Innovation is a Question of Value – and Focus

Ein Beitrag, der sich speziell zu lesen lohnt: für Champions, für Innovatoren, für Manager, die sich mit Innovationen herumschlagen müssen (dürfen).

Die Mehrheit der „radikalen“ und prägenden Innovationen im Angebot – gerade in grösseren Organisationen – entwickelt sich „von unten nach oben“. Das Management muss für die entsprechenden Rahmenbedingungen sorgen und die besten Ideen fördern.

Der nachfolgende Text ist geschrieben vom Betreiber von www.mopsos.com Martin Dugage (Direktor Knowledge Management bei Schneider Electric).
…………………………..

Robert Burgelman of Stanford made a presentation on May 2. at the Ecole Polytechnique in Paris about the nonlinear dynamics of innovation. Innovation Tribune talks about it.

Robert makes a distinction between two processes of innovation. One which is top-down, mainstream, induced by the company strategy, called the „blue“ process (why blue?), and another one, which is bottom-up, autonomous, rational at the local level, and divergent with respect to the official strategy, called the „green“ process (why green?). The blue process is a response to evolutions in the familiar environment as perceived through traditional SWOT analysis. The green process is a response to evolutions in the unfamiliar environment, i.e. faint signals that only specialists or visionaries can grasp.

This is not very new. Every engineer in large organization knows that radical innovation comes from small teams working in a stealth mode at the edge of the organization. But what was interesting to me was Robert’s insights into what makes this green process work at companies like Intel. He elaborated on the concept of „strategic recognition“, i.e. the ability of top management to recognize what makes sense for the company. Quoting Napoleon („on s’engage et puis on voit“), he showed how Andy Grove at Intel or Lou Gerstner at IBM were able to recognize a key initiative to launch from a small emerging project of the company.

What struck me is two things he said about Intel, a company he apparently knows very well. First, the honesty, if not humility, of the CEO acknowledging publicly his failure to appreciate the chipset initiative, a key strategic move that turned out to be a huge success for the company („And I said it could not be done“). And second, the importance of culture as expressed by the ability of the senior execs of the company to spot interesting ideas and gradually build support over time on good projects („The best for the company is definitely in the minds of top executives at Intel“)

This last point is key to me. In Who Really Matters Art Kleiner points out to the importance of the „core group“ of a company, i.e. the community of those „who really matter“ and around whom all other employees gravitate. Most senior execs are part of this core group, but other less senior people sometimes are too. Art distinguishes between the „good“ core groups who really embody the knowledge and the culture of the company, and the „bad“ core groups, who really equate to a bunch of mercenaries in search for personal success. If a company is plagued with a „bad“ core group who doesn’t really understand what the company is, internal politics are really the name of the game, and there is no chance to build support over time for any disruptive strategy.

So in the end, what makes a great company is a paradox. You need brilliant people at the edge able to generate great projects, and you also need a core group of decision-makers able to commit collectively to supporting bold moves. This means a very high level of trust. Read my book 😉

Future Value: The $7 Trillion Challenge

Nearly 60 percent of the aggregate value of the US stock market is based on investor expectations of future growth – and yet no real methodology exists to analyze future value. Accenture and AssetEconomics are working to create such a model, including how to translate intangible assets into manageable market value.

Stand Februar 2004, aber immer noch aktuell.

Originallink zum Downloaden

Wenn Sie ein Modell suchen, mit dem man die „Shareholders Profit Expectation“ bestimmen kann, dann schauen Sie hier.
oder Goggeln Sie nach „Shareholders Profit Expectation“

Howard Dresner, der Erfinder des Begriffs „Business Intelligence“ über das, was der Begriff ursprünglich meinte.

Die ursprüngliche Meinung des Begriffs „Business Intelligence“ ging weit über den heutigen „Technologie-Fokus“ hinaus.

Wenn Geschäfte erfolgreich sein sollen, muss der Schwerpunkt auf’s Geschäften gelegt werden – nicht auf die Technologie. Die Technologie ist „nur“ Mittel zum Zweck.

