure performance; I do not question the worth of these approaches (throughput is crucial in measuring station effectiveness, for example), but I'm not certain they fall within the realm of accounting per se, managerial or otherwise.
How about an authority on the subject - what does the Chartered Institute of Management Accountants (UK) have to say on the matter? Among other things, "Management accounting [. . .] comprises the preparation of financial reports for non management groups such as shareholder's, creditor's, regulatory agencies and tax authorities" ("Management Accounting," 2009). Interestingly enough, the Institute of Management Accountants has released a new definition of management accounting, effective just last month. In the new definition, management accountants are hailed as "providing expertise in financial reporting," suggesting that segment reporting is central to the function of a managerial accountant. The document goes on to reveal that the foundation of managerial accounting has always included "preparation of financial reports for non management groups such as shareholder's, creditor's, regulatory agencies and tax authorities," concurring word for word with the CIMA's view of the subject (IMA, 2008).
Reading and thinking further on the subject, I think some clarification is in order. Segment reporting isn't the only function of the managerial accountant, thus they aren't perfect analogs, just as my hand is not my entire person, but is an integral part of me. So would it be most fair to say not that segment reporting and managerial accounting are the same, but rather, that financial accounting and managerial accounting overlap in this function (that is, segment reporting)?
Six of one, half dozen of the same . . . I think terminology sometimes gets in the way of concept in accounting. When I first started learning about segment accounting issues, it struck me how segment reporting was nothing more than the information management already needed in order to make decisions. The FASB complicates things further by using phrases such as "the chief operating decision maker," which has no commonly accepted meaning. In fact, the phrase "the chief operating decision maker" may refer to more than one person, defying the basic rules of grammar (See SFAS No. 131, para. 12) (FASB, 1997). Incomprehensibility has long been a problem in law, with "plain English" statutes being enacted by exasperated legislators so that subsequent law could be understandable. Such mandates date back as far as 1362 in England; in the United States, President Carter signed into law a bill that required future federal legislation to be written "as simple and clear as possible" in 1978 (Tiersma, n.d.). States followed suit with similar legislation, but I am unaware of any similar, successful movement in accounting circles. In fact, a prominent M & A lawyer, Vince Pisano, bemoaned the reluctance of the industry to embrace the SEC's attempt to force plain-language disclosure in 1998, observing: "The initial reaction of many securities lawyers was total outrage. How could you possibly explain complex ideas in simple English? The true difficulty in the plain-English rules became clear in subsequent drafting sessions. Not all authors of disclosure documents could write. Not all of them understood what they were writing about. Hiding behind incomprehensible jargon gave the appearance of understanding. The SEC's comment letters with 300 comments related to plain-English disclosure finally caused all of us to think more about what we were trying to say and to say it clearly" (2008).
In the words of Pisano, "If Steven Hawking could write the history of the universe in plain English, or sort of, we can figure out how to write accounting disclosures that people can understand."
IMA. (2008, December). Statements on management accounting: Definition of management accounting. Retrieved January 22, 2009, from the Institute of Management Accountants website: http://www.imanet.org/pdf/definition.pdf.
Management accounting. (2009, January 21). In Wikipedia, The Free Encyclopedia. Retrieved 02:02, January 23, 2009, from http://en.wikipedia.org/w/index.php?title=Management_accounting&oldid=265450448.
Pisano, V. (2008, September 12). Speaking of accounting. Retrieved January 23, from the New Deal Magazine website: http://www.thedeal.com/newsweekly/community/speaking-of-accounting.php.
Tiersma, P. (n.d.). The plain English movement. Retrieved January 23, 2009, from the LanguageandLaw.org website: http://www.languageandlaw.org/PLAINENGLISH.HTM.
As one student put it:
"You make a good argument but as stated in my reply the manager makes his
decision on the financial statements of the segment so the manager is not really
doing the financials just interpreting them and making his decision. This
may make managerial accounting similar to segment reporting only because the
manager uses the same financials to inform others. Right?"
I agree that a manager makes decisions based on segment financials but frequently acts as the interpreter, not the creator, of this information. However, if "the manager uses the same financials to inform others," I'm a little confused how they aren't, well, "the same." Thus my contention that the differences are largely semantical.
