On 8/18, FASB published a massive overhaul to the accounting rules for not-for-profit organizations. The release is ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which you can find here.
(Cross-post from my other blog, Nonprofit Update.)
ASU 16-14 will be effective for fiscal years beginning after December 15, 2017.
Let’s translate that… it will first be effective for calendar year December 31, 2018 financial statements. For NPOs with fiscal year ends, it will be effective for 6/30/19 or 9/30/19.
Since 6/30/16 audits are underway, for a rough ballpark figure three years from now for required implementation.
Early application is permitted.
Really fast intro
If a judgment at trial were big enough, it could mean the end of a large firm. Writing on August 13th at Market Watch, Francine McKenna explains PwC faces 3 major trials that threaten its business.
That threaten its business phrase in the headline actually means could take down the entire firm.
There are three major cases, each with a serious enough impact, that an adverse ruling in any one could take out the firm. One is in court now, another expected next February, with the final one in court within a year.
Work with me as I try to process through the cases. Here is the thumbnail version.
Two lawsuits over one client
Taylor Bean & Whitaker Mortgage Corp allegedly generated massive amounts of fraudulent loans, a large portion of which were sold to Colonial Bancgroup. Both companies failed during the financial crisis.
PwC audited Colonial Bank and allegedly did not discover the bad loans that their client, Colonial Bank, bought from PwC’s non-client Taylor Bean.
I have been discussing Professor Frank Holt’s book The Treasures of Alexander the Great: How One Man’s Wealth Shaped the World . You can find other posts on the ancient finances tag.
The second half of the book explores Alexander’s spending. There is even less historical information available on his spending than on his looting.
One part caught my eye.
Alexander built about 13 major cities according to the educated guess in the book. That doesn’t include dozens of small villages or all the sundry fortifications.
One of these cities, Ai Khanoum, had three miles of wall, which is guessed to have taken 3,000 workers six months to build.
How much would that construction cost? I will make a wild guess. Read the rest of this entry »
Barron’s suggests Mansa Musa, the Emperor of Mali in the 1300s, was the richest man who ever lived.
Since I firmly believe that I am richer today than John D. Rockefeller was back in 1916, I would also insist that I am, right now, richer than Mansa Musa was in 1324. But that isn’t the point of the story. I’ll mention travel costs momentarily.
The 7/23 article from Barron’s gives a glimpse into ancient finances by wondering Who Was the Richest Person Who Ever Lived? / The Emperor of Mali lived on top of a 14th century Goldmine so prolific that it probably made him the richest person who ever lived.
Musa Keita I is referred to as Mansa, or Emperor, Musa. He was born somewhere around 1280 and died somewhere around 1337. He was the ruler of the Mali Empire which stretched across Western Africa.
Consider the economic resources in the area: gold and salt.
A few recent reports: Reason for no criminal prosecution of one too-big-to-fail bank is that it was TBTF, an indictment and a settlement in forex cases, and progress in the money laundering investigations.
Since I use the term a lot, here is a definition of fiasco from Google:
a thing that is a complete failure, especially in a ludicrous or humiliating way. Synonyms: failure, disaster, catastrophe, debacle, shambles, farce, mess, wreck.
Seems to me throwing away $530 million of bank capital because bank staff and leaders wanted to cheat customers meets the definition of fiasco.
7/11 – Francine McKenna at Market Watch – HSBC wasn’t prosecuted because it was ‘too big to fail’: House Committee – A House committee concluded that HSBC wasn’t prosecuted for willful AML violations because it was TBTF. One part of the violations was intentionally leaving out of wire instructions any indication that the funds were related to activity in countries with bans.
Staff recommendations were to pursue a criminal prosecution. Attorney General Eric Holder determined the systemic risk was too high and thus agreed to a deferred prosecution agreement.
Consider this idea: perhaps GAAP-based accounting numbers aren’t giving stock investors all the information they need.
What is wrong with this picture?
In April, Netflix announced their earnings fell short of analysts’ expectations. Usually that would drop the stock price. What happened?
Nexflix stock jumped 18%.
What could cause that? The market supposedly has incorporated the consensus into the price. Missing the expectation should drop the price.
Consider this: At the same time, Netflix announced their new-subscribers were 4.9 million instead of the expectation of 4.0M.
That means they will have stronger earnings for the next several quarters than was expected the day before the announcement. Thus, the stock price rose.
Investors looked at the new subscriber tally as a better indicator of future earnings and thus future stock price than this quarter’s GAAP net income. New subscribers is more important than EPS.
If you wonder are wondering why GAAP EPS isn’t the driving force in that story, here is a brain stretcher for you:
“The End of Accounting”
Professors Baruch Lev and Feng Gu point to The End of Accounting and the Path Forward for Investors and Managers in their June 21 Wall Street Journal article.
You can find the book at Amazon here. It is a bit steep, $32 in hardback and $26 in Kindle format, which is really high for an e-book. I already have a copy on my e-reader. Started reading it yesterday.
The professors suggest that reported earnings under GAAP are losing relevance for investors as we move further and further away from an industrial economy. When know-how, processes, patents, using the internet, and other intangibles are the source of income, GAAP doesn’t report useful information for figuring out future earnings.
By the way, keep in mind that providing historical information to readers of the financial statements to allow them to make estimates of future earnings and cash flows of the company is, like, sorta’, kinda’, the purpose of GAAP financial statements.
The problem with GAAP
Some drawbacks in looking at GAAP numbers, according to the professors:
If your peer review resulted in anything other than a pass report there are a couple of deadlines you need to remember if you are in California.
Keep in mind you are responsible for your compliance with regulations. Here are a few tips to point you in the right direction. These comments discuss the regs in California. If you are in another state, you really ought to check out what your board of accountancy has to say. I’ll guess there is some comparable reporting requirement when a peer review does turn out well.
Notification requirement for reports less than pass — 45 days
If you received either a pass with deficiency or a fail report, you need to be in touch with the California Board of Accountancy (CBA).