Es geht jetzt wieder „zurück zu den Ursprüngen“: Es geht um die Beziehungen: von Fertigung coinstar mission statement Coinstar Money Transfer in Constanta, Romania und Finanz, Fertigung und Verkauf, Fertigung und Marketing, Fertigung und HR, Fertigung und R&D….

Wir müssen die Gleichzeitigkeit dieser Beziehungen verstehen und berücksichtigen.

Das bisherige „finanzbasierte Performance Management geht über in ein „Performance Management Beyond Finance„….
Es zählen jetzt auch die nichtfinanziellen Werte.
Originallink
Backuplink

Werte – Splitter 01

5. Die Einführung des Geldes.

Vor der sog. Geldwirtschaft gab es eine Tauschwirtschaft, in der Waren beliebig ausgetauscht wurden, z.B. fünf Birnen gegen acht Äpfel. Eigentlich ist auch die moderne Wirtschaft eine Tauschwirtschaft, das neue Tauschmittel Geld hat jedoch unter anderem eine sehr angenehme Eigenschaft: es wird im Regelfall von allen Wirtschaftsteilnehmern akzeptiert. Wenn mein Nachbar keine Birnen mag, kann er sich etwas anderes dafür kaufen. Und Geld hat noch andere positive Eigenschaften, es bietet einen exakten Massstab, den sogenannten Tauschwert oder Preis und weist hohe Haltbarkeit auf. Im Vergleich zum Obst als Tauschgut ist ein Euro ein Euro. Und nicht ein grosser Apfel oder ein kleiner Apfel und auch nicht ein unreifer oder ein schon verfaulter Apfel. Aufgrund der vielen Vorteile, die das Geld beim Handel hat, unterscheidet man deshalb auch die Geldwirtschaft von der Tauschwirtschaft. In der menschlichen Entwicklung war der Übergang von der Tauschwirtschaft zur Geldwirtschaft wahrscheinlich fliessend. Die ersten Formen des Geldes waren wahrscheinlich Stein-, Bronze- oder metallene Werkzeuge, die das Leben erleichterten (deshalb allgemein begehrt waren) und doch eine gewisse Haltbarkeit aufwiesen.
Aus Wikibooks „Betriebswirtschaft“

Ueber die Einführung des Geldes wurden schon viele Texte geschrieben. Tatsächlich wurde das Geld irgendwann als „praktisches Tauschmittel“ eingeführt. Geld HAT einen Wert bekommen. Ueber die Zeit, als das Geld „sich verbreitete“, „mauserte“ sich das „Tauschmittel mit Werteigenschaften“ zum „selbständigen Wert“ und gleichzeitig zum zentralen Wertmassstab der Oekonomen.

Die Entwicklung vom Tauschmittel zum Wertmassstab und wird eigentlich erst seit Mitte der 70er Jahre langsam hinterfragt. Mit der Einführung des Computers – beziehungsweise der dafür erforderlichen Software – begann der Kopfwerker den Handwerker zu verdrängen. Während dieser Entwicklung wurde zunehmend klar, dass die alten Kriterien für die Bewertung der Arbeitsleistung von Handwerkern nicht mehr für die Bewertung der Kopfwerker taugten. Das Ergebnis des Kopfwerkers hat nicht mehr eine materielle Form, sondern ist immaterieller Natur.

Die neue Arbeitsleistung war nicht mehr vorzeigbar. Sie war nicht am Lager – und sie war auch in keiner Bilanz. Damit bekam die Bewertungsfrage eine völlig neue Dimension, die man beim „Tauschen von physischen Arbeitsergebnissen gegen einen Lohn“ gar nie berücksichtigen musste.

Patent Search

Sie wollen wissen, wer wo was patentiert hat?