There are aspects of managerial accounting that stray significantly from the financial reporting attributed to segments, such as throughput analysis, but I think such aspects tend to stray from the whole idea of accounting, which is generally accepted to be financial in nature. Attributing other performance measures to accounting only confuses the sense of the word - if I report certain performance information on a specific production line machine to management (units produced, operating temperature, energy consumption), that data is of considerable import, but is it all accounting information? Or should it properly be called something else? Thanks to the work of folks like Eliyahu M. Goldratt, we have new means to measure performance; I do not question the worth of these approaches (throughput is crucial in measuring station effectiveness, for example), but I'm not certain they fall within the realm of accounting per se, managerial or otherwise.
How about an authority on the subject - what does the Chartered Institute of Management Accountants (UK) have to say on the matter? Among other things, "Management accounting [. . .] comprises the preparation of financial reports for non management groups such as shareholder's, creditor's, regulatory agencies and tax authorities" ("Management Accounting," 2009). Interestingly enough, the Institute of Management Accountants has released a new definition of management accounting, effective just last month. In the new definition, management accountants are hailed as "providing expertise in financial reporting," suggesting that segment reporting is central to the function of a managerial accountant. The document goes on to reveal that the foundation of managerial accounting has always included "preparation of financial reports for non management groups such as shareholder's, creditor's, regulatory agencies and tax authorities," concurring word for word with the CIMA's view of the subject (IMA, 2008).
Reading and thinking further on the subject, I think some clarification is in order. Segment reporting isn't the only function of the managerial accountant, thus they aren't perfect analogs, just as my hand is not my entire person, but is an integral part of me. So would it be most fair to say not that segment reporting and managerial accounting are the same, but rather, that financial accounting and managerial accounting overlap in this function (that is, segment reporting)?
Six of one, half dozen of the same . . . I think terminology sometimes gets in the way of concept in accounting. When I first started learning about segment accounting issues, it struck me how segment reporting was nothing more than the information management already needed in order to make decisions. The FASB complicates things further by using phrases such as "the chief operating decision maker," which has no commonly accepted meaning. In fact, the phrase "the chief operating decision maker" may refer to more than one person, defying the basic rules of grammar (See SFAS No. 131, para. 12) (FASB, 1997). Incomprehensibility has long been a problem in law, with "plain English" statutes being enacted by exasperated legislators so that subsequent law could be understandable. Such mandates date back as far as 1362 in England; in the United States, President Carter signed into law a bill that required future federal legislation to be written "as simple and clear as possible" in 1978 (Tiersma, n.d.). States followed suit with similar legislation, but I am unaware of any similar, successful movement in accounting circles. In fact, a prominent M & A lawyer, Vince Pisano, bemoaned the reluctance of the industry to embrace the SEC's attempt to force plain-language disclosure in 1998, observing: "The initial reaction of many securities lawyers was total outrage. How could you possibly explain complex ideas in simple English? The true difficulty in the plain-English rules became clear in subsequent drafting sessions. Not all authors of disclosure documents could write. Not all of them understood what they were writing about. Hiding behind incomprehensible jargon gave the appearance of understanding. The SEC's comment letters with 300 comments related to plain-English disclosure finally caused all of us to think more about what we were trying to say and to say it clearly" (2008).
In the words of Pisano, "If Steven Hawking could write the history of the universe in plain English, or sort of, we can figure out how to write accounting disclosures that people can understand."
Sources
FASB. (June 1997). Statement of financial accounting standards no. 131 (as amended): Disclosures about segments of an enterprise and related information. Retrieved from Wiley's Accounting Research Manager database.IMA. (2008, December). Statements on management accounting: Definition of management accounting. Retrieved January 22, 2009, from the Institute of Management Accountants website: http://www.imanet.org/pdf/definition.pdf.
Management accounting. (2009, January 21). In Wikipedia, The Free Encyclopedia. Retrieved 02:02, January 23, 2009, from http://en.wikipedia.org/w/index.php?title=Management_accounting&oldid=265450448.
