Kudos to David Reilly, the Wall Street Journal's accounting reporter par excellence for noting in today's "Heard on the Street" column that GAAP's increasing emphasis on fair value was resulting in a return to that classic pro forma standby, EBBS, or "Earnings Before Bad Stuff."
As we reported yesterday, MBIA roundly blamed its first-quarter earnings results on fair value, and Reilly cites this gem of a quote from MBIA chief financial officer Edward Chaplin: "[Fair value is] disorting the book value of the company as opposed to providing additional useful information to investors."
Fair value is the hot topic these days, and you can be sure you'll be seeing more from us on this. But the fair value controversy is just the latest contretemps stemming from another issue that's rarely addressed directly, and that is that banks and financial services firms simply don't like accounting rules.
Accounting rules are largely written for companies that make money by selling services or widgets. But banks and financial services firms make money by selling money itself — not to mention advising clients on creative ways to bend (or "leverage") accounting rules to their advantage.
Frankly, I think accounting standards setters worry too much about accommodating banks. I've sat in on FASB meetings in the past that have foundered on the topic of what a particular rule would mean for banks or various funky financial instruments — a classic case of the tail wagging the dog. I've also noted before that banking regulators often give banks a pass on GAAP compliance.
Accounting would probably be far simpler for most companies if banks were just forced to follow more generic rules. These days, there's plenty of evidence that investors would be better off as well.
A partial solution to this may come from the SEC's Advisory Committee on Improvements to Financial Reporting, which has proposed eliminating industry-specific guidance. Of course, that's more likely to simplify items like revenue recognition for software companies than send a message to financial services firms to suck it up. But it's a start.
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