FIN 48 was the initial standard reviewed by the FAF and today, after receiving input from various constituents (including academics), the FAF released its report.  The 12-page report concludes that the standard generally achieves its objective of increasing relevance and comparability in reporting information about income tax uncertainties.  However, it also notes that some stakeholders think it could be improved.

Look for an upcoming FASRI Roundtable that will discuss the post-implementation review process and how academics can get more involved.  Providing ex-ante research to standard-setters has been a challenge for academics (although I think we’ve gotten better at doing this), but we are uniquely suited to provide ex-post research that can inform how standards have affected information environments for financial statement users.

• Does Santa’s fiscal year end on Dec 25?
  • If so, when does he conduct his annual inventory count?
  • If not, does he have a Dec 31 year-end?
• Assuming a Dec 31 year-end, how does he figure in children’s goodness payments (i.e., presents) for the last seven days of the year (Dec 25 – Dec 31)? In other words, if “fiscal year-end” is Dec 31, when is “present year-end”?
  • Is the present year-end also on the 31st? Does the Dec 25th present payment include an estimated payment for the remaining seven days? Does Santa then make an adjusting entry on the 31st?
  • Or does the present year-end differ from the fiscal year-end resulting in an entry for “accrued present liabilities” on Dec 31?

I asked these questions to one of my cousins who gave me the ingenious responses. In his opinion, Santa gives an estimated payment on Dec 25th. He then uses magic to adjust how much joy individuals receive from their presents. This allows him to end the year without any liabilities on his books.

So, if you snuck out of bed at 2am on Dec 25th, peaked at all your presents, and then went back to bed, none of the presents disappear, you simply enjoy them less to make up for your naughtiness after the present payment date.

Just over a year ago I took the GMAT. While I spent a good deal of time preparing for the GMAT, I think I spent at least as much time trying to figure out where I wanted my GMAT scores to be sent. That was one of the most difficult parts of the entire recruiting process: choosing my initial list of schools. So, I thought I’d offer my two cents for anyone who may be in a similar dilemma. I’ve grouped my thoughts around questions that I was desperately seeking answers to. On every one of these questions realize that this is what I learned from my experience. It doesn’t necessarily apply to you, and you should definitely seek other ideas.

Question: How many schools should I apply to?

Answer: The common philosophy is that more is better. Each additional application increases your likelihood of getting accepted. While I think that’s a good rule of thumb, let me add a caveat. Your resources are limited. Each and every application needs to be personal. In the job market, blindly sending out a million resumes on the web doesn’t work nearly as well as making  a concerted effort for a smaller set of openings. The same is true, if not amplified, for PhD programs. For example, letters of intent need to be customized (see Rob’s post on this topic). Additionally, be respectful of the people who are writing letters of recommendation. Asking for 65 letters within a two week period is a bit overboard.

Question: How do I decide which schools to apply to?

Answer: The first thing to do is decide what your interests are. Do you want to teach or to research? What subject areas are you interested in (e.g., financial, audit, tax, managerial, systems)? Are you more interested in archival research or more behavioral/experimental research? You don’t need to know exactly what you want to do, but it’s good to have at least some sort of idea. From there, looking at school rankings (for some ranking options see the U.T. Dallas and BYU websites) may be a good place to start. However, it is in no way an endpoint.

In my opinion the most important thing to consider is who you would work with. This is starkly different from an undergrad or master’s experience where the name of the school is the most important thing. In a PhD program, your focus is on quality and direction of training. After I assembled a large list of schools in my interest area I identified professors at each school who I might work with. Find out a little bit about them. Are they still actively researching? Do their recent papers look interesting to you? The BYU website helps with this as it gives authors who have done research in each area at each school.

Question: What should I put in my letter of intent?

Answer: First, make sure you answer everything they ask, in the format they ask, etc. Next, make your letters sincere. If you don’t have a good reason why you’re applying to a certain school, why are you applying there? Let schools know why you are interested in that particular school. Finally, sell yourself. Why do you want to do a PhD? What have you done to prepare for it?

Question: What else can I do to better prepare myself?

Answer: More math and econ will definitely help. I did a minor in econ as part of my undergrad and I still feel like I’m barely staying afloat in graduate microeconomics. Next, get into the literature. It’s never too early to start reading. Pick up a copy of an accounting journal (e.g., The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research, etc) and start reading. Most universities have online copies.

If you have other questions you would like answered, feel free to post them here or e-mail me.

If you google “Bob Herz retires” you’ll have over 900,000 hits. Shortly after I arrived here, I was presented with a document that included the following: “be mindful that FAF is an independent, internationally recognized non-profit organization whose mission, activities, and operations have a profound impact beyond the confines of the organization.” I’ve studied and taught these impacts for 30 years. Now it seems that I can actually feel the reverberations. It’s a privilege to be in the midst of a 160 person staff and board with so much influence, intelligence, positive energy, and professionalism.

My first objective is to get a sense of the status of each of the FASB’s 13 projects actively in process. Watch these blog pages for announcements of round tables with project managers of several of these projects in the near future. The roundtables will update you on the status and issues and give you an opportunity to ask questions related to technical aspects of the projects and ideas for informative academic research.

