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Tom Selling
Professor Emeritus of Accounting, now working as an independent provider of consulting, training and litigation support services.
Interests: classical music, tennis, biking. fluent in spanish, conversant in german.
Recent Activity
THE ACCOUNTING ONION HAS MOVED! FOR THE LATEST POSTS, PLEASE VISIT After having just written a post on HP’s massive write-off of goodwill, I am reluctant to keep on banging the drum of how bad goodwill accounting can be. But, I can’t resist following up on Bloomberg columnist Jonathan Weil’s coverage of yet another recent acquisition by a big-time company that went sour practically out of the box. Mr. Weil’s main motivation was to express annoyance at companies that are wont to characterize asset impairment charges as being “non-cash” in nature -- as if it could mute the impact... Continue reading
Posted Feb 4, 2013 at The Accounting Onion
Companies overpay to acquire other companies all the time; but Hewlett Packard Co. just might be the new record holder for getting fleeced. I don't have the exact amount, but let's say that the goodwill HP initially recorded from the E.D.S. and the Autonomy acquisitions combined was on the order of $20 billion. Given the subsequent goodwill impairment charges for most of it, and the revelations that surrounded those charges, it should come as no surprise that investors have expressed dissatisfaction with everyone – management and the board, their outside financial advisors and auditors – associated with the decision making... Continue reading
Posted Jan 22, 2013 at The Accounting Onion
Over the years, the notion of accounting for "substance over form" has been trumpeted in IFRS circles as the apotheosis of principles-based accounting. From a practical standpoint, something like it is absolutely necessary for filling in the large gaps in specific guidance and the paucity of application examples. This is what the IASB's Conceptual Framework said about "substance over form" until pretty recently (more on the change later): "If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and... Continue reading
Posted Jan 17, 2013 at The Accounting Onion
I read numerous news sources this week echoing the SEC's announcement that it finally has a case it thinks it can win against auditors stemming from the 2008 financial crisis. One journalist, Jon Weil of Bloomberg, takes it a step further to ask, 'What took so long'? "It has been frustrating to look at the SEC's own highlights of the lawsuits it has filed in connection with the financial crisis -- and to see that none of them had been against an auditor. Now the SEC will have one case to cite, albeit against a couple of small fries. It... Continue reading
Posted Jan 13, 2013 at The Accounting Onion
I will have a lot to say about the FASB's recent publication of its proposed revisions to the accounting for loans over the next few months. In particular, I'm going to vivisect the horrendous "basis for conclusions" section of Proposed Accounting Standards Update 2012-260. To give you a preview of the issues I'll be covering, however, nothing in the proposed ASU's basis for conclusions even acknowledges that the FASB once considered measuring all loans and most other financial instruments at fair value. At least it proves my point that "due process" at the FASB is a myth. Bless the Journalists,... Continue reading
Posted Jan 1, 2013 at The Accounting Onion
If you are looking to buy a holiday present for an accountant, then you should consider Double Entry: How the Merchants of Venice Created Modern Finance. It's a pretty fast read – both for its moderate length (256 pages) and for Jane Gleeson-White's graceful and clear writing style. Double Entry also covers a lot of ground. It begins with what little is known about the origins of accounting in ancient Mesopotamia, moving quickly to the first known treatise on the eponymous bookkeeping* system published in 1494, and then to its proliferation throughout Europe (largely owing to the near simultaneous invention... Continue reading
Posted Dec 18, 2012 at The Accounting Onion
Hewlett Packard Co. claims they were 'misled' (to put it mildly) by accounting 'misstatements' (to put it mildly) into overpaying, on the order of $8 billion, to acquire Autonomy. But, if anybody outside of HP has precise knowledge of those questionable accounting practices, they're not letting on in their public disclosures (e.g. Form 8-K): "Following the completion of its annual review of its goodwill and purchased intangible assets for impairment, on November 20, 2012, HP announced that it recorded a non-cash charge for the impairment of goodwill and intangible assets within its Software segment of approximately $8.8 billion in the... Continue reading
Posted Dec 2, 2012 at The Accounting Onion
The author of this post is Annie Schedrin of the London-based organization Accounting for International Development (AfID). It seems like they do good work where it is much needed. I am always hopeful that educators will share my posts with their students – but this one especially so. In many ways good financial management is the foundation upon which effective international development is built. If a school in a Malawian slum hasn't budgeted properly for the academic year it might run out of funds half way through and have to cut short the education of its most impoverished children. It... Continue reading
Posted Nov 26, 2012 at The Accounting Onion
