Where is the harmonization?

Maybe the move to international standards won't be so easy. Here is an article from Accountancy Age discussing European criticism of proposed standard IFRS#3 (here is a link to the US Exposure draft). Much of the criticism regards the inclusion of fair value accounting into the measurement process.

The European Financial Reporting Advisory Group (Efrag) has drafted a letter to the IASB expressing 'major concerns' over ammendments to IFRS3. It says the new standard would introduce unreliable fair value measurements, and claims that standard-setters are changing their approach without prior discussion.

Efrag's concern is that the IASB and FASB are seeking to reinvent financial reporting with new rules rather than harmonise the existing standards.

The new standard would have major effect on post-transaction earnings per share as a result of M&A activity. This is a key measure of a deal's success, and would lead to drastic changes in the balance sheet of acquirers.

Flu vaccine shortage due to revenue recognition rules?

When I saw the WSJ headline "Death by Accounting" I was skeptical that accounting was somehow responsible for the flu vaccine shortage. The artticle discussed the ramifications of SAB 101 on bill and hold revenue recognition issues. The vaccine industry is an excellent example of a bill and hold situation, vaccine companies receive a lot of money upfront in payment for vaccines that will be sent out later. However the revenue for these prepaid vaccines can not be recognized until the vaccines are "delivered".

I am still skeptical after reading the article. Companies increase value by taking on positive NPV projects not because they recognize revenues this period as oppossed to a later period. In fact some of the quotes in the article are just plain wrong, take for example:

The upshot of this policy is that no matter how much cash the government puts in vaccine-makers' hands for making drugs for the stockpile, they cannot include this money in their official sales until it is actually delivered to doctors when and if there is a disease outbreak. This period can last more than a year. While one part of government is urging manufacturers to have a reserve on hand for a flu outbreak, another is telling them that they won't show any gain on their books for doing so. In fact, companies that contribute to the stockpile will take a paper loss for this part of their business, because the SEC is not about to let them postpone "recognition" of their costs of making the vaccines. And because of other regulations and trial lawyers always eager to pounce on "deceptive" accounting, it is difficult for companies to communicate with investors about this distorted earnings picture.

Is the author really suggesting that if a drug company explained to its shareholders the revenue recognition policy behind the stockpile program and clearly disclosed it in its financial statements that it would be sued for "deceptive" accounting?

I am still skeptical. I imagine what the SEC wants to prevent is a drug company that is not going to meet its earnings number dump a bunch of vaccines into the national stockpile so that it can recognize revenue.

A classroom discussion about ethics

One item that I don't remember seeing when I was an accounting student was a news story about an accounting partner denied bail and under indictment. An article on WEBCPA discusses the case of David Greenberg, the KPMG partner indicted by the federal government as part of the investigation into unlawful tax strategies.

David Greenberg, 46, was one of 10 former KPMG executives indicted Monday in connection with the design and marketing of alleged phony tax shelters, and was the only defendant to be arrested by authorities. Greenberg has been accused of falsifying documents to hide his involvement in questionable tax shelters, coaching a co-conspirator to lie to investigators and misleading investigators about whether he had surrendered all his passports.

This story allows for a good discussion of ethics in the accounting profession.

international standards

There is an interesting article on FT.com which examines the effect of public companies in England adopting international standards and what that means for private companies. Currently, UK standards do not harmonize with international standards so there is a situation in which two competitors,one public, one private, may be accounting for similar transactions in a different manner. The UK standard setters goal is to harmonize with international standards over time but what happens in the mean time? In addition, the article states that there are three issues that are casting doubt about harmonization:

There was widespread agreement with this and, in 2004, the first of these "convergence" standards appeared. But three developments have since clouded the consensus.

One was the agreement by the International Accounting Standards Board to start a separate "small and medium-sized enterprises project", aimed at developing a separate set of standards suitable for private companies.

The second factor was the ASB's proposal to extend the application of its financial instruments standard FRS26 (the effective equivalent of the infamous IAS39) to all entities using full UK standards. It seemed strange to make UK private companies apply a version of IAS39 when even large listed companies were complaining about its onerous requirements. This convinced many that convergence of this sort might not be what was needed.

Finally, reinforcing this unease was the IASB's own proposals to converge with US GAAP. This seemed to be importing lengthy and elaborate rules, based on some new and unfamiliar concepts.

These factors will also come into play when (and if) the US adopts international standards.

R&D spending

There is an interesting article inUSA Today concerning recent cutbacks in R&D spending by various companies. The article states:

Spending on R&D by companies in the benchmark S&P 500 index has grown 3.3% over the past four quarters, well below the 11.6% growth in revenue during the same period, S&P says.

The article also cites a recent study by the consulting firm Booz Allen Hamilton that discusses the link between current R&D spending and future profitability.

A new study by consultant Booz Allen Hamilton encapsulates these fears. It found that big R&D spenders don't get returns on their outsized investments and that R&D spending has no effect on growth, profitability or shareholder return. R&D is "a roll of the dice of what you will get back," says Barry Jaruzelski, vice president of Booz Allen and co-author of the study that looked at 1,000 companies going back six years.

I always enjoy the discussion among students on the question of expensing versus capitalization of R&D. They recognize the link to future profits, but also understand the accounting reason for expensing. I try to get them to some middleground or why can't we as accountants be comfortable with not being able to exactly measure the the future linkage.