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Archive for March, 2009

William Albrecht (1919-2009)

William Albrecht

William Albrecht, USPS

With today’s post I honor my father.

William “Bill” Albrecht, 89, of Iowa City died Tuesday, March 17, 2009 at the Iowa City Health Care and Rehabilitation Center.  His death followed from a ten year illness.

Bill was born October 28, 1919, in Iowa City the son of James and Mamie (Sedivec) Albrecht. Following graduation from Iowa City City High School in 1939 he enlisted in the United States Marines. On December 30, 1944, he was united in marriage to L. Grace Peek in Iowa City. For many years Bill was employed at the Bob & Henry’s Service Station located on the corner of Gilbert and Burlington Streets in Iowa City. Later he became a postal service employee at the Iowa City Post Office, retiring after over twenty years of service.

He was a member of the First United Methodist Church in Iowa City.  He enjoyed his many years of league bowling at Plamor Lanes, dancing, playing cards and cheering on those Iowa Hawkeye’s!

Bill’s family includes his three children, David Albrecht and wife, Kay of Bowling Green, Ohio and their children, Tom and Chris, Steve Albrecht and wife, Ofie of San Francisco, California and their children, Jeremy and Andrea, and Janet Albrecht of Greensboro, North Carolina.

He was preceded in death by his parents, wife, Grace (12/13/2004); two brothers, George and Wesley Albrecht; and two sisters, Elsie Albrecht Bishop and Dorothy Albrecht Hotka.

So ends a long love story between my parents, Bill and Grace.  He spotted her riding  on an Iowa City bus, and rode that bus for days until she again took a bus ride to work.  He introduced himself, and the rest is history.

Bill and Grace shortly before they married.

Bill and Grace shortly before they married.

Neither of my parents went to college, but through their hard work they made possible my college education.  I am very grateful to have been their son.

Debit and credit – - David Albrecht

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Bill would create body to oversee accounting standards
CPA Letter Daily | 03/09/2009

faobLawmakers have introduced a bill that would create the Federal Accounting Oversight Board, a new entity.  The FAOB would not replace the Financial Accounting Standards Board; it would approve standards and decide how they are applied.

I’ve been reading about this all weekend.   I don’t get the point of needing a new board, presumably within the SEC umbrella (I could be wrong about its position in the SEC).  Isn’t the chief accountant already charged with having the final say on SFAS?   I’m guessing that this is a legislative attempt to gain political influence over accounting standards, probably over fair value accounting, in particular.

I wonder, though, how it would relate to IFRS in general.  I think increased government regulation (FAOB represents an attempt to increase regulation) is a threat to IFRS adoption.

The world experienced an era of free flow of capital across national boarders, a period that lasted nearly 40 years from 1890 to 1930. Recession/depression across the world ushered in an era of retreat.  Tight regulation of financial markets became the word of the day as politicians sought to justify their office and protect citizens.  This era lasted until 1961. Eventually world-wide recovery brought pressure to free capital flows again and loosen regulation.  The rise of IFRS can, in part, be explained because it is a necessary and essential tool to this global financial market system.   In recent decades, the SEC has evolved to become an agency providing only loose regulation.

Now, though, deepening financial difficulties are producing early calls for the U.S. to increase regulation of its own financial markets.  At least, this is how I see it. Mary Schapiro, the new SEC chair, was appointed to implement a system of more effective regulation. This proposal for a FAOSB is consistent with a political push for new regulation.  So is Schapiro’s intents to prolong use of GAAP, strengthen the PCAOB and more fully implement SOX.

I think it will be interesting to view developments over the next few weeks and months, to see which way the U.S. will go. And, whether anyone else in the world will follow.  The Obama administration’s stated position, driven by globalizer Paul Volcker, is to embrace global financial markets and the free flow of capital. Increased financial regulation is antithetical to this position.

Who knows, perhaps nationalization of the U.S. banking industry is one way to accomplish the need for increased specific regulation while at the same time enabling conditions to support globalization for the rest of the portfolio of U.S. corporate interest.

Bob Jensen has called for me to drop my crusade against IFRS, at least on AECM.  Don’t know if this is reasonable or not.  However, as an academic, it also seems reasonable to craft theories about the influences that shape the financial accounting world we live in.  I’ll be doing this over the coming days.

Debit and credit – - David Albrecht

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Today’s essay is simply part of an unfinished work.  If one can discover what one thinks by writing about it (see Thinking on Paper, by V.A. Howard), then this is an early attempt by me to figure out what is going on in the world of IFRS.  Comments are welcomed, as I am attempting to learn by writing this essay.  I probably don’t have it all figured out.

money12

Capital is excess money available for investment.

Current economic orthodoxy is based on the internationalization of financial markets and free flow of capital across any and all national borders.

