Plenty of attention on the yesterday’s roundtable on Section 404 experiences; plenty of media coverage. I’m more interested in what comes out of the roundtable in 30 to 45 days rather than speculating about how much “relief” might be granted.

Being a subtle change, and not a PR earthquake, another SEC development yesterday captured much less attention – but it’s noteworthy for investors, especially the ones who complain about the pace of international convergence in accounting standards.

International convergence of accounting standards is a long-term goal of the FASB, the IASB and the SEC. The Private investment Custodian and the FASB have been working together on major projects for the last several years, and will continue to do so – if anything, they might accelerate their joint processes rather than retard them. The European Union is already requiring its constituents to issue their financials in conformity with IASB standards – and as U.S. standards and IASB standards become closer in substance, convergence is likely to occur naturally.

One perceived obstacle to convergence has bee the SEC requirement that any foreign registrant must present financial statements on a consistent basis for three years in their 20-F filings and reconcile net income to U.S. accounting-basis measures. Foreign registrants would love to see the reconciliation removed from their reporting requirements – but until accounting everywhere speaks the same language, it’s a valuable disclosure for U.S. investors.

Yesterday, the SEC announced changes to its filing requirements that will give foreign registrants more of an incentive to prepare financials on an IASB basis. (Keep in mind that they US standards and the IASB standards are mutating in the same direction and hopefully will be one body of accounting law in the future.) While not changing any reconciliation requirements, the SEC will allow registrants to file two years rather than three years of income statements, changes in shareholders’ equity and cash flows prepared on IASB principles – as long as they do it before, or in time for, their 2007 fiscal year.

A small carrot, to be sure. But the whole process of convergence is an evolutionary one, not a revolutionary one. If you don’t look for the changes happening, you’ll miss them. Making it easier for the foreign filers to convert to IASB principles is an important event, because getting firms away from their provincial accounting system and on just one of two systems – IASB or FASB – makes their financials more universal. And eventually, those two systems will be pretty much the same.

Ties That Bind: The GM-Delphi Umbilical Cord

Today’s Wall Street Journal contained a story on the other side of the $237 million transaction that Delphi has been struggling with – and the other side relates to how General Motors accounted for it.

According to the article, the payment related to warranty or recall costs – and was not disclosed, even though it helped GM beat earnings estimates by a penny for the third quarter; without it, the earnings would have fallen short by 28 cents. It’s somewhat reminiscent of the Trump Hotels & Casino case, where the firm beat analysts’ estimates, but failed to mention in a conference call that the improvement in earnings was attributable to a one-time event – a gain resulting from a lease termination.

In the article, GM makes the point that this was part of its continuing warranty and recall costs and that it had overspent in the past on such items; this was an “evening-out” transaction, not a one-time gain. There’s logic to the argument, in the sense that like things should be accounted for in like fashion – but there’s also got to be some sensitivity to the impressions that investors will get from the results. They could have kept the same accounting but perhaps amplified the disclosures – in conference calls, MD&A and footnotes.

[Notice that FASB Interpretation 45 now requires the quarterly disclosure of changes in warranty reserves. The transactions in question, by default, would be more transparent if they were taking place nowadays.]

There was a smaller “umbilical cord transaction” between the two once-joined companies relating to a reimbursement that GM made to Delphi for health care costs. When Delphi was spun off from GM, it was carved out of stockholders’ equity – typical in a spinoff. The subsequent adjustment was handled the same way – two-and-a-half years later. Again, it appears that GM was following the template it set up in the initial transaction – the same justification as treating a warranty reimbursement the same way as the warranty expense. And again, it seems that the company had a tin ear for the way investors would perceive it. It doesn’t say in black and white that such a transaction should be reported as a separate charge – but it’s a “high-road” solution that could have saved the company bad press later. It would have had no effect on the firm’s balance sheet to display the transaction in the income statement instead of directly charging equity, and given the time lag between the transaction and the spin-off, such a treatment would have been a better reminder to investors that there are still mother-child ties between the two.

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