Pisano, V. (2008, September 12). Speaking of accounting. Retrieved January 23, from the New Deal Magazine website: http://www.thedeal.com/newsweekly/community/speaking-of-accounting.php.
Tiersma, P. (n.d.). The plain English movement. Retrieved January 23, 2009, from the LanguageandLaw.org website: http://www.languageandlaw.org/PLAINENGLISH.HTM.
Friday, January 23, 2009
Managerial Accounting VS Segment Reporting: Round One
A series of questions was posed in my accounting class this week:
"I've often heard arguments that managerial accounting does not have to comply with GAAP but when you look at the bigger picture isn't it the same data?"
If the information is accurate, then absolutely - it is the same data. Finer points of GAAP-compliant accounting may differ from what management wants to know, but in the end, the numbers are supposed to be meaningful. Management makes decisions based on accounting data, and investors do likewise; the FASB issued SFAS No. 14, and later SFAS No. 131, because financial statement end users have an interest in more than just the big picture.
"How likely is it for an organization to keep 2 sets up books? Is it more or less common?"
According to Jules Schwartz, many companies keep two sets of book, primarily for reasons to do with issues stemming from taxation (n.d.). Depreciation takes the lead on GAAP/tax differences, but, according to Michael Alerding, "other items that require two sets of books for small businesses include inventory, warranty reserves, goodwill, intangible assets, [and] certain types of liabilities," to name but a few (2005). In fact, says Alerding, "If a company's financial statements are prepared using the same principles as its income-tax return, it is very likely that it's not reflecting the true economic substance of its financial position and operations [. . .] The bottom line is that small business can and should keep two sets of books to ensure that its financial results are presented properly and that income taxes are minimized." It is difficult to find data on how common this practice actually is, however; in some sense large corporations are apt to keep many sets of books in a virtual fashion because operations and software often differ.
"When we speak of not complying with GAAP, are speaking in terms of formatting or accountability of transactions? It appears that what's important to management should also be important to financial users?"
Complying with GAAP is important because, according to the FASB, "Accounting standards are essential to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, transparent and understandable financial information. Financial information about the operations and financial position of individual entities also is used by the public in making various other kinds of decisions" (FASB, 2008). Accountability is important, and part of accountability is disclosure - which is why financial accounting has evolved to encompass more than its traditional bailiwick of aggregate data, and SFAS No. 131 is a direct reflection of this evolution.
Sources
Alerding, M. (2005, November 28). Keeping two sets of books OK for small businesses ... you may be missing tax-saving opportunities or not reflecting your financial position and operating results in the best possible light. Indianapolis Business Journal.
FASB. (n.d.). Facts about FASB. Retrieved January 22, 2009, from the FASB website: http://www.fasb.org/facts/index.shtml.
Schwartz, J. (n.d.). The great courses: Finance and accounting for the non-financial manager (audio lecture). Chantilly, VA: The Teaching Company.
"I've often heard arguments that managerial accounting does not have to comply with GAAP but when you look at the bigger picture isn't it the same data?"
If the information is accurate, then absolutely - it is the same data. Finer points of GAAP-compliant accounting may differ from what management wants to know, but in the end, the numbers are supposed to be meaningful. Management makes decisions based on accounting data, and investors do likewise; the FASB issued SFAS No. 14, and later SFAS No. 131, because financial statement end users have an interest in more than just the big picture.
"How likely is it for an organization to keep 2 sets up books? Is it more or less common?"
According to Jules Schwartz, many companies keep two sets of book, primarily for reasons to do with issues stemming from taxation (n.d.). Depreciation takes the lead on GAAP/tax differences, but, according to Michael Alerding, "other items that require two sets of books for small businesses include inventory, warranty reserves, goodwill, intangible assets, [and] certain types of liabilities," to name but a few (2005). In fact, says Alerding, "If a company's financial statements are prepared using the same principles as its income-tax return, it is very likely that it's not reflecting the true economic substance of its financial position and operations [. . .] The bottom line is that small business can and should keep two sets of books to ensure that its financial results are presented properly and that income taxes are minimized." It is difficult to find data on how common this practice actually is, however; in some sense large corporations are apt to keep many sets of books in a virtual fashion because operations and software often differ.