It has grown from two distinct origins–German and French.  The German belief in the free flow of capital stems from its unpleasant experience following World War I.  International control and regulation of the German economy rankled those who believe Germany could have been better off had its capital been able to flee to other countries, thereby gaining it a degree of protection.  French support for the free flow of capital stems from a realization that government control of French capital only controlled middle and working class citizen’s of capital, and not that of the richer upper class.  Therefore, to afford equal treatment to workers, it is necessary to endorse the free flow of capital.

European adherence to the free flow of capital is self-serving.  Proponents expect that Europe will experience a net inflow of capital if worldwide, all barriers to capital are removed.  Where will the capital flow from?   It will come mostly from the U.S. (that is where most of the capital resides), but also from the developing world.

Building a global financial system premised on the free flow of capital requires that no nation regulate its own capital market, or at least regulate its own capital market more stringently than does any other country.  Since detailed accounting standards and active enforcement of corporate compliance are hallmarks of regulation (the additional regulation/inspection of auditors is a hallmark of U.S. regulation), then more generalized and flexible accounting standards and indictment of only the most egregious corporate frauds are absolutely essential conditions for GFS and the free flow of capital.   The economic theory of free flow of capital absolutely requires accounting standards such as today’s IFRS.  Because the U.S. is such a large actor in the world economy, the economic theory of free flow of capital absolutely requires the U.S to discard GAAP and adopt IFRS.

This theory has several corollaries.   There is a sense that capital is indestructible.  If conditions suddenly turn unfavorable for capital invested in a particular company in a specific country, then the capital can be preserved by allowing it to flee immediately to another company in what very well may be another country.  There is a sense that there will always be sufficient greener pastures to absorb all capital flowing away from negative investments.  There is also a sense that there is enough information publicly available that investors can always accurately value alternative investments and make the most rational investment decisions.  [Accountants can interpret this to mean that accounting rules do not matter, and that executive attempts to manipulate valuations will always be ineffective.]

The U.S. has a different history (socially, economically, politically) and hence has some citizens that see the world a different way.  The Great Depression of the 1930s scarred the national psyche, and has produced a mindset that financial markets should always be regulated because that preserves investor capital.

Moreover, capital is viewed as a national resource.  U.S. citizens demand government policies conducive to strategic creation, maintenance and management of that capital.  Capital can be viewed the same way as other national resources such as precious minerals or the productive capacity for military defense.  Said another way, strategic capital management is an essential aspect of the national security.

When viewed from this piont of view, it is easy to see that U.S. GAAP and SEC enforcement and the Sarbanes-Oxley emphases on internal controls and auditor inspections are essential to the national security of the United States.

There are corollaries to this view.  First, capital is destructible, it can dissipate.  Moreover, greener pastures (if they exist) may be insufficient to absorb any capital flowing away from adverse circumstances.  Second, markets are not efficient and intrisic valuation of companies is not possible.  Therefore, accounting information does matter and the specifics of accounting rules do matter.

Having gone through this line of thought, my conclusion is that if you believe that the capital of a country’s citizens can be viewed as a national resource, then you should support the U.S. retention of its GAAP.  If you believe in the free flow of capital, then you should support IFRS for the U.S.

The existence of the free trade of goods and services are not directly related to the free flow of capital.

Debit and credit – - David Albrecht

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What started off as an economic theory is having profound consequences in accounting and finance.

A while back, some French economists started writing about the need to create a global financial system. The hallmarks of this global financial system are (1) there should be a free flow of capital around the world to those who can best use it (2) a free flow of capital should be able to guarantee average investor returns due to it being the ultimate portfolio diversification (3) individual government protection of its country’s capital formation and accumulation, and its national capital market system are antithetic to the creation of a world system.

Government officials in Europe quickly bought into the theory, and implementation proceeded from the 1960s.  In the U.S., buy-in started in the 1980s and 1990s, has been by both Democrats and Republicans..

Although there are a few critics who view this Global Financial System (GFS) as inherently destabilizing for citizens in any particular country and economic colonialism in its most racially crass form, GFS criticism has been largely non-existent.  GFS is the orthodox view today.

As GFS  is being implemented in ways that affect those in accounting and finance. For example, GFS needs a single set of global accounting standards.  These accounting standards should be flexible (1) because companies need to be able to imaginatively and persuasively make a case for attracting capital, (2) because investors should be able to discern a company’s intrinsic value, the details of accounting don’t really matter, and (3) accounting standards that are too stringent are viewed as impediments to globalization.

It also turns out that the Sarbanes-Oxley Act of 2002 is a fly in the ointment.  From a GFS perspective, a U.S. focus on requiring internal controls is a waste of time and effort because it hinders the flow of capital from and to places that require no internal controls. Also, the U.S. reliance on the PCAOB inspection of audit firms (both domestic and foreign) is a barrier to free capital flow.

