CaP'N GRuNGe Posted March 16, 2009 Share Posted March 16, 2009 Alice in Wonderland Accounting... Quote Link to comment Share on other sites More sharing options...
Perchoutofwater Posted March 16, 2009 Share Posted March 16, 2009 I've mentioned this several times and wiegie keeps saying it isn't a big deal. Quote Link to comment Share on other sites More sharing options...
muck Posted March 16, 2009 Share Posted March 16, 2009 (edited) Speaking as someone who is directly and personally impacted by this, understanding clearly what the rules are (and what they are not) is a HUGH issue. It seems to me that the 'threat' of changes to the rules makes it VERY difficult for me to make investment decisions as the way these prospective investments gets accounted for may look VERY different under one set of rules than another. I won't go into it further (gotta love the regulators), but suffice it to say, I would be REALLY happy if they'd just pick a rule and go with it. I would REALLY like it if loans that are intended to be held until the maturity of the loan (as opposed to loans that are sold before maturity to another investor / lender) would be able to be considered to be "hold to maturity" investments. Right now, only bonds can be considered "hold to maturity" investments, even though (generally) bonds are substantially more marketable than loans and the majority of risk factors that are relevant to a bond are relevant to a loan. In many ways it is a very silly distinction to me...alas... Also, note that "mark to market" is supposed to apply to ALL assets (including non-financial assets). What is the market value of McDonalds' trademark on that golden M? What about the value of Coca-Cola's script logo? What about the market value of the microwave in my office? What is the market value of a brand new manufacturing facility in a small town? Edited March 16, 2009 by muck Quote Link to comment Share on other sites More sharing options...
Ursa Majoris Posted March 16, 2009 Share Posted March 16, 2009 What is the market value of McDonalds' trademark on that golden M? What about the value of Coca-Cola's script logo? Nothing, surely, since neither is of any use in terms of resale. While they provide brand recognition and therefore have value in that, I really don't see why they would be on the books as "value" Quote Link to comment Share on other sites More sharing options...
Yukon Cornelius Posted March 16, 2009 Share Posted March 16, 2009 I've mentioned this several times and wiegie keeps saying it isn't a big deal. me2 Quote Link to comment Share on other sites More sharing options...
wiegie Posted March 16, 2009 Share Posted March 16, 2009 I've mentioned this several times and wiegie keeps saying it isn't a big deal. actually, my thoughts on the matter are very much in line with those of the author of the article that Grunge linked to Quote Link to comment Share on other sites More sharing options...
Azazello1313 Posted March 16, 2009 Share Posted March 16, 2009 I can see why it (mark-to-market) makes sense from a theoretical standpoint....but it's also pretty easy to see how the practical application of the rule would greatly exacerbate the impact any financial downturn. Quote Link to comment Share on other sites More sharing options...
muck Posted March 16, 2009 Share Posted March 16, 2009 I can see why it (mark-to-market) makes sense from a theoretical standpoint....but it's also pretty easy to see how the practical application of the rule would greatly exacerbate the impact any financial downturn. +1 (sorta) MTM is great for publicly traded securities. Your shares of Microsoft, Coca Cola and Pfizer. However, MTM is a real BEAR for highly structure investments that have (literally) no publicly traded proxies. In the last month, I've asked senior partners at several big-time accounting / audit firms regarding how the MTM rules impact me to see if any of them have any guidance. The standard response is, "Wow. I think that's a good question ... not sure what the answer is, but that is a good question." ...so, as a business manager (who just so happens to primarily operate in the world of unique investments), what am I supposed to do with this type of perspective from the experts in the field? How am I supposed to make operational decisions? How am I supposed to make investment decisions. It's all VERY frustrating. Quote Link to comment Share on other sites More sharing options...
