At FASB, IASB, the Urge to Converge

The two standards-setting boards look to agree on a global set of accounting rules. Herding cats? Elsewhere: VC investments dropping, Nicor restating, and GE provisioning.


What happens when standards-based accounting collides with principles-based accounting? We’re about to find out.

On Tuesday, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued a joint-statement saying they are committed to crafting one set of accounting standards.

In the press release, the two groups said their joint short-term convergence project should lead to changes in U.S. and international accounting standards that reflect common solutions to specifically identified differences.

Last month, the two groups agreed to add a joint short-term convergence project to their agendas.

FASB in particular has been criticized by some for not reacting quickly enough to the recent spate of accounting scandals in the U.S. Yesterday’s announcement is not likely to appease those critics. FASB and the IASB indicated they expect to issue an exposure draft to address a number of the accounting differences by the end of 2003.

The goal of the convergence project: to unify accounting standards, which in turn, should improve comparability of financial statements across national jurisdictions.

“The FASB is committed to working toward the goal of producing high-quality reporting standards worldwide to support healthy global capital markets,” said FASB chairman Robert H. Herz. “By working with the IASB on the short-term convergence project — as well as on longer-term issues –the chances of success are greatly improved. Our agreement provides a clear path forward for working together to achieve our common goal.”

For his part, Sir David Tweedie, Chairman of the IASB, stated: “This underscores another significant step in our partnership with national standard setters to reach a truly global set of accounting standards. While we recognize that there are many challenges ahead, I am extremely confident now that we can eliminate major differences between national and international standards, and by drawing on the best of U.S. GAