streetwise BY STEPHEN BARLAS, MATT KOPECKY, BOB RANDALL, KATHY WILLIAMS [NEWS] FASB, IASB Publish Joint Proposals on MAKING CMA THE Business Combinations | KATHY WILLIAMS GOLD STANDARD The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have each published an Exposure Draft containing joint pro- posals to improve the accounting and reporting of business combinations. According ➤Help validate the value of to both groups, the objective of the project is to develop a single high-quality stan- the Certified Management dard for accounting for business combinations that could be used for both domestic Accountant (CMA) credential! and cross-border financial reporting. The proposed standard would replace the The Institute of Certified Man- FASB’s Statement of Financial Accounting Standards (SFAS) No. 141, “Business Com- agement Accountants (ICMA) is binations,” and the IASB’s International Financial Reporting Standard (IFRS) 3, preparing to launch a new job “Business Combinations.” analysis to confirm the knowl- Both Boards said that the proposals retain the fundamental requirement to account edge, skills, and abilities need- for all business combinations using a single method—where one party is always iden- ed by professionals who tified as acquiring the other. The principal proposed changes include a requirement practice management account- “to measure the business acquired at fair value and to recognize the goodwill attribut- ing and financial management able to any noncontrolling interests (previously referred to as minority interests) inside organizations. This rather than just the portion attributable to the acquirer.” There would also be fewer updated analysis was strongly exceptions to measuring the assets acquired and liabilities assumed at fair value. And recommended in the Bench- payments to third parties for consulting, legal, audit, and similar services associated marking Study last fall and will with an acquisition would be recognized as expenses when incurred rather than capi- be conducted using psychomet- talized as part of the business combination. rically accepted measurement The two groups published additional Exposure Drafts “that propose that noncon- techniques. The study will vali- trolling interests be classified as equity within the consolidated financial statements and date exam content and elevate that acquisitions of noncontrolling interests be accounted for as equity transactions.” the prestige of our certification You can find the Exposure Drafts on the FASB website at www.fasb.org and on the program, provide insight into IASB website at www.iasb.org, and the organizations welcome comment letters. These the ongoing development needs letters are due in writing by October 28, 2005. Please send only one comment letter to of our members, and help us one group as they are going to share all letters and make decisions about the project create a strong value message jointly. about the CMA. Many IMA If you want to respond to the FASB, submit your comments by e-mail to members will probably be [email protected], File Reference 1204-001, or by regular mail to Technical Director— asked to respond to a survey in File Reference 1204-001, Financial Accounting Standards Board, 401 Merritt 7, conjunction with this project, so P.O. Box 5116, Norwalk, CT 06856-5116. No faxes, please. please participate when asked. If you want to respond to the IASB, submit your comments by e-mail to Your input is vital. ■ [email protected]. ■ August 2005 | STRATEGIC FINANCE 19 streetwise [GOVERNMENT] Letters to the Editor Grassley Wants Pension Accounting Changes | STEPHEN BARLAS, EDITOR Senate Finance Committee Chairman Charles Grassley (R.-Iowa) thinks the Error in Salary Survey way some companies handle accounting for their pension plans rivals the way Let me first say “thank you” for Enron did its off-balance-sheet accounting. Does that mean there’s now a publishing such a useful, educa- Grassley equivalent of Sarbanes-Oxley in the wind? It’s a strong possibility, tional, and thought-provoking given that Grassley is refining a pension reform bill he initially introduced in magazine. I love it! January called the National Employee Savings and Trust Equity Guarantee I was looking through the June (NESTEG) Act. That bill dealt mostly with premiums that companies must pay 2005 edition, and in the “IMA to the Pension Benefit Guaranty Corporation and the method for determining 2004 Salary Survey” article, there’s pension funding. The January version contained no accounting reform provi- a misprint. On Table 5: Compensa- sions, but in June, two days after the Finance Committee held hearings on the tion by Age and Certification, p. 33, United Airlines’ pension default, Grassley promised to include new provisions the top part of the table shows in NESTEG when he reintroduces the bill. These will undoubtedly touch on average salary by age range. For all accounting problems in pension accounting generally. “As the Finance Com- ages and classifications of certifi- mittee’s investigation of United Airlines’ pension default and the GAO’s (Gov- cation