CaP'N GRuNGe Posted March 16, 2009 Author Share Posted March 16, 2009 Just make your bets, but be sure to hedge against them. Quote Link to comment Share on other sites More sharing options...
wiegie Posted March 17, 2009 Share Posted March 17, 2009 +1 (sorta) MTM is great for publicly traded securities. Your shares of Microsoft, Coca Cola and Pfizer. However, MTM is a real BEAR for highly structure investments that have (literally) no publicly traded proxies. In the last month, I've asked senior partners at several big-time accounting / audit firms regarding how the MTM rules impact me to see if any of them have any guidance. The standard response is, "Wow. I think that's a good question ... not sure what the answer is, but that is a good question." ...so, as a business manager (who just so happens to primarily operate in the world of unique investments), what am I supposed to do with this type of perspective from the experts in the field? How am I supposed to make operational decisions? How am I supposed to make investment decisions. It's all VERY frustrating. Do you have capital requirements? Quote Link to comment Share on other sites More sharing options...
muck Posted March 17, 2009 Share Posted March 17, 2009 Do you have capital requirements? I report monthly / quarterly net asset values. Quote Link to comment Share on other sites More sharing options...
Apathy Posted March 17, 2009 Share Posted March 17, 2009 PcW Breaking News on Fair Value Reporting The above is what happens when the dang accountants get involved in setting rules. I know of all the reasons mark-to-market / fair value accounting is supposed to be wonderful and yet it has accomplished nothing except to confuse people at the very least and contribute to a cycle of write-downs and sell-offs, which then beget more write-downs. The notion that we can make the balance sheet look like a market price or that price volatility will somehow be kept in check is silly and has never come to fruition. And this is a quote from a high level Big Four auditor sent to a bunch of folks, including myself, in an email yesterday... Just in case you scholars are curious, dont consider any careers that have anything remotely to do with tax, accounting, or financial reporting. Auditors think there is a correct way to measure everything in the world and they are driving me crazy. If i become leader of the whole world i will outlaw spreadsheets and all financial decisions will need to be made with a pencil and calculator. All these spreadsheets do is give you the ability to confuse what should be simple logic. I am convinced that regardless of the amount of regulation or govt interference, the current mess would not be as bad without spreadsheets and we wouldnt have missed out on anything either. And Muck is right...when asset (and liability) values are not readily known, they become subject to highly discretionary valuation models using assumptions that 10 different people can have 10 different thoughts on. Quote Link to comment Share on other sites More sharing options...
Apathy Posted March 17, 2009 Share Posted March 17, 2009 Also, note that "mark to market" is supposed to apply to ALL assets (including non-financial assets). What is the market value of McDonalds' trademark on that golden M? What about the value of Coca-Cola's script logo? What about the market value of the microwave in my office? What is the market value of a brand new manufacturing facility in a small town? You don't have to adjust the value of the logo or marks unless they are investments subject to sale. The microwave...couldn't tell you...how fast can it heat a hot pocket? Nothing, surely, since neither is of any use in terms of resale. While they provide brand recognition and therefore have value in that, I really don't see why they would be on the books as "value" Only if they are sold would they pop up on a balance sheet, and then they would have substantial value. Quote Link to comment Share on other sites More sharing options...
Ursa Majoris Posted March 17, 2009 Share Posted March 17, 2009 Only if they are sold would they pop up on a balance sheet, and then they would have substantial value. But do they have resale value? Assuming you weren't getting any stake in the firm, what use would the logo / trademark actually be? And if it's no use, why would anyone buy it? Quote Link to comment Share on other sites More sharing options...
Apathy Posted March 17, 2009 Share Posted March 17, 2009 But do they have resale value? Assuming you weren't getting any stake in the firm, what use would the logo / trademark actually be? And if it's no use, why would anyone buy it? If you had no ownership interest in Coke but owned the marks, you could license them and make pretty good money. The accounting rules state that from a market participant standpoint, the Coke logo does have value, but only in a sale...that's what's so strange about fair value accounting. As is owned by Coke, you're right...Coke can't put the logo on their balance sheet. But they could sell the company or just the logo. Either way - the acquiror will book a substantial amount on their balance sheet and call it trademark, tradename, whatever. And the person that would end up valuing the logo would be making a good bit of the assumptions up because as Muck is saying - there wouldn't be any empirical data (aka, a price from The Wall Street Journal) to tell us how much the Coke logo is worth. So Coke isn't likely to sell their logo but nobody thought GE would ever be a risky investment either. Quote Link to comment Share on other sites More sharing options...
