Uncle Sam Needs You!

Uncle Sam Needs YouIn 1966, the finger pointed directly at you from the fierce visage of a red white and blue top hatted bearded Uncle Sam on the recruiting poster.  I couldn’t look away in good conscience then and it is no less difficult now.  In an article posted on CFO.com titled Walker Makes Plea to CFO’s http://www.cfo.com/article.cfm/12448209/c_12447541 David Walker the former U.S. comptroller general asks CFO’s to help bail the country out of its’ current economic crisis and a $50 trillion deficit.  While, as with most of you, I’d be the first in line to offer my services, it won’t happen.  The first responsibility of every politician is to get re-elected.  Correspondingly as long as we have a system that allows for ‘pork’ trailers in legitimate bills, legislators unwilling to make the unpopular decision and lacking the intestinal fortitude to enforce a balanced budget, I’m not sure there is much we can do as advisors.  Because they just won’t listen!

The government bureaucratic system is not predicated on economic motivation from ‘self interest’ and individual benefit and correspondingly can’t be successful as a participant in a capitalistic economy. As Adam Smith, the father of modern economics, summarized in The Wealth of Nations – “I have never known much good done by those who affected to trade for the public good”.  If you haven’t read Free to Choose by Milton and Rose Friedman this would be a good time.  Here’s a great example found on the internet last week: Continue reading “Uncle Sam Needs You!”

How to create profits out of thin air

In my last posting I tried to make assets out of liabilities.  Now I want to make some profits out of my liabilities.  This is a piece of cake under current GAAP but my current favorite again relates to the issue of the convertible debt that seems to be so popular with companies with a bit of a going concern problem. Continue reading “How to create profits out of thin air”

Now to make silk purses (assets) out of sows’ ears (liabilities)

I have noticed a few companies using some ingenious accounting to create assets by issuing liabilities.

I have noticed a few companies using some ingenious accounting to create assets by issuing liabilities. One would have thought that debit cash credit liabilities would be a fairly simple transaction when you issue debt.  Not so when that debt is convertible debt issued with a warrant.

The way the scheme runs is a follows. The text books and the ancient APB 14 tell us that when you issue debt with detachable warrants you have to separate the warrants out from the debt and take the value assigned to the warrants to paid in capital. Continue reading “Now to make silk purses (assets) out of sows’ ears (liabilities)”

Convertible Debt and Its Never Ending Financial Statement Destruction

While preparing for the next client argument, I mean discussion, involving the issuance of convertible debt I was reminded of the additional effects certain provisions of EITF 00-19 has on other outstanding financial instruments / derivatives.

As anyone with outstanding convertible debt is aware, the key point to simplifying the accounting for any conversion feature that appears to require derivative accounting is to force the feature into being classified as permanent

While preparing for the next client argument, I mean discussion, involving the issuance of convertible debt I was reminded of the additional effects certain provisions of EITF 00-19 has on other outstanding financial instruments / derivatives.

As anyone with outstanding convertible debt is aware, the key point to simplifying the accounting for any conversion feature that appears to require derivative accounting is to force the feature into being classified as permanent equity.   In general, the best way to classify the resulting derivative as permanent equity is to convince yourself, your auditor, and in most cases the SEC, that your debt qualifies as a “conventional convertible debt” as unclearly defined by paragraph 4 of EITF 00-19 and then by the equally obscure EITF 05-02. Continue reading “Convertible Debt and Its Never Ending Financial Statement Destruction”

Does anybody know what an accounting policy is?

Until FAS 154 came along I thought I understood what an accounting policy was.  They were the things that went into note 1 to the financial statements for situations where there was an accounting choice between two alternatives.  Rather curiously whatever choice you made ended up providing a fair presentation as long as you were consistent and disclosed it in Note 1.

Until FAS 154 came along I thought I understood what an accounting policy was.  They were the things that went into note 1 to the financial statements for situations where there was an accounting choice between two alternatives.  Rather curiously whatever choice you made ended up providing a fair presentation as long as you were consistent and disclosed it in Note 1. Continue reading “Does anybody know what an accounting policy is?”