I read a lot, and lately have increased my reading from Continental business, economic and finance sources. It is interesting. An Accountancy Age editorial on Thursday, Feb. 19 railed against U.S. resistance to IFRS, and argued that no global recovery to the current economic crisis is possible unless the U.S. immediately switches to IFRS. (That’s right, GAAP is an insurmountable barrier to the world’s economic health. Moreover, it is the only barrier.)  Is it just me that thinks this idea is absurd?  Of course, if you are a proponent of GFS and the free flow of capital, the editorial makes perfect sense.

Later that day, Charley McCreevey railed against the PCAOB, the Senate Banking Committee, the SEC under Mary Schapiro, and Charlie Niemeier because all insist on U.S. inspection of foreign audit firms.  Like anyone who has bought into GFS, McCreevey views the U.S. imposing its view of auditor enforcement on the world as a threat to the free and unfettered international flow of capital. It is unneeded anyway, because investors can instrinsicly value companies.

Rarely, a GFS proponent will admit that the cost of capital might increase under GFS.  This doesn’t matter, as the benefits from getting the world’s capital to the best companies will eventually increase the world’s wealth to a far higher level than possible under the current system.

My reaction to this, at the current time, is that we seem to be chasing a Eutopian dream much like that of the Star Trek era. No one ever needs to work again as replicators can produce all our basic needs. The problem is that in 2009 we have no replicators.

Debit and credit – - David Albrecht

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FISH Inventory Method

The inanity of it all.

A hotly debated topic in accounting is the valuation of inventory for the current asset section of the balance sheet, and for the cost of goods sold expense line of the income statement.  The methods that surface during any discussion are:

  1. Specific identification–permanently remember how much was paid for an item.  When that item is sold, move the asset value from the inventory account to the cost of goods sold account.  This method is theoretically superior in a context of historical cost accounting and matching cost to revenue.  This method is impractical because there are far too many items being purchased and sold to bother with all the identification and record keeping.  Hence, there are methods for approximating values.
  2. FIFO–first-in/first-out.  Since the physical flow of inventory items is usually for the oldest items to be sold before newer items, the oldest inventory costs are the first to be moved from the inventory account to the cost of goods sold account.  It is easy to implement, because the cost of goods sold computation is Beginning Inventory + Purchases − Ending Inventory.  The amount of purchases is easily determined by summing all debits to the inventory account, and ending inventory can be computed by reference to the latest invoices.
  3. LIFO–last-in/first-out.  Historically, there has been time lag between purchase and sale of inventory items, so there is opportunity for post acquisition market fluctuations.  LIFO does a fine job of matching current cost with sales revenue, thereby emphasizing the income statement.  Analysts like this.
fishbowl

The LIFO inventory method is sometimes referred to as FISH.

Ed Scribner, of New Mexico State University, substitutes the acronym FISH in place of LIFO.  He reasons that if the last in costs are first sent to cost of goods sold, then the first in items are still here:  FISH (first-in/still-here).  He also substitutes LISH (Last-In/Still-Here) for FIFO.  Any accountant that says LISH must be a lush.

LIFO was initially put forth as a way of minimizing taxes after the imposition of the first federal income tax. The baseline rate of 1% met with much complaint on the part of American citizens.  U.S. law insists that use of the tax deduction be mirrored in financial reporting.  Except for that, there is no hue and cry on the part of U.S. corporations for its continued use in financial reporting.  The law could be changed (and I have heard that a change is reasonably possible) to permit continued use of the tax deduction but no longer require its mirrored use in financial statements if IFRS are adopted by the SEC.

Many internationals consider U.S. use of LIFO for financial reporting purposes to be ridiculous and absurd. Their dislike is of it seems to be so strongly held that it approaches religious fervor.  Presumably it is because it is crass cost manipulation. In actual practice, all companies and products physically flow in a FIFO manner. Internationals argue, with considerable sound reason, that cost flow should match the physical process.

Personally, I think that perpetual LIFO is the single most ridiculous part of financial reporting.

It is also reasonably possible that LIFO could be discontinued for tax purposes.  If it is discontinued, it will be because some governmental officials have decided not to offer that particular deduction any more. Given that Prez Obama is about to ring up a nearly 2 trillion deficit and is about to hike taxes up to the nanosphere, perhaps he will move for LIFO elimination.   The timing has never been better to discontinue LIFO in the United States.

party_lampshade1There are other methods of accounting for inventory.  When accounting professors get together at cocktail parties these other methods are always discussed.  There is NIFO, LieFO, and the FIFO/LIFO combo.  My apologies to Edwards and Bell.

Debit and credit – - David Albrecht

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