Oder was patentrechtlich nicht mehr geschützt ist? Also das, was Sie problemslos für Eigenentwicklungen verwenden können?
Oder Sie wollen wissen was von technologischer Seite her auf uns zukommt?
Hier die Suchseite der WIPO (World Intellectual Property Organization)
Machen Sie sich selbst ein Bild – oder fragen Sie mich.
peter.bretscher@bengin.com

Self-learning method and apparatus for rating service providers and predicting future performance

Abstract

In one aspect, the invention relates to a method for creating a supplier-rating matrix for rating services of a supplier. The method includes defining a plurality of job 4seohunt.com/www/www.bengin.net attributes each including a plurality of sub-attributes, each sub-attribute representing a range of job attribute values and defining a job attribute vector associated with the supplier, the job attribute vector including a plurality of dimensions each corresponding to a sub-attribute. The method further includes defining a plurality of performance metrics and defining a performance vector associated with the supplier, the performance vector including a plurality of dimensions each corresponding to a performance metric. The method further includes defining a initial values for the job attribute vector and the performance vector and generating a supplier rating matrix for the supplier by mathematically combining the job attribute vector and the performance vector.

Download PDF: Here

Questions of Value

Is fair-value accounting the best way to measure a company? The debate heats up.
Tim Reason, CFO Magazine
February 01, 2003

Despite 29 years as an accountant in the United States and abroad, Robert H. Herz still considers himself an economist by training and disposition. „I got into accounting to get a job, basically,“ he says.

Which, as casual career plans go, worked out pretty well. Last July, Herz became chairman of the Financial Accounting Standards Board. That puts him in charge of setting the generally accepted accounting principles used in the United States standards whose perceived global superiority has been called sharply into question by a year of accounting scandals and market turmoil. What’s more, Herz came to FASB from the International Accounting Standards Board (IASB), and is now in a position to exert powerful influence on the efforts by both those bodies to massage U.S. GAAP and international accounting standards as they coalesce into a worldwide standard.

Although highly regarded among his peers for his knowledge and proficiency as an accountant, it is the economist in Herz that should make CFOs sit up and take notice. He has strong opinions about what’s wrong with accounting and financial reporting in the United States. „Accounting has historically not defined income as change in wealth, or change in net worth or value,“ he explains. „It has defined it by thousands and thousands of conventions that measure allocations of historical costs.“ In other words, accounting hasn’t really defined income.

These „pure accounting fantasies,“ Herz declares, have helped create „a basic schism in U.S. industry“ between company management and investors. He believes CFOs and CEOs „and current accounting methods“ focus on meeting annual budgets and reporting those financial metrics that they control (and for which they are held accountable).

What’s wrong with that? „Unfortunately for people who invest in companies,“ he says, „that’s a very incomplete exercise. Investors also want to know what the impacts of external events on enterprise value are.“

CFOs may bemoan the fact that this view deemphasizes their own role in creating value, but given the fragile state of the capital markets, they may have ample cause to welcome Herz’s focus. „If I can achieve anything good“ as FASB’s chair, he says, it will be to improve management’s and investors‘ understanding of their different perspectives. After all, absent investor confidence, the most strenuous efforts to create value can’t amount to much.

To be sure, the concept of fair value is far from problem-free. And while FASB has long believed in fair value, years will pass before that belief fully becomes practice. But in Herz, the board has a strong proponent of fair value at its helm, and he thinks it’s high time the process was accelerated.

Fair Use
Herz’s views reflect his education at England’s University of Manchester, cradle of Hicksian economics, a branch that focuses on changes in overall economic value when measuring economic growth and productivity. For Herz, in practical terms that generally means reporting the fair value of „or marking to market“ assets and liabilities whenever it can be reliably determined.

