Archive for maio \26\+00:00 2008


maio 26, 2008

The Spirit of Accounting: Comparability, schmomparability

Paul B.W. Miller and Paul R. Bahnson

19 May 2008 –Accounting Today – 15 – Vol. 22, No. 9

Norwalk, Conn. — We’re not sure if we’re having another epiphany, or merely looking at the world a little bit differently, but we have some thoughts on an area of accounting practice and theory that we’d like to share with you.

Specifically, we’re looking deeper at the worthiness of comparability as a goal for financial reporting information. As we described in a recent column questioning the wisdom of merging all standard-setting authority in one body, it has been traditionally assumed that useful information helps users compare competing investment opportunities. Think of this notion of comparability as Company A and Company B balanced on a seesaw, suggesting that the investor’s decision is between buying one company’s stock or the other’s.

Although this idea has significantly shaped accounting thought for decades, we think it’s time to supplant it with something else.


The Financial Accounting Standards Board’s Conceptual Framework includes comparability as a qualitative characteristic of useful information, and defines it as “the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena.”

SFAC 2 comments on comparability with these words: “Information about an enterprise gains greatly in usefulness if it can be compared with similar information about other enterprises and with similar information about the same enterprise for some other period or some other point in time” (Par. 111). The board attributes great importance to comparability when it also says: “The difficulty in making financial comparisons among enterprises be- cause of the use of different accounting methods has been accepted for many years as the principal reason for the development of accounting standards” (Par. 112).

This connection to standard-setting is, we think, important, because history shows that the quest for comparability has been twisted to become satisfaction with uniformity, which is something quite different.

Uniformity is the condition in which everyone applies the same rules to the same transactions and events. Uniformity brings about comparability if and only if the uniformly applied rule actually produces relevant and reliable information.

For example, most everyone uses straight-line depreciation for their tangible assets. For another, most everyone accounts for non-controlling investments in subsidiaries using the equity method. For still another, everyone now accounts for stock-option expense by spreading the options’ grant-date value over the vesting period. And yet another example is the tortured set of procedures mandated by FASB for defined-benefit pension and OPEB plans.

The fact is, however, that these accounting methods do not provide relevant or reliable information that users need for predicting future cash flows from the company. As a result, usefulness and comparability do not follow from uniformly applying these principles.

So, what explains GAAP’s long-standing emphasis on uniformity? We think it appeals to managers and auditors. It’s much easier to prepare and audit information the same way as everyone else than to implement unique reporting practices that reveal more about future cash flow prospects. Because managers and auditors have long had great political influence over the standard-setting process, it doesn’t surprise us that the rules reflect their interests, and not those of users.


Instead of presuming that users are asking, “Should we invest in Company A or Company B?” financial reporting needs to catch up to the idea that investors actually are (or should be) asking this question: “Should we invest in Company A or not?” As we see it, they’re going through the list of possible investments one company at a time, not in pairs. If so, they’re not looking at two balance sheets or income statements and converting their reported measures to the same basis, such as getting them both on FIFO, so they can be compared against each other.

Instead of balancing Company A and Company B on the seesaw, investors are really comparing their estimate of a single security’s intrinsic value with its market value.

Intrinsic value is an economic concept that represents the security’s true value. It is elusive and hard to assess because it’s always changing as the enterprise and its environment change. Economists and finance theorists often say that intrinsic value is the present value of the future cash flows discounted at the rate that most completely reflects underlying risk.

What investors are searching for is an imbalance between a security’s current intrinsic and market values. It doesn’t matter which way the imbalance tilts — a profit can be made because the capital markets will sooner or later close the gap between the two as the consensus market value converges on the intrinsic value. Depending on the direction of this momentary gap, investors decide whether to take short or long positions.

Because securities’ market values can be observed, the investor’s task is to assess intrinsic value, and that process is generally thought to be usefully accomplished when investors (and their analysts) perform a fundamental (as opposed to technical) financial analysis. This activity is the basic rationale for publishing financial reporting information.

Here is our bottom line: Modern financial analysis demands financial reports that support investors’ search for intrinsic values.


What this thought reveals to us is that traditional financial reporting practice has probably been oriented on the wrong compass. Rather than trying to force everyone to adopt the same practices, whatever those practices turn out to be, this better role for financial reporting demands that policy makers provide managers with latitude to produce statements that transparently describe their economic circumstances to best support users’ assessments of their securities’ intrinsic values.

Before anyone goes ballistic on us, we are not advocating anarchy in which anything goes. We have more aversion than most to false information in financial reports. Liars and cheats should be both shunned and prosecuted.

What we want to do is liberate honest managers from the shackles that literally force them to lie in their financial statements by, for example, reporting depreciation expense when their assets are appreciating, or R&D expense when their labs are discovering all sorts of good things.


In February 2007, FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, which allows management the freedom to account for some or all of its financial assets and liabilities at their fair values. But this fair value method wasn’t weakened by traditional compromises. The holding gains and losses are to flow straight to the income statement, whether realized or not. This is serious accounting, and we think it ought to be applied to all assets and liabilities.

Why do we favor it? Because it provides more useful information for comparing intrinsic and market values of a company’s stock. It does so by reducing users’ reliance on their own relatively uninformed estimated fair values of a company’s assets and liabilities. It also reduces their need to roll unrealized gains and losses into reported income out of the equity section where they are awkwardly parked while waiting for irrelevant cash transactions. That cautious practice makes traditional GAAP income statements much less than fully useful.

Furthermore, value-based accounting also contributes to traditional comparability. That happens because it actually tells the truth, the whole truth, and nothing but the truth. It’s unadulterated useful information.