"When we speak of not complying with GAAP, are speaking in terms of formatting or accountability of transactions? It appears that what's important to management should also be important to financial users?"
Complying with GAAP is important because, according to the FASB, "Accounting standards are essential to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, transparent and understandable financial information. Financial information about the operations and financial position of individual entities also is used by the public in making various other kinds of decisions" (FASB, 2008). Accountability is important, and part of accountability is disclosure - which is why financial accounting has evolved to encompass more than its traditional bailiwick of aggregate data, and SFAS No. 131 is a direct reflection of this evolution.
Sources
Alerding, M. (2005, November 28). Keeping two sets of books OK for small businesses ... you may be missing tax-saving opportunities or not reflecting your financial position and operating results in the best possible light. Indianapolis Business Journal.
FASB. (n.d.). Facts about FASB. Retrieved January 22, 2009, from the FASB website: http://www.fasb.org/facts/index.shtml.
Schwartz, J. (n.d.). The great courses: Finance and accounting for the non-financial manager (audio lecture). Chantilly, VA: The Teaching Company.
Thursday, January 22, 2009
Segment Reporting VS Managerial Accounting: Introduction
Our fifth week in ACC 541 opened with a teaser question that forced the students to step back and think conceptually about segment reporting:
"Most financial statements represent summary data. Typically when you think of financial accounting you think more in terms of summary data. Is segment reporting similar or different from managerial accounting?"
Semantics aside, segment reporting and managerial accounting are much the same. In delineating operating segments, SFAS 131 states that "Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance" [italics added for emphasis] (FASB, 1997). The "chief operating decision maker" sounds an awful lot like a manager, does it not? SFAS 131 goes on to state: "Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments" (FASB). The "basis that is used internally" could really mean little else other than managerial accounting. According to Managerialaccounting.org, "Managerial accounting is concerned with providing information to managers- that is, to those who are inside an organization and who direct and control its operations" (Geense, 2005) - or, in other words, the "chief operating decision maker."
Finally, from the FASB itself in is stated objective within the very text of SFAS 131: "The method the Board chose for determining what information to report is referred to as the management approach. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance" (FASB). According to Investopedia, "managerial accounting information is aimed at helping managers within the organization make decisions" ("Managerial Accounting," 2008). Hey, did I hear an echo? Nope - that was just the sound of the FASB saying that management information is relevant to outside users of financial statements as well, something we knew all along!
References
FASB. (June 1997). Statement of financial accounting standards no. 131 (as amended): Disclosures about segments of an enterprise and related information. Retrieved from Wiley's Accounting Research Manager database.
Geense, M. (2005). Managerial accounting. Retrieved January 22, 2009, from the Managerialaccounting.org website: http://www.managerialaccounting.org/.
Managerial accounting. (n.d.). Retrieved January 22, 2009, from the Investopedia website: http://www.investopedia.com/terms/m/managerialaccounting.asp.
"Most financial statements represent summary data. Typically when you think of financial accounting you think more in terms of summary data. Is segment reporting similar or different from managerial accounting?"
Semantics aside, segment reporting and managerial accounting are much the same. In delineating operating segments, SFAS 131 states that "Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance" [italics added for emphasis] (FASB, 1997). The "chief operating decision maker" sounds an awful lot like a manager, does it not? SFAS 131 goes on to state: "Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments" (FASB). The "basis that is used internally" could really mean little else other than managerial accounting. According to Managerialaccounting.org, "Managerial accounting is concerned with providing information to managers- that is, to those who are inside an organization and who direct and control its operations" (Geense, 2005) - or, in other words, the "chief operating decision maker."
Finally, from the FASB itself in is stated objective within the very text of SFAS 131: "The method the Board chose for determining what information to report is referred to as the management approach. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance" (FASB). According to Investopedia, "managerial accounting information is aimed at helping managers within the organization make decisions" ("Managerial Accounting," 2008). Hey, did I hear an echo? Nope - that was just the sound of the FASB saying that management information is relevant to outside users of financial statements as well, something we knew all along!
