Let's Scrap the Comprehensive Income Statement

Just found this article http://accounting.smartpros.com/x62289.xml
H.

The Accounting Cycle
Let's Scrap the Comprehensive Income Statement
Op/Ed
By: J. Edward Ketz


June 2008 -- The statement of comprehensive income, whether displayed as a separate financial statement or in conjunction with the income statement or as part of the statement of changes in shareholders' equity, has served its purpose. It is time to scrap the concept and incorporate these items where they actually belong -- in the income statement.


Over the years the Financial Accounting Standards Board created a problem by allowing a variety of items to bypass the income statement, a result of te FASB's bias toward the balance sheet. In other words, FASB focused on reporting assets and liabilities of the business enterprise, but did not worry too much about the impact on the income statement. Included within the comprehensive income statement were foreign currency translation adjustments under the all-current method, holding gains and losses for investments under the available-for-sale category, gains and losses on derivatives if they are considered cash flow hedges, and losses if necessary to establish a minimum pension liability. If these things make sense to include on the balance sheet, surely their income statement effects are meaningful as well.

The board sometimes justified this approach by claiming that these items had less reliability than other events and transactions included in the income statement. But, this argument loses water in today's world. Surely if the fair value changes recently booked in the accounts of financial institutions are reliable, then these other measurements are equally reliable. This follows because the fair value changes recently recognized are the result not of changes in market values but in changes in model estimates.

Consider last year's 10-K for Merrill Lynch. The firm did not have a particularly good year, as witnessed by its 7.7 billion dollar loss. If the items in other comprehensive income are incorporated as well, the loss grows to almost 9 billion dollars.

The foreign currently translation loss, net of taxes, is a mere 11 million dollar loss. Nonetheless, it is a real economic loss to shareholders and should be recognized as such.

Merrill Lynch had losses on its investment securities considered available for sale of 2.5 billion dollars. Again, this is net of income taxes. As these securities reflect certain real changes of value, they too would be better displayed on the income statement.

Enron Recovery Rate Hits 50 Percent !

For those of you who are still follwoing the Enron case. H.

June 3, 2008 (Associated Press) -- DALLAS - Enron says it distributed more than $6 billion in the past month to creditors of the bankrupt energy-trading company, pushing the recovery by creditors to more than 50 cents on the dollar.

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.

Citigroup was the last remaining defendant in what was known as the "Mega Claims" lawsuit, a bankruptcy lawsuit that the Enron recovery corporation filed in 2003 against 11 banks and brokerages alleging they helped Enron hide its financial problems from creditors.

Since November 2004, Enron has returned about $20.59 billion to creditors, more than 289 percent of the original estimate, the recovery corporation said.

After Monday's distribution, the disputed claims reserve had about $613 million.

Enron Corp. imploded in 2001, leading to the loss of thousands of jobs, more than $60 billion in Enron stock value and more than $2 billion in employee pension plans.

© Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

About auditors' compensation !

You think you know everything about auditors' compensations ! No.
Read the follwoing reports:


Reports of the Major Public Company Audit Firms to the Department of the Treasury Advisory Committee on the Auditing Profession
http://thecaq.org/publicpolicy/treasurydata.htm

Financial Scandals Are Not Rreally New !

One of the biggest financial scaldals that took place in history is the case of the south sea Bubble.
Harvard Business School is putting online an interesting project (web site) detaling the scandal. It is really great.

Dr.HH

Stretching Accounts Payables.

These are very nice cartoons about issues in accounting (Accounts payables in this case). They simplify life for accounting students . Enjoy. Dr.H

Stretching" Accounts Payables (i.e. paying accounts payables past the due date without remitting the penalty, or paying after the discount period has expired but still taking the discount) is a common way that some firms gain cheap financing. However, a firm can only get away with it if they have an imbalance of power between them and the vendor. Here are a few Dilbert cartoons that illustrate the basic idea almost perfectly:



Unfortunately, unless you're a Wal-Mart (notorious for abusing their vendors), the flyswatter eventually ends up in the vendors' hands. So, "free" isn't always "free".

If a textbook vendor was smart, they'd just use Scott Adams for most of their illustrations.

More about XBRL!

A very nice website that introduces XBRL for those who are not familiar with the technology.
http://www.xbrleducation.com/
Best.

Bradford & Bingley: Time the FSA got serious on insider trading

By a neat coincidence, the latest briefing paper on the battle against insider trading from the Financial Services Authority pinged into the City's e-mail boxes just as news broke of what, by any rational analysis, was serious insider trading in the shares of Bradford & Bingley.

The tottering bank, one of the more widely held financial stocks, saw 14 per cent wiped off its share price in the three working days immediately preceding a profits warning so shocking that it allowed the two banks underwriting the rights issue to walk away from their obligations and rejig the issue.

The FSA admits that it is “disappointed” by the level of insider trading in London, which it believes took place before a fifth of all takeover announcements last year. The record shows that since 2001, when the authority took over responsibility for policing market abuse, of which insider dealing is just one variety, there have been only 14 successful actions. Despite the odd high-profile case, most recently the £750,000 fine on Philippe Jabre, the hedge fund manager, net worth when last estimated £200 million, most fines ran to a few thousand pounds.

On Wall Street, the Securities and Exchange Commission has also admitted that today looks like a replay of the Ivan Boesky years. The Americans are, true to form, taking action, against some blue chip names where necessary. In London, it ought to be just as easy. Insider trading cases in the 1990s were few, occasionally sweeping up the odd blameless analyst who had extracted too much out of the finance director over a G&T. The criminal burden of proof, required, beyond all reasonable doubt, was too onerous. The FSA was able to take over by promising to up the hit rate by going for a civil, balance of probabilities, proof that was much more likely to get results.

You take some hedge fund that has never expressed the remotest interest in B&B, say, but took a large short position last Thursday afternoon. Unless same hedge fund can find a pretty compelling reason for its behaviour, it should be bang to rights.

You won't pick up everyone who dealt inside, but it's a start, and it doesn't half encourage the others. These past few difficult months have seen some apparently flagrant abuse, such as the short-selling and false rumours that undermined HBOS shares earlier in the year. In these febrile markets, when no one knows what anything is worth, it is all too easy.

Yet nothing seems to be happening. At this point it is traditional to kick the FSA. But the authority counters that the tribunal deciding market abuse cases seems increasingly to be applying a far higher burden of proof than the 51:49 required. This tribunal in part consists, cosily enough, of City practitioners sitting in judgment on their peers.

This has required the FSA to fall back on more difficult criminal action. Which puts us back where we were. The FSA is pinning its hopes on plea-bargaining and immunity for whistleblowers. This would blow apart those cosy cartels of insiders that we know exist out there. But this would take primary legislation and could be years off. If recent unpleasant events in the market, not least those involving B&B, do not result in a couple of high-profile scalps, then we will know the system as it stands is not fit for purpose.

One of the authority's recommendations is to keep the number of insiders to a minimum. Blindingly obvious; but on the B&B warning/rights reshuffle there were four banks involved. No one is saying how many knew, but assume a hefty four-figure number. Funny how it seems to have leaked.