The Mary Schapiro era at the SEC is coming to an end without, despite herculean efforts, having moved the ball forward on IFRS convergence. The final denouement was the departure of Chief Accountant James Kroeker on the day before the release of his staff's dismal (in more than one sense) final report to wind-up the two-year study of IFRS adoption. It should go without saying that the timing of Mr. Kroeker's departure was carefully timed to minimize the humiliation. For its part, the IASB must surely understand that the SEC staff's backtracking has posed an existential threat – if not... Continue reading
Posted Nov 18, 2012 at The Accounting Onion
The purpose of this post is to review a recently published monograph authored by former FASB Chair Dennis Beresford. To summarize, it supports the status quo for money market funds, and I want to explain why I think the reasoning and analysis leading to that conclusion is flawed, and hence potentially misleading. With no disrespect intended, I'll be referring to my subject as Denny. And, without wishing to lay it on too thick, I want to state at the outset that I consider him to be a friend whom I greatly respect for both his intellect and integrity. Speaking of... Continue reading
Posted Nov 8, 2012 at The Accounting Onion
We have been covering loan impairment for the past few weeks, and the FASB's proposals leave me with the feeling that we will be discussing it for a long time to come. Once the FASB shoves its post-WWI-Germany-derived "Current Expected Credit Loss Model" through the meat grinder that it refers to as "due process," the banking oligarchs will be mollified, and financial results will hum right along again … for maybe a decade. After the next tsunami of bank insolvencies will hit without warning; my best hope is that accounting standards setters (it might not be the FASB that far... Continue reading
Posted Oct 24, 2012 at The Accounting Onion
In my previous post, I committed to providing a statement of my own accounting principles with newer readers of this blog in mind. I am also adding a few observations about what the process of standard setting has come to be without guiding principles – i.e., standard setting at the FASB and IASB. A Statement of Basic Accounting Principles (I apologize for the dense formatting, but I couldn't figure out how to (or couldn't be bother) add spaces in lists with html commands.) The purpose of financial statements issued by public companies (hereinafter, reporting entity) should be consistent with the... Continue reading
Posted Oct 18, 2012 at The Accounting Onion
Tom I'm [Osman Sattar,] a relatively new reader to your blog and I understand that you favour market values in accounting. In this article, you say that: (1) "[B]oth models [the current incurred loss model and the proposed CECL model] are terrible because they both require estimates of future cash flows over a loan term of 5, 10 or even 30 years out". (2) "How can the value of a loan at its inception be anything different than the net proceeds to the borrower?" But, in arriving at a market value for loans (which are not generally traded in a... Continue reading
Posted Oct 6, 2012 at The Accounting Onion
In response to my previous post, Edith Orenstein (author of the FEI blog and fellow Ohio State alum) asked me whether I preferred the status quo "incurred," or the proposed "expected" loan loss model (CECL). Also in that post, I stated that I would have more to say about how the FASB defined "expected" in the CECL model. As it turns out Edith's question makes for a good lead in, so I'll take on both of these questions here. The Expected Loss Model is a Move in the Wrong Direction Actually, Edith, both models are terrible because they both require... Continue reading
Posted Sep 26, 2012 at The Accounting Onion
At its August 22nd meeting, the FASB came to some significant tentative conclusions regarding the recognition and measurement of loans: "The Board decided that the model [of loan loss measurement] should utilize a measurement objective of "expected credit losses" and there should not be an initial recognition threshold that must be met before an entity recognizes a credit impairment. Expected credit losses are defined as the estimate of contractual cash flows not expected to be collected…" Withholding judgment for a teensy moment, let's begin with a simple example. Let's call it Exhibit A in the case against the FASB: On... Continue reading
Posted Sep 14, 2012 at The Accounting Onion
No one will ever say that U.S. GAAP revenue recognition standards are consistently principles-based, but few would say the system needs to be completely overhauled. Other than to achieve convergence of U.S. GAAP and IFRS, what will a new revenue recognition standard accomplish to improve financial reporting? And at what cost? Before the boards' issue their third exposure draft, they may want to answer those questions. The sole reason for a joint revenue recognition project was that IFRS revenue recognition standards had huge holes, yet the EU would never have tolerated the details of U.S. GAAP and the attendant loss... Continue reading
Posted Sep 3, 2012 at The Accounting Onion