References
FASB. (June 1997). Statement of financial accounting standards no. 131 (as amended): Disclosures about segments of an enterprise and related information. Retrieved from Wiley's Accounting Research Manager database.
Geense, M. (2005). Managerial accounting. Retrieved January 22, 2009, from the Managerialaccounting.org website: http://www.managerialaccounting.org/.
Managerial accounting. (n.d.). Retrieved January 22, 2009, from the Investopedia website: http://www.investopedia.com/terms/m/managerialaccounting.asp.
Wednesday, January 21, 2009
Segment Reporting Explained
Businesses often have operations with distinctly different purposes - they may target different markets, in terms of customers, products, or services. Each operational segment generally has assets, liabilities, earnings and expenses that are specific to the operation. For example, a company might engage in business-to-business and business-to-consumer enterprises. Operations for each market are likely to have significant differences; a computer manufacturer, for example, will not target consumers with marketing efforts for servers and server racks, but it will target consumers with marketing efforts for personal computers. Each portion of the enterprise will need different assets (such as specialized manufacturing equipment) and will incur expenses specific to the operation (such as the purchase of parts and targeted marketing efforts).
Management will need to know financial information about how each operating segment is performing, so companies generally collect this information for their own purposes. Naturally, investors are interested in this information, too; companies may not be terribly motivated to reveal this information, however, because the aggregated picture can help to hide poor performance in one operating segment. Additionally, competitors can use this information to mount more aggressive marketing efforts in an area where the company is already weak, forcing it out of a market where it may have otherwise turned an eventual profit.
Disclosure tends to win the battle in financial reporting, and both the SEC and the FASB have been involved in directing the reporting requirements for segments ("Segment Reporting," n.d.). SFAS 14 initially defined five salient reporting areas: industry segment, reportable segment, revenue, operating profit or loss, and identifiable assets. Continued controversy prompted the issuance of SFAS 131, which expanded the definition of an operating segment for financial reporting purposes; essentially, if a segment is important for financial reporting purposes to management, it is important to disclose (Schroeder, Clark, and Cathey, 2005).
References
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2005). Financial accounting theory and analysis (8th ed.). Hoboken, NJ: John Wiley & Sons, Inc.
Segment reporting. (n.d.) Retrieved January 21, 2009, from the Lawyer Links Topic-Driven Database: http://www.lawyerlinks.com/.
Management will need to know financial information about how each operating segment is performing, so companies generally collect this information for their own purposes. Naturally, investors are interested in this information, too; companies may not be terribly motivated to reveal this information, however, because the aggregated picture can help to hide poor performance in one operating segment. Additionally, competitors can use this information to mount more aggressive marketing efforts in an area where the company is already weak, forcing it out of a market where it may have otherwise turned an eventual profit.
Disclosure tends to win the battle in financial reporting, and both the SEC and the FASB have been involved in directing the reporting requirements for segments ("Segment Reporting," n.d.). SFAS 14 initially defined five salient reporting areas: industry segment, reportable segment, revenue, operating profit or loss, and identifiable assets. Continued controversy prompted the issuance of SFAS 131, which expanded the definition of an operating segment for financial reporting purposes; essentially, if a segment is important for financial reporting purposes to management, it is important to disclose (Schroeder, Clark, and Cathey, 2005).
References
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2005). Financial accounting theory and analysis (8th ed.). Hoboken, NJ: John Wiley & Sons, Inc.
Segment reporting. (n.d.) Retrieved January 21, 2009, from the Lawyer Links Topic-Driven Database: http://www.lawyerlinks.com/.
Winter Madness
Tax time is here again, and this year I've volunteered for VITA, despite my hectic schedule working full-time and working towards my master's degree in accountancy. Unfortunately, the instructor was either late or never showed up on the day of training, so I left after twenty minutes when discouraged volunteers started filtering out. With a writing obligation of around 3,000 words per week, my master's degree dictates that no spare time can be wasted.