it shows the average salary ernment Accountability Office) recent report on the pension crisis have made of $107,744. I think this number painfully clear, we need completely new rules requiring accurate measurement should be closer to $91,715. of pension liabilities and full funding of all pension plans,” Grassley says. In Thanks again for a great particular, he promised his bill would eliminate the so-called “smoothing” tech- magazine! niques that let companies hide massive pension losses from their employees Matt Kopecky and the public at large. Smoothing techniques allow pension plans to credit Cost Analyst paper investment gains and then carry them into the future for as far as five years, even if those paper investment gains have long since evaporated. “As the Great catch, Matt! You are right. stock market plummeted in 2000, 2001, and 2002, United used these smooth- According to the authors, the cor- ing techniques to make its pension plans look like the late ’90s stock market rect amounts should be $91,715 boom had never ended,” Grassley says. “There is nothing unique about United. for all salary and $105,883 for all The same blinders that United put on are used by companies everywhere.” total compensation. Thanks for bringing this to our attention. Eds. SEC Report Cites Corporate Accounting Weaknesses Pension accounting also came in for some hard knocks in a June Securities & Exchange Commission (SEC) report mandated by Sarbanes-Oxley. Put togeth- We welcome all opinions on er by the office of the chief accountant, the report looks at off-balance-sheet arrangements, special-purpose entities (SPE), and related issues. Donald T. articles and departments Nicolaisen, SEC chief accountant, says, “Since the events leading to passage of published in Strategic Finance. the Sarbanes-Oxley Act, we have made progress in improving financial report- E-mail correspondence to ing to investors, but more can still be done. I’m hopeful that this report will help focus efforts on further ways to improve transparency.” Nicolaisen’s office Kathy Williams at recommended changes in accounting guidance for defined-benefit pension [email protected]. plans and other post-retirement benefit plans. The trusts that administer these plans are currently exempt from consolidation by the issuers that sponsor them, effectively resulting in the netting of assets c ontinued on last page 20 STRATEGIC FINANCE | August 2005 streetwise [BOOKS] Red (Ink) on Their Hands The great stock market bubble of the 1990s left many Her salary matched her perceived value to her firm—a jump casualties in its wake when it finally burst, and most of from $15 million in 1999 to $23 million in 2000. them were unknown and unmourned investors who lost mil- Jack Grubman, at Salomon Smith Barney and, after the lions on stocks hyped by analysts who made millions for merger, Citigroup, was known as the “King of Telecom” for themselves and their firms. Former Wall Street Journal his relentless promotion of WorldCom, Global Crossing, and reporter Charles Gasparino tells the story of these analysts Qwest over traditional telecommunication companies. His and the bubble bursting in his book, Blood on the Street, star started falling, however, when the market turned down- published by Free Press. ward and Business Week pointed out he was a fabulist who The genesis of the debacle can be traced back to May claimed he was an MIT graduate when he actually had 1975, when Congress approved a new floating rate system earned a B.A. from Boston University. that allowed market forces to control commissions. As a The regulatory agencies don’t emerge unscathed from result, commissions dropped, firms had to remake them- the story of Wall Street’s follies. Gasparino writes, “But the selves into investment banking firms, and blame should be cast wider. All of this analysts were paid from revenues from activity also occurred under the nose of investment banking deals. Gasparino points Wall Street’s chief regulator, the Securities out, “[I]t didn’t take long for analysts to and Exchange Commission, which seemed become de facto investment bankers… to be taking an extended coffee break dur- hyping their assessments of banking ing one of the greatest destructions of prospects in an attempt to win business wealth in American history.”Arthur Levitt, and earn their keep.” Jr., appointed SEC chairman by President Gasparino focuses on three major “rock Bill Clinton, “talked a good game.” But for star analysts” who became famous on the all his good intentions, by the end of the Street and then infamous as the bubble decade he “had failed small investors.” began to burst. Henry Blodget at Merrill Gasparino notes how during “much of his Lynch touted the new technology and “new tenure, the number of enforcement cases paradigm” created by the Internet and how that would be launched by the commission remained relatively stable the wealth creator for Wall Street firms, but he admitted even as fraud exploded.” that many companies would fail to master the new medi- The situation was ripe for politically ambitious New York um.