„I think it’s hard to argue with the conceptual merits of fair value as the most relevant measurement attribute,“ Herz told a conference of Financial Executives International (FEI) in November. „Certainly, to those who say that accounting should better reflect true economic substance, fair value, rather than historical cost, would generally seem to be the better measure.“

Corporate finance executives agree, up to a point. „The relevance of fair value ‚if you can define it in a meaningful fashion‘ is easy to support,“ concedes General Electric comptroller Philip D. Ameen. But as former chair of the FEI’s Committee on Corporate Reporting, Ameen has long argued that determining the relevance and reliability of fair-value measures is often fraught with difficulty for publicly traded corporations. Moreover, he says, for some companies, wholesale use of fair value would require disclosure of hundreds, if not thousands, of valuation assumptions and how they were derived.

„I understand the whole attraction of market-value accounting,“ says Charles W. Mulford, professor of accounting at the DuPree College of Management at Georgia Institute of Technology, adding that many balance-sheet items already are carried at fair value, and some, such as property, plant, and equipment, probably should be. But while reluctant to criticize fair value itself, Mulford is troubled by the possibility of emphasizing total company value at the expense of measuring management performance. „What amount of value creation can be assigned to the efforts of management for a particular time period? That is the essence of accounting,“ he says. „Otherwise, it’s simply an appraisal process.“

The other, often unspoken, argument against fair value is that regularly measuring the effect of market movements on a company’s assets and liabilities can introduce enormous volatility into financial statements. Fear that volatility will spook investors is the reason companies manage earnings in the first place. It’s even the driving force behind some existing accounting standards, such as smoothing of pension gains and losses, says Mulford, since income numbers can otherwise become so volatile as to be meaningless.

Fair-value proponents, by contrast, believe volatility may be the price of investor confidence. „Where feasible, fair value provides the best information to investors,“ insists Rebecca McEnally, vice president of advocacy for the Association for Investment Management and Research (AIMR). „Obviously, this can involve assumptions if there are not fair-market prices [available.] But if all the assumptions are disclosed, that brings a good deal of sunlight to the process.“

McEnally also counters criticism of fair value’s reliability by noting that historic cost numbers „are reliable and relevant only on the day they are recorded.“ This is the crux of the fair-value debate: each side agrees both qualities are important, but fair-value advocates emphasize relevance, while historical-cost advocates place greater weight on reliability. „Reliability is infinitely greater when we are not marking everything in the statements to market,“ responds Ameen. For example, he says, annually valuing a simple asset like a desktop computer is a nearly impossible exercise, while amortizing its original cost „is a simple mechanical process“ involving only the assertion of its known original cost and its life.

Still, Ameen says Herz’s speech was not a surprise. FASB has long indicated a preference for fair-value measurements, which have been making inroads into accounting standards for the past 15 years. The simplest and least-controversial application is to use fair value for the initial recognition of assets and liabilities. FAS 141 and 142, for example, dealt with mergers and the purchase of intangibles by requiring the use of fair value at a far more granular level and for many more items than previous standards.

Since Herz came on board, FASB also has issued Interpretation 45. Written partially in response to Enron’s illegal side agreements to back supposedly independent financial deals, it requires that companies issuing guarantees recognize an initial liability for the fair value of the obligation, and disclose quarterly the current carrying amount of the liability and maximum potential amount of future payments. And, of course, this year the board is expected to revisit FAS 123, whose preferred treatment of expensing stock options at fair value is finally gaining grudging acceptance.

To Mark It, to Mark It
Fair value’s first use in U.S. accounting, however, was not initial recognition, which for simple assets is often the same as historical cost. Instead, it was first used to mark to market financial instruments on an ongoing basis. That remains a vastly more complex and controversial exercise. „Even for traded securities,“ notes Ameen, „the relevance of fair value, let alone the reliability, is a challenge. When you get into derivative positions such as those that Enron held, the reliability is very suspect.“

Indeed, far from improving investor confidence, fair-value accounting was abused by energy and telecom companies when they recognized enormous phantom gains from trading hedges and capacity swaps. „I am happy to see some recent events curb some of the enthusiasm for fair value,“ says Ameen. „Those who believe in fair value seem to believe it is universally appropriate and solves every [problem].“

Yet Jackson M. Day, the Securities and Exchange Commission’s acting chief accountant, suggests public perception of earnings quality suffers from inconsistencies in the way earnings and net assets are measured. „Unfortunately,“ he said in a December speech before the American Institute of Certified Public Accountants, „we still have a mixed-attribute model that can be arbitraged, and not much has been done yet about providing measurement guidance, especially related to providing valuation guidance when estimating fair value.“ Does that potential for arbitrage mean Day favors a wholesale move to fair value? „Well, we have to do something,“ he told CFO.