To make matters worse, I had a broken-down dryer and two DNF complaints on my geocache to contend with. After leaving the instructor-less VITA class, I worked on my master's degree homework, then headed out to the first waypoint of my geocache to see if it had disappeared. It had not. I was able to get a more accurate signal through the naked winter branches above my cache, however, so I updated the coordinates so the less astute geocachers could find the first waypoint.
Given the cold temperatures and the paucity of free time I had over the weekend, I grumbled a bit over slow-witted cachers before moving on to the problem of the dryer. Long and boring story made short, it involved pulling our better one out of storage and likewise replacing the washing machine because my wife wanted our newer washing machine. Unfortunately, some water had remained in the pump, freezing and cracking the pump and rendering it inoperable. More time wasted swapping machines for no reason - sigh.
I fired off an email to the VITA site coordinator, inquiring as to whether he had made it to class Saturday and if not, if he had rescheduled training. Then I started work on the VITA study material at the IRS website on my lonesome. Even after taking a master's-level class in taxation, I ran across terms I was unfamiliar with. Given the nature of the people that qualify for VITA assistance (low income), I was baffled that so much training was necessary in the first place. The tax code continues to impress me with its illogic.
So . . . I've been busy. Next week I am supposed to take time off to help my uncle, a CPA, with the madness of tax season. All in all, it has been nearly impossible to write so much as a paragraph on my blog. The same goes for my (extremely) amateur photography.
No free time for fun lately, it seems. My life has never really been about more than trying to better myself, my family and my world, though, while others are more interested in expounding on why it is vastly immoral for rich people to be compelled to do so much as lift a finger for the desperately needy. Too many Americans would rather devote their energy to criticizing those that would try to alleviate suffering in the world than take a moment to denounce the likes of Madoff.
If you can't beat them, join them, right? I invite my more conservative friends to ignore the suffering in the world and worship with me at the altar of the almighty dollar - no use going to a real church and being a hypocrite! Jesus denounced them roundly (He also had a few choices words for rich people, come to think of it).
Now let us pray to the God of Derivatives, who has abandoned us of late . . .
To make matters worse, I had a broken-down dryer and two DNF complaints on my geocache to contend with. After leaving the instructor-less VITA class, I worked on my master's degree homework, then headed out to the first waypoint of my geocache to see if it had disappeared. It had not. I was able to get a more accurate signal through the naked winter branches above my cache, however, so I updated the coordinates so the less astute geocachers could find the first waypoint.
Given the cold temperatures and the paucity of free time I had over the weekend, I grumbled a bit over slow-witted cachers before moving on to the problem of the dryer. Long and boring story made short, it involved pulling our better one out of storage and likewise replacing the washing machine because my wife wanted our newer washing machine. Unfortunately, some water had remained in the pump, freezing and cracking the pump and rendering it inoperable. More time wasted swapping machines for no reason - sigh.
I fired off an email to the VITA site coordinator, inquiring as to whether he had made it to class Saturday and if not, if he had rescheduled training. Then I started work on the VITA study material at the IRS website on my lonesome. Even after taking a master's-level class in taxation, I ran across terms I was unfamiliar with. Given the nature of the people that qualify for VITA assistance (low income), I was baffled that so much training was necessary in the first place. The tax code continues to impress me with its illogic.
So . . . I've been busy. Next week I am supposed to take time off to help my uncle, a CPA, with the madness of tax season. All in all, it has been nearly impossible to write so much as a paragraph on my blog. The same goes for my (extremely) amateur photography.
No free time for fun lately, it seems. My life has never really been about more than trying to better myself, my family and my world, though, while others are more interested in expounding on why it is vastly immoral for rich people to be compelled to do so much as lift a finger for the desperately needy. Too many Americans would rather devote their energy to criticizing those that would try to alleviate suffering in the world than take a moment to denounce the likes of Madoff.
If you can't beat them, join them, right? I invite my more conservative friends to ignore the suffering in the world and worship with me at the altar of the almighty dollar - no use going to a real church and being a hypocrite! Jesus denounced them roundly (He also had a few choices words for rich people, come to think of it).
Now let us pray to the God of Derivatives, who has abandoned us of late . . .
Tuesday, January 20, 2009
EESA / TARP Depreciation: Bacon, Anyone?