[This is my fourth consecutive post on loan accounting. Here are the first, second and third.] I love finding accounting lessons buried in stories that on their surface seem to have little to do with accounting. See, for example, my post on the appalling politics of joint replacement databases, "No Escaping the Politics of Information." The example I'm going to describe here is a little bit closer to home than body parts: an August 11th, WSJ article headlined, "For Chesapeake, a Question on How it Counts Reserves." Some background: in January 2004, Royal Dutch Shell announced that it would have... Continue reading
Posted Aug 21, 2012 at The Accounting Onion
This is my third consecutive post on the perils of loan loss reserves (first here; second here); and a fourth is going to follow very soon. My fourthcoming (I couldn't resist the pun J) post will be based on recent coverage of Chesapeake Energy Corp's natural gas reserves reporting; I believe there are lessons to be learned about how to do a better job of measuring loans from the experiences of energy exploration companies with estimates of their reserves. But, let's not get ahead of ourselves. The motivation for this current post comes from an anonymous* reader of my previous... Continue reading
Posted Aug 15, 2012 at The Accounting Onion
Less than a day after posting my critique of the FASB and IASB loan loss allowance proposal, I happily learned that the FASB may be backtracking. According to a PwC In Brief: "After considering the results of outreach efforts and constituent feedback, the board unanimously agreed with concerns that aspects of the "three bucket" impairment model are complex and difficult to understand. As a result, the FASB will not move forward with an exposure draft on the "three bucket" impairment model … The FASB's decision to explore a revised approach could result in an impairment model that differs from the... Continue reading
Posted Aug 8, 2012 at The Accounting Onion
Once one chooses to ignore market values and to account for loans on the basis of "amortized cost" – as the IASB has "tentatively" concluded and the FASB may now be starting to question once again – the inevitable and ineffable question then becomes how and when to recognize losses on bad loans. Let's examine the alternatives. The current rules constitute what is known as the 'incurred loss model.' Its only defender in the U.S. is the American Bankers Association, and that should be sufficient to put it to bed. But, if you would like to have the gory details,... Continue reading
Posted Aug 2, 2012 at The Accounting Onion
This is my second post reviewing the SEC Staff's Report on its IFRS Work Plan. My first post is here. To recap only slightly, the best news to come out of the Staff Report is a forthright acknowledgement that outright IFRS adoption is clearly not feasible. Now for the bad news: the Staff is still desperately seeking any excuse possible for remaining in bed with the IASB. I know this because no matter how damning the arguments against any form of endorsement of IASB standards, the staff's mantra is unaltered: that investors, issuers and regulators generally support "the concept of... Continue reading
Posted Jul 26, 2012 at The Accounting Onion
I am proud to announce that I did my civic duty yesterday. I turned off all of my electronic devices for the entire day and actually read the entire final SEC Staff report on its IFRS Work Plan. After finishing, I skipped dinner and headed straight for the wet bar. I mean this in all seriousness: it took me just a few minutes to figure out that the SEC doesn't want anyone to read this report. I know this because, despite years of the Staff's researching, round-tabling, surveying, conferencing, reading, analyzing, monitoring and speechifying since the 2008 Roadmap release, its... Continue reading
Posted Jul 19, 2012 at The Accounting Onion
This post could turn out to be a little dry. So, to whet your curiosity, I'll start with the payoff: First, contrary to the conclusions of the FASB and IASB, level periodic lease expense does not reflect the unerlying economics of leasing. Second, even though current capital lease accounting rules would 'frontload' lease expense, the amount of the frontloading is less than the amount that best reflects the underlying economics of leasing. I provided a partial demonstration of the first point in my first post on this topic, in which the asset being leased was non-depreciating. In this post, I'll... Continue reading
Posted Jul 5, 2012 at The Accounting Onion
As I was sitting down today to write the second and final installment on periodic lease expense, I received this email from a friend [bold italics supplied by yours truly]: I was at the IMA annual conference …. Leslie [Seidman, FASB chair] and Bob Herz [former chair] both spoke, not at the same time, however. Each had essentially the same message. Total convergence is off the table. At most SEC will encourage FASB to 'endorse' IASB proposals, if they make sense in the context of U. S. financial reporting. It looks like the great optimism of a couple of years... Continue reading
Posted Jul 4, 2012 at The Accounting Onion
The best thing to come out of the lease accounting project is that, except in very limited circumstances, 'operating lease' accounting will be jettisoned. At the inception of a lease contract, lessees will have to recognize a liability to make future lease payments and a corresponding asset for a right of use (ROU) of the leased asset during the lease term. I do wish I had more positives to report, but such is not the case. For the past ten years, the boards have been beset at every turn by financial statement issuers; mostly to grind down recognition of lease... Continue reading
Posted Jun 28, 2012 at The Accounting Onion