We’re hoping some chief executives and chief financial officers get the point that here is a great way to improve the quality of their financial reports by doing what other, less-enlightened managers won’t do — namely, tell the truth.

Further, they can innovate without violating GAAP because of SFAS 159, which is exactly the kind of standard that FASB needs to issue over and over again. By making innovation voluntary, the board encourages progress without compromise and without compulsion. We hope this experiment is a success and that it’s followed by many more.

Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors’ views are not necessarily those of their institutions. Reach them at paulandpaul<at> (c) 2008 Accounting Today and SourceMedia, Inc. All Rights Reserved.

Brasil, país do futuro

maio 12, 2008

The country of the future finally arrives

With an export boom and oil finds, Brazil, the sleeping giant of South America is awakening – Tom Phillips –The Guardian, – Saturday May 10 2008

This article appeared in the Guardian on Saturday May 10 2008 on p41 of the Financial section. It was last updated at 00:12 on May 10 2008.
A young girl plays in front of a Brazilian flag in Rio de Janeiro

A young girl plays in front of a Brazilian flag in Rio de Janeiro. Photograph: Douglas Engle/AP

Sitting in his air-conditioned office in Guarantã do Norte, a remote agricultural town on the edge of the Amazon rainforest, local mayor José Humberto Macêdo looked a contented man.

Thanks largely to the global boom in commodities, this soya-growing region has been transformed into the vanguard of Brazil’s march on to the world stage. “This is going to be the new Brazil,” Macêdo beamed, explaining how ballooning commodity prices had made his region, Mato Grosso state, into a powerhouse of the Brazilian economy.

Across the country, similar optimism can now be heard among businessmen and politicians, all convinced that South America’s sleeping giant is finally waking up. Brazil has long been known as the país do futuro (country of the future). But a series of economic and political crises and 21 years of military rule somehow meant the future never quite arrived.

Now things seem to be changing. Brazil’s currency recently hit a nine-year-high against the dollar, inflation is under control and millions of Brazilians are being propelled towards a new middle class. Last week, meanwhile, Brazil was awarded “investment grade” status by the financial rating agency Standard & Poor’s, sending the country’s stocks soaring to an all-time high.

Following the announcement, Brazil’s president, Luiz Inácio Lula da Silva, said: “If we translate this into a language that the Brazilian people understand, it means that Brazil was declared a serious country, that has serious policies, that takes care of its finances with seriousness and because of this we deserve international confidence.”

From oranges and iron ore to biofuels, Brazilian exports are booming, creating a new generation of tycoons. Brazil’s millionaire club grew from 130,000 in 2006 to 190,000 last year – one of the fastest rates in the world, according to a study by the Boston Consulting Group.

“We are the biggest exporters of meat, coffee, sugar, fruit juices and the second biggest of grains,” Brazil’s agriculture minister, Reinhold Stephanes, boasted at a conference in Brasília last month.

Meanwhile, Brazil’s stockmarket, known as the Bovespa, was one of the best performing in the world last year.

Despite the world economic crisis, the Brazilian government recently raised the projected growth rate this year to 5% – lower than the other so-called BRIC nations of Russia, India and China but impressive for a developing country.

“The future has already arrived,” said David Fleischer, a political scientist at the University of Brasília. “Foreign investments coming into Brazil are very strong; inflation is more or less under control; Brazil now has more international reserves than foreign debt, and the commodities are booming.”

Not to mention the oil. A series of huge offshore discoveries by the state-owned energy company Petrobras has led many to dub the president “Sheikh Lula” and claim that Brazil may soon become a major oil producer.

In April, when Haroldo Lima, head of Brazil’s national petroleum agency, made headlines after claiming that another huge oilfield had been found off Rio’s coast, the news appeared to confirm what many Brazilians have long claimed: God is Brazilian.

Lia Valls, an economist at Rio’s Getulio Vargas Foundation, said: “We are now living a singular economic situation we have never experienced before. The international situation is very favourable to Brazil.”

In February, when the government announced that it had paid off its foreign debt, Lula boasted that Brazil had “taken an extremely important step towards transforming itself into a country taken seriously in the financial world”.

“We will transform this country, definitively, into a great economy and a great nation,” the president added.

Keen to transform itself from developing nation to world power, Brazil is also presiding over a 1,200-strong UN stabilisation force in conflict-ridden Haiti. Paulo Cordeiro, the country’s former ambassador in Port-au-Prince, said the presence of Brazilian troops was a “demonstration of Brazil … wanting more responsibility.

“I think Brazil has already reached a certain level of development in which the international community starts calling on it to act more,” he said.

“Brazil’s international leadership has grown a great deal over the last six or seven years,” said the University of Brasília’s Fleischer, citing Brazil’s involvement in the UN mission and its leadership of the emerging nations in the Doha talks. “The tendency is for this influence to keep growing.”

For analysts, much of the euphoria sweeping Brazil is down to the ability to control the inflation that plagued the country in the late 1980s and early 1990s. In 1993 inflation reached 2,490%. Today the figure stands at about 4.7%.

“I think now it is difficult to imagine a return to this,” said Valls.

Analysts are less certain, however, about the effects that a drop in commodity prices might have. Many believe this could bring a dramatic end to Brazil’s boom. Others question whether the infrastructure and education systems are strong enough to maintain the economic momentum.

Valls warned: “All this does not mean you are guaranteed economic growth. Brazil still has serious structural problems; there needs to be lots of investment in infrastructure. There are some serious pitfalls that compromise this growth: education, having a qualified workforce, health.”