"So let's think about the 50% bonus depreciation that was part of the economic stimulus package; is this going to hurt companies in the long run because they have depreciated property earlier than the revenue will be produced? Or does it wash itself out in the end? I've thought a lot about how these stimulus packages work and if they really work to stimulate the economy and if it can actually hurt the economy later on."
I wasn't aware of the depreciation variance written into EESA until a sharp friend pointed it out to me. In theory, a dollar now is always better than a dollar later. I would be inclined to think that accelerating depreciation would free up capital for companies to reinvest, thus contributing to aggregate macroeconomic stimulation - if the government had not already manipulated the economy through unnecessarily low interest rates. But I don't think Keynes ever gave thought to a government lowering interest rates so much before a recession that it had already destroyed its options once the economy starting sagging for real. So it may be too little, too late.
I confess to some bafflement as to how our elected representatives thought we could increase our debt load and dole out tax breaks at the same time, but maybe they're using a special kind of math. And the depreciation provisions smell fishy - or perhaps I should say they smell like pork. They appear to be specific to certain types of business and investments, such as "motorsports racing track facilities." Hmmm. I don't see a huge advantage to the economy there, just certain congresspersons' constituents.
Some of the businesses that will qualify for the early tax break are less exotic than racetracks, even if they do not appear to offer any real hope of economic stimulation on a macro level. This depreciation bonus might be a boon to those companies if they invest their savings wisely. Unfortunately, we've all heard where the extra cash we've provided through EESA has gone: executive bonuses, dividends, all sorts of crazy things. Nothing that offers a solid ROI. One is left to wonder if anybody gets a CEO position on merit any more. These decisions do not seem rational in the least.
Many of our captains of finance and industry graduated from prestigious universities. Like every other school, the Ivy League institutions have realized that students that flunk out don't pay tuition; I suspect that standards aren't what they used to be as a consequence of growing concern over the academic bottom line. At $32,557 for tuition for the 2008-2009 school year for Harvard, dropouts add up quickly. Where is the incentive to enforce standards in the face of these kinds of numbers? Prestigious schools now seem more like a great place to network than a great place to learn. After all, are they really teaching anything special that you can't learn at any other school? As a product of this system, Henry Paulson is a good case in point: he graduated from Dartmouth with a degree in English, then from Harvard with an MBA. He quickly got a job assisting the dirty folks involved in the Watergate scandal, then went to work for Goldman Sachs. And now that he is Treasury Secretary, guess who one of the primary beneficiaries of EESA has been? You guessed it, Goldman Sachs ("Henry Paulson," 2008). Why in the world can't we get an economist in his position?
Just to add insult to injury, after the GAO released its report on the implementation of the TARP program under EESA earlier this month, House Financial Services Committee Chairman Barney Frank released a statement that read, in part, as follows:
References
Henry Paulson. (2008, December 18). In Wikipedia, The Free Encyclopedia. Retrieved December 21, 2008, from http://en.wikipedia.org/w/index.php?title=Henry_Paulson&oldid=258745753
I wasn't aware of the depreciation variance written into EESA until a sharp friend pointed it out to me. In theory, a dollar now is always better than a dollar later. I would be inclined to think that accelerating depreciation would free up capital for companies to reinvest, thus contributing to aggregate macroeconomic stimulation - if the government had not already manipulated the economy through unnecessarily low interest rates. But I don't think Keynes ever gave thought to a government lowering interest rates so much before a recession that it had already destroyed its options once the economy starting sagging for real. So it may be too little, too late.
I confess to some bafflement as to how our elected representatives thought we could increase our debt load and dole out tax breaks at the same time, but maybe they're using a special kind of math. And the depreciation provisions smell fishy - or perhaps I should say they smell like pork. They appear to be specific to certain types of business and investments, such as "motorsports racing track facilities." Hmmm. I don't see a huge advantage to the economy there, just certain congresspersons' constituents.