MrTed46 Posted March 17, 2009 Share Posted March 17, 2009 (edited) If you had no ownership interest in Coke but owned the marks, you could license them and make pretty good money. The accounting rules state that from a market participant standpoint, the Coke logo does have value, but only in a sale...that's what's so strange about fair value accounting. As is owned by Coke, you're right...Coke can't put the logo on their balance sheet. But they could sell the company or just the logo. Either way - the acquiror will book a substantial amount on their balance sheet and call it trademark, tradename, whatever. And the person that would end up valuing the logo would be making a good bit of the assumptions up because as Muck is saying - there wouldn't be any empirical data (aka, a price from The Wall Street Journal) to tell us how much the Coke logo is worth. So Coke isn't likely to sell their logo but nobody thought GE would ever be a risky investment either. But Coke could sell it if they wanted to (they won't). What would you propose different if not M2M everything? Edited March 17, 2009 by MrTed46 Quote Link to comment Share on other sites More sharing options...
Apathy Posted March 17, 2009 Share Posted March 17, 2009 But Coke could sell it if they wanted to (they won't). What would you propose different if not M2M everything? What's wrong with the good old fashioned cost approach? The link I provided above suggests some even more convoluted methodology as far as determining whether the assets (or liabilities) may regain their value at some point in the future. This just confuses matters more and adds subjectivity rather than taking it away. I really can't see how fair value accounting is adding creditbility in the eyes of financial statement users. I mean, at the end of the day, cash flow is what's important, not how "accurate" the balance sheet is. Stock volatility has never benefited from FV accounting and the companies that are really impacted by this are public companies and I don't care if the balance sheet reconciles with the stock price and gets updated real time. Take a not-so-extreme example: A company writes down its assets, perhaps hurting stock value and blowing some debt covenants. As a result, it is limited on it borrowing capacity and/or its cost of debt (and equity) shoots up. And it may in fact have to service the entire debt immediately. The line of credit is hampered and now the company endures operational problems (can't buy much needed equipment, can't pay suppliers on time, etc.). As a result, financial results take a hit, the stock value declines, the company becomes undercapitalized, and we start all over again. Oh and by the way, the assets written down were a customer list and some noncompete agreements...silly assets the company was required to put on the balance sheet several years ago. Who cares? Another possibility I guess is to clean up the fair value accounting rules and employ them, but also document cost data in the notes, so the reader can get both pictures. I don't know, the whole thing gives me a headache. Quote Link to comment Share on other sites More sharing options...
muck Posted March 17, 2009 Share Posted March 17, 2009 ...actually, it appears that this missive from PwC may provide a 'way through' for me... Quote Link to comment Share on other sites More sharing options...
The Irish Doggy Posted March 17, 2009 Share Posted March 17, 2009 But do they have resale value? Assuming you weren't getting any stake in the firm, what use would the logo / trademark actually be? And if it's no use, why would anyone buy it? I'll give you an example: Swiss Army Knives. Every guy loves a good SA knife, right? The Swiss Army Brands have branched out to a number of different places besides watches and knives - luggage/travel goods especially. But lots of it is done by other companies that hold a brand name license. Its quite ingenious really. The SA luggage has higher sale prices than many other brands just because of the quality associated with the name. Victorinox doesn't have to deal with the hassles of making and delivering the stuff if they don't want to. I believe there are SA/Victorinox retail stores, but heck, those could be using a license too. Essentially, you buy a brand name so that you don't have to develop your own. Quote Link to comment Share on other sites More sharing options...
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