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Readers write to say that "convergence" is a misnomer; consumer-driven health plans are a cost shift, not a cost control; the Web 2.0 world can expect to be downsized; small companies don't understand cash-flow statements; and more.
CFO Staff, CFO Magazine
May 1, 2008
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Let's be clear: the term convergence continues to be misleading ("Goodbye GAAP," April). It implies that it will ultimately lead to a hybrid of U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). This is not necessarily true. The objective was never to meet somewhere in the middle, but rather to develop a global standard based on the best available thinking in the field, whether it resembled U.S. GAAP or not. So for those companies hoping that IFRS will eventually look like U.S. GAAP, it may or may not.
The Financial Accounting Standards Board and the International Accounting Standards Board are committed to creating standards that make the most sense and clearly depict the economic circumstances of the firm. It is my hope that we start calling a spade a spade — that is, IFRS are not converging with U.S. GAAP, but rather are being developed in deep consultation with accounting standards setters around the globe, including FASB. Perhaps the term convergence sounds good only to those who are afraid to wander too far from home.
IFRS were not written with consideration of abuse and fraud in mind, so they will make both [of those risks] easier and more prevalent. Even GAAP is weak on this point, as no member of FASB has had any training in fraud prevention or detection. However, GAAP is far better than the scanty standards of IFRS. With the so-called convergence, the world should be prepared for much larger Enrons, WorldComs, Halliburtons, and the like. Shareholders will need to brace themselves for the forthcoming torrent of frauds — but this time, with the loosey-goosey IFRS, they may have far less recourse.
In addition to A/R lending or factoring as mentioned in "Living on Borrowed Time" (Topline, March), we are seeing an increase in machinery and equipment, inventory, and intellectual-property loans.
As valuation professionals, we are increasingly being called upon to assist lenders in determining the value of these assets under various potential situations, such as orderly liquidation value or forced orderly liquidation value. The institution can then determine what amount it is willing to lend on the asset. Asset-based lending is more popular right now because many lenders are looking for more collateral.
Straight Talk on Health Plans
Let's get this straight: consumer-driven health plans are a cost shift, not a cost control ("A Fatal Flaw for CDHPs?" Topline, March). Value-based medicine has shown the savings opportunities when you lower or reduce financial barriers to coverage. CDHPs will cost you more because their high deductibles will delay or defer care needed for chronic conditions.
Web 2.0: Hype Versus Promise
Much of the talk about Web 2.0 is market hype ("Web 2.0, Confusion 1.5," March), and people can quickly lose interest in novel ideas. If users find a new technology truly useful, that new technology will stay. So I think that blogs about new laws, new technologies, and human concerns will remain. But I will certainly never blog about some incidental sundry product I've purchased. Only if a product were expensive or defective, or I felt unfairly treated, might I want to blog about it. Who has the time and interest to blog about any triviality? Probably only bored teenagers with time on their hands.
The Internet media, unlike TV and radio before it, is not uni-directional. Its fundamental characteristic is interactivity. Only when companies understand this difference will their businesses find the appropriate approach to optimally using the Internet for the well-being of their customers.
Cross Media Solutions GmbH
Clients Take a Hit
The introduction to your interview with Joe Martinetto of The Charles Schwab Corp. (On the Record, March) stated that a "conservative risk profile saved the company exposure to subprime-mortgage risk in its corporate portfolio." While it may be true that the company had little exposure, that is not entirely true for its clients. Customers who held positions in the company's YieldPlus Select short-term bond fund have fared very poorly in the past five months. The net asset value has declined approximately 15 percent from exposure to assets that may not be subprime paper but probably have indirect exposure. While the company may have avoided a hit, some of its clients have not.
Edward F. Reifsnyder
The Reifsnyder Group
Understanding Cash Flow — Or Not
The new approach to financial statements that FASB plans to propose ("A New Vision for Accounting," February) may work for large companies presenting financials to big banks and Wall Street analysts. My experience with smaller companies, however, is that their owners and top management have a hard time grasping the three categories of the cash-flow statement. To apply that concept to the income statement and the balance sheet would really blow their minds. Maybe FASB's aim is to make financial statements so complicated that only a CPA can understand them and thus create job security for some.
I am the founder and chair of the Savannah CFO/Controller's Council, which includes about 150 members, mostly from companies about $75 million in revenue or smaller. A surprising number have never seen, or prepared, a cash-flow statement. Many companies in this size range make business decisions from the P&L alone without recognizing the cash implications of the decision.
My problem with the FASB proposal is that it just adds more complication. It makes perfect sense for us bean counters, but for senior managers who don't have a strong accounting background, the FASB concept will have their eyes going around like a pea in a whistle.
H. Roy Austin
Chief Financial Officer
D.J. Powers Co.
"Goodbye GAAP" (April) reported that it would cost Procter& Gamble more than $1 million to convert from generally accepted accounting principles to international financial reporting standards. In fact, such a conversion would likely cost tens of millions of dollars, according to Mick Homan, comptroller of corporate accounting at P&G.