Some of the businesses that will qualify for the early tax break are less exotic than racetracks, even if they do not appear to offer any real hope of economic stimulation on a macro level. This depreciation bonus might be a boon to those companies if they invest their savings wisely. Unfortunately, we've all heard where the extra cash we've provided through EESA has gone: executive bonuses, dividends, all sorts of crazy things. Nothing that offers a solid ROI. One is left to wonder if anybody gets a CEO position on merit any more. These decisions do not seem rational in the least.
Many of our captains of finance and industry graduated from prestigious universities. Like every other school, the Ivy League institutions have realized that students that flunk out don't pay tuition; I suspect that standards aren't what they used to be as a consequence of growing concern over the academic bottom line. At $32,557 for tuition for the 2008-2009 school year for Harvard, dropouts add up quickly. Where is the incentive to enforce standards in the face of these kinds of numbers? Prestigious schools now seem more like a great place to network than a great place to learn. After all, are they really teaching anything special that you can't learn at any other school? As a product of this system, Henry Paulson is a good case in point: he graduated from Dartmouth with a degree in English, then from Harvard with an MBA. He quickly got a job assisting the dirty folks involved in the Watergate scandal, then went to work for Goldman Sachs. And now that he is Treasury Secretary, guess who one of the primary beneficiaries of EESA has been? You guessed it, Goldman Sachs ("Henry Paulson," 2008). Why in the world can't we get an economist in his position?
Just to add insult to injury, after the GAO released its report on the implementation of the TARP program under EESA earlier this month, House Financial Services Committee Chairman Barney Frank released a statement that read, in part, as follows:
“The American people received two kinds of news about the TARP program – bad news and worse news. The bad news was confirmation by the GAO in its first report
about the program that Treasury has no way to measure whether taxpayer funds
invested in banks are being used in accordance with the purpose of the law – to
increase lending. The much worse news is Treasury’s response that it does not
even have the intention of doing so" (Marr, 2008).
Don't it make you feel all warm and fuzzy inside to read this stuff?
References
Henry Paulson. (2008, December 18). In Wikipedia, The Free Encyclopedia. Retrieved December 21, 2008, from http://en.wikipedia.org/w/index.php?title=Henry_Paulson&oldid=258745753
Marr, W. (2008, December 4). TARP: December 4, 2008 Frank’s Statement on GAO TARP Report. Retrieved December 20, 2008, from Financial Economics Today Web site: http://alaskakid.wordpress.com/tag/troubled-asset-relief-program/
Thursday, January 1, 2009
Happy New Year
A strange thing happens over the holidays: my pants shrink around the waistline. I attribute it to some sort of clever built-in obsolence.
Rather than purchase new pants, every New Year's Day I always resolve to get in even better shape than I am currently in. Nigh impossible, you say? Believe it or not, I am a wee bit overweight; the difference between my ideal weight and my current weight, however, could be measured in mere ounces (of course, so could an elephant, given enough digits).
So a plan is enacted. My fitness regime generally consists of a series of short runs - about three in total over the month of January - during the course of which I remember that exercise sucks each and every time. No doubt about it. It is at this point that I reassess the possibilities. Dieting is one. Simply doing nothing is another.
In the spirit of truly scientific thinking, I embrace T. C. Chamberlin's philosophically seminal method of multiple working hypotheses, and search for yet more alternatives. Eventually, my mind wanders, and I turn my attention to more pressing problems.
Such as why my shirts have gotten tighter about the midsection.
Rather than purchase new pants, every New Year's Day I always resolve to get in even better shape than I am currently in. Nigh impossible, you say? Believe it or not, I am a wee bit overweight; the difference between my ideal weight and my current weight, however, could be measured in mere ounces (of course, so could an elephant, given enough digits).
So a plan is enacted. My fitness regime generally consists of a series of short runs - about three in total over the month of January - during the course of which I remember that exercise sucks each and every time. No doubt about it. It is at this point that I reassess the possibilities. Dieting is one. Simply doing nothing is another.
In the spirit of truly scientific thinking, I embrace T. C. Chamberlin's philosophically seminal method of multiple working hypotheses, and search for yet more alternatives. Eventually, my mind wanders, and I turn my attention to more pressing problems.
Such as why my shirts have gotten tighter about the midsection.
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