Such a move was certainly favored by Edmund L. Jenkins, Herz’s predecessor. „We now fair-value some financial [instruments] and not others,“ he told CFO in the wake of the Enron scandal. As a result, companies had to take the extra step of recording changes to fair value for cash-flow hedges under FAS 133 under comprehensive income. „If we had fair value for all financial instruments,“ said Jenkins, „we would have a better presentation in the financial statements.“

Herz says FASB is „very cognizant“ of the potential for abuse when active markets don’t exist. FASB, he told the FEI in a recent speech, will „make sure that our promulgation of standards that require fair-value measurements doesn’t outstrip the ability of people in the real world to properly implement the concept.“ He has also announced plans to create Valuation Advisory Groups to help preparers of financial statements.

As for FAS 133 ‚at 800 pages the Moby Dick of accounting standards and arguably an equally large black mark for fair-value accounting‘ Herz shrugs. „Any standard that raises 200 implementation issues is not a good standard,“ he says.

Revisiting FAS 133 in depth, however, is not likely to be on FASB’s immediate agenda, which is jammed with potentially massive undertakings that include redesigning the income statement and evaluating a shift away from detailed accounting standards to principles-based accounting. Both projects are likely to include substantial debate about the broader application of fair value.

The Next Wave
In fact, wider adoption of fair-value measurements could pick up where recent regulatory efforts leave off. Among the requirements of the Sarbanes-Oxley Act of 2002 is disclosure of whether or not a company has a „financial expert“ on audit committees, defined as an individual who understands the application of GAAP to estimates, accruals, and reserves. The legislation was rushed through so quickly, congressional aides say, that the background materials that typically explain the thinking behind such language are limited. But estimates, accruals, and reserves ‚all basic, interrelated accounting topics‘ have something else in common: they are all fertile ground for fraud.

„I think Sarbanes-Oxley got it right when it identified these three items,“ explains the AIMR’s McEnally. „They are all noncash accounting entries. And if you want to manipulate your accounting statements, you are forced to deal primarily with the noncash items.“

„Estimates are subject to abuse. It is very, very easy to manipulate reserves,“ agrees John Tonsick, a managing director at the Global Intelligence and Security Division of Citigate, which helps companies assess their compliance with the act. „Congress has recognized that you can define [the accounting] as tightly as you want, but in the end, the only thing that is going to work is oversight and corporate governance.“

But what if a wide move to fair value simply eliminated these trouble spots? McEnally thinks fair-value reporting would eliminate reserves, at least. „There would just be fair-value adjustments period to period. If I sold $100 worth of goods, but think I’ll receive only $97, then I would record the $97 not $100 with a $3 [bad debt] reserve.“

Historically, restructuring reserves have been particularly prone to earnings management. That’s because unlike reserves for taxes or bad debt, there was little ongoing calculation to ensure that the charge a company took matched its actual restructuring costs. Indeed, by subsequently requiring detailed, periodic reporting of restructuring efforts, the SEC’s SAB 100 seemed to be groping in the direction of fair-value accounting. But while Congress and the SEC must rely primarily on additional oversight and disclosure, FASB may be moving toward a more fundamental solution.