I decided to start with the Financial Statement Presentation (FSP) project. In July 2010, both the IASB and FASB staffs posted “staff drafts” of an exposure draft at their individual websites. You can find the FASB’s 150-page document here. Interestingly, paragraphs BC28 through BC31 of the “basis for conclusions” section refers to a FASRI experimental study that “influenced the FASB’s decision to require entities with more than one reportable segment to present disaggregated by-function and by-nature information together in their segment note.” You can read more about this study on the FASRI WebPages.

So, academic research can make a difference. And more remains to be done. A major difference between the IASB and FASB exposure drafts pertains to the segment reporting information referred to in the paragraph above. In particular, the FASB requires by-nature reporting to vary across segments according to the manner in which management makes decisions regarding the activities of each segment. The IASB proposal requires segment by-nature reporting to conform to the disaggregation for the entity as a whole, precluding variation across segments. In addition to the research cited above, archival research such as work by Christine Botosan, Susan McMahon and Mary Stanford (2009 Working paper) discussed on the FASRI WebPages should have an impact on whether and how convergence of the IASB and FASB financial statement presentation standards eventually converge.

More generally, perhaps we can begin a discussion on these WebPages of major differences between IASB and FASB proposals and between current IFRS and U.S. GAAP. This discussion might fruitfully aim toward developing more academic research with the potential to influence the way in which FASB and IASB policy statements ultimately converge.

Disclaimer: The views expressed here are my own and do not represent positions of the Financial Accounting Standards Board. Positions of the FASB are arrived at only after extensive due process and deliberations.

How does the multiple principal/multiple reporting situation affect the effort put forth by the individual (or team)?

Since then I’ve been pointed to a rebuttal article I enjoyed reading (these fair value arguments can be so much fun).

To prove his point (and ours, unwittingly), he made this prodigious gaffe: “For example, accounting rules allowed the creation of off-balance-sheet special-purpose vehicles that resulted in increased leverage and risks in the financial system. Now that we are in the middle of a crisis, FASB is proposing to put those vehicles back on the books of banks, which will reduce their capital ratios and their ability to lend. These and other accounting rules are far too important to be left to accountants without proper government oversight.”

Here are his mistakes: It wasn’t rules that created excessive leverage, but the bankers’ folly when they voluntarily drove truckloads of money through the loophole; his wish to leave this loophole open would produce glaringly false representations; and all good accounting will do is reveal how far bankers reduced their real capital ratios with excessive leverage.

In other words, bankers found a loophole and exploited it. When the problem exploded on itself, bankers blamed the FASB for creating the problem but insisted that they leave the loophole open . . . shame on you for letting us make bad decisions, double shame for not letting us keep making them.

He might as well blame thermometers for hot weather or X-ray machines for broken bones. Here are the facts: Bankers took extreme risks without realizing it; when the markets finally assessed the risk, they pummeled the instruments’ values; and GAAP required these facts to be reported. Rather than cope with clear reality, Isaac tried to drag others into his absurd world of denial.

I don’t know if there is much research potential in either article, but there is sure potential for classroom fun! A room full of MBA’s could debate this for hours and learn some valuable lessons about fair value, special interests, and standard setting.

There is no end of disagreement on how to account for these “difficult transactions”, but perhaps we can all agree on this: no solution is likely to be very satisfactory because the very nature of the transactions in question impedes meaningful reporting in a summary financial statement. This possibility in turn leads me to wonder whether difficult transactions should be subject to heightened regulatory scrutiny. More to the point, perhaps we should ban publicly-traded companies from engaging in transactions that are difficult to account for.

Did I get your attention? Most accountants would blanche at this proposal because they view the accountant as a scorekeeper. Managers of the firm are supposed to run their business, and the accountant simply does the best possible job in aggregating the state and performance of the firm in financial statements. If the best possible job is not very good, well c’est la vie! The managers can find supplementary channels to convey their information, or the market may simply face more uncertainty about the firm than they otherwise would.

But decades of research on the agency problems between shareholders and the managers they employ have undermined the notion that the scorekeeper is a passive participant in the behavior of the firm. Accountants keep the score that determines how managers get paid, when debt covenants are violated, and (because regulators and tax authorities often piggyback on financial accounting standards) whether a bank is closed or a firm has a tax liability. Intelligent managers therefore choose their actions in light of how they will be scored.

But what if the accountant has no good way to keep score, because the structure of the transaction intentionally or unintentionally makes scorekeeping impossible? Difficult accounting makes the manager unaccountable to all parties who rely on summary financial statements, including Boards of Directors setting compensation, creditors monitoring their risk exposure, and regulators hoping to mitigate systemic risk or assess appropriate tax liabilities.

Banning difficult transactions is an extreme course of action, but various halfway measures are possible. Accounting standards could demand that difficult transactions are accounted for in ways managers are likely to find unpalatable (e.g., delaying gains, accelerating losses, demanding immediate recognition of liabilities and so on). Alternatively, managers who wish to engage in difficult transactions could be forced to justify those transactions to their Board of Directors.

I can imagine a number of arguments against such regulatory proposals. But it is worthwhile to note one argument that does not have much force. “You can’t restrict these transactions—they generate more economic value than the alternative.” My answer? “Good luck proving that!” By virtue of the fact that the transaction in question is difficult to account for, establishing its worth will be a challenge!