Standing Up to Greenspan
Of course, how far and how fast Herz can move FASB is still a political question. „Every time we propose changing an accounting rule,“ he complains, „the lobbyists come out in full force. It’s not a particularly warm feature of our system.“

However, Herz may be just the right combination of purist and consensus-builder to steer FASB through the occasional political storm. A case in point: FASB’s recent exposure draft on special-purpose entities – one of the first major initiatives of his tenure. Anxious to calm investors in Enron’s wake, the SEC clamored to make the rule immediately effective. Then, recalls Herz, he heard from officials at the Federal Reserve. Often at odds with the SEC over banking issues, the Fed was fearful that implementing the rule too soon would roil the already rattled credit markets, which rely heavily on such vehicles. „I told them, ‚I don’t have an office of economic analysis,'“ says Herz. „‚We believe we have the right [accounting] solution. Why don’t you guys walk down the street and talk to each other about the right date to make it effective?'“ Remarkably, that’s exactly what happened. „Our only public-policy mission is good accounting and good disclosure,“ he says.

In fact, while Herz jealously guards FASB’s independence from government, he regards the Fed as an ideal operating model for his board. „Do we hold large conferences and constant, everyday lobbying efforts to tell the Fed to raise or lower interest rates?“ No, he says, because the Fed’s management of monetary policy is viewed as a public good. „Well,“ he says, „good reporting is a public good, too.“

Tim Reason is a staff writer at CFO.

Without a Shot Fired

In 1995, the Financial Accounting Standards Board’s efforts to require the expensing of stock options brought it to the brink of extinction. But the issue that so bedeviled his predecessors has gone far easier for current FASB chair Robert H. Herz.

To be sure, Herz was at the International Accounting Standards Board in December 2001, when U.S. companies were warning IASB chair Sir David Tweedie of dire consequences if he rekindled the issue on the international stage. But shortly after Herz joined FASB last July, Coca-Cola announced plans to expense options, and a slew of large-cap firms followed suit. Among them was General Electric, whose comptroller, Philip D. Ameen, was a prominent voice in the Financial Executives International’s opposition to expensing options. „We saw the light,“ he says of GE’s subsequent decision. „We showed investors the pro forma effects, and they said they wanted them to count.“

FASB seems likely to mandate expensing this year, and such experiences (not to mention the IASB’s budding ability to run interference for its American cousin) might embolden Herz as he considers broader applications of fair value.

„The Silicon Valley people say we are going to stifle American entrepreneurism. Then the corporate-governance zealots come to me and say [they want a standard that will] make sure there is never, ever a stock option issued in the future,“ says Herz. „Neither is my perspective. We are just trying to figure out what the [right] reporting is.“

But there’s the rub. Under FAS 123, fair value is measured at the grant date; subsequent adjustments are not generally allowed. Yet even this relatively simple fair-value application is challenging.

Coca-Cola, for example, won praise for its plan to value options by averaging bids solicited from investment banks. But some observers suspect those bids will simply represent an outsourcing of the Black-Scholes calculation, not executable market transactions. Real market prices would include discounts for unique features of stock-options such as nontransferability. (FAS 123 does not allow such discounts for companies applying valuation techniques internally.)

Coke’s 2001 estimate of its stock-options expense would have cut its earnings that year by $202 million. But John Finnerty, of Analysis Group/Economics, says if a market existed, the actual expense might be as little as half that amount, simply because Black-Scholes ignores the illiquidity of the grants.

„I actually believe a market could be created in hedging of stock options,“ says Herz. Finnerty agrees, noting that there’s more than enough profit potential tied up in stock options to interest investment banks. He believes a developed market for stock option instruments is only a matter of time. „There are smart guys in these investment banks who have solved similar problems in the past,“ he says. —T.R.

Rule, Britannia?

While the Financial Accounting Standards Board’s published agenda is already loaded with complex and controversial issues, chairman Robert H. Herz has suggested in recent speeches that the board revisit pension accounting.

International accounting standards offer little clue about what this may mean for pension smoothing – IAS differ from U.S. generally accepted accounting principles only in the technical detail of application. But before he was chair of the International Accounting Standards Board, Sir David Tweedie oversaw the development of FRS 17 in UK GAAP – a virtually unsmoothed pension technique that requires measuring the liabilities and assets of pension funds and recording the year-over-year change as income or expense.

Herz would seem sympathetic to that approach: In addition to being a CPA, he is a UK-chartered accountant and unapologetic Anglophile who considers Tweedie an ally in the struggle to improve accounting standards. In fact, when interviewed by CFO during his IASB tenure, Herz suggested hypothetically that one way of circumventing the technical differences between the IAS and U.S. GAAP pension accounting was to simply eliminate pension smoothing.

So is this an area of convergence where the UK’s answer would trump both GAAP and IAS?

„Clearly, that is a concern,“ says General Electric comptroller Philip D. Ameen, former chair of the Financial Executives International’s Committee on Corporate Reporting. „FEI would not care for that. We think that pensions have to be viewed with a very long-term horizon, [and are concerned about] the extreme volatility we could see in short-term operating results.“

Ameen can take some comfort in Herz’s thoughts on FRS 17. „I’m not quite there,“ says Herz of eliminating smoothing entirely. Because measuring the liability is an actuarial exercise, he believes some smoothing should be preserved. „But on the asset side, I would eliminate expected return and just record value of the assets.“

Herz is quick to point out that his personal opinion isn’t necessarily shared by FASB’s six other members, so that approach is far from a foregone conclusion. But whatever the outcome, it’s clear Herz is serious about addressing pensions. „As a citizen, beyond my standards-setting capacity, this is a very important issue with regard to the whole retirement structure of our nation. My concern is that we have constructed accounting methods that prompt strange behavior. It’s like stock options – if accounting prompts strange behavior solely because of the accounting, that’s not a good answer.“ – T.R.

Where Fair Is Fair

Accounting standards in which fair value plays a prominent role for initial recognition or ongoing valuation.

FAS # Subject
FAS 115 Valuing equity investments
FAS 123 Stock-option accounting
FAS 133 Hedging derivatives
FAS 141 Business combinations
FAS 142 Purchased intangibles
FAS 143 Asset retirement obligations
Interpretation 45 (affects
FAS 5, 57, and 107) Guarantees

After Sarbox

Yesterday’s sit-down with Chuck Mulford adds to our suspicion that that the FASB’s embrace of fair value accounting will ultimately prove more controversial than it has so far.

This approach, which is the basis of a number of individual items on the accounting board’s agenda as well as its so-called conceptual framework, requires that assets and liabilities be marked to market instead of allowing them to be carried at historical cost.

The idea has generated some criticism but nowhere near the firestrom fueled by Sarbox. But that’s likely to change once the FASB’s emphasis on it is better understood.

Chuck’s fundamental objection is that marking assets to market makes it harder to figure out what is driving a company’s earnings. Under fair value, for example, an increase in its earnings may reflect nothing more than the appreciation of its real estate, yet that may not be apparent without a lot of analysis.

Mulford isn’t alone in worrying about this possibility. As Jack T. Ciesielski put it in the cover letter for the April 3 edition of The Analyst’s Accounting Observer, „fair value was one of the ingredients in the witches brew that Enron’s managers concocted; it enabled them to recognize profits years earlier than they should have, if they they should have recognized any at all.“

Ciesielski went on to liken fair value to strong medicine that kills if used improperly. On the other hand, he understands why Chairman Bob is such a big fan of the stuff. Used properly, wrote Jack, it can be downright indispensable–when it’s telling investors and analysts more about the true state of a firm’s financial condition than does comparable historical cost-based accounting.

This is no doubt just the beginning of what promises to be the next big debate in financial reporting. And if as Tim reported way back when, corporate finance bigs like GE’s Phil Ameen have anything to say about it, the debate will not ensue without a certain amount of fireworks. Look for the financial reporting package we’re starting to put together for the magazine to delve further into all of this.

Posted by Ronald Fink | April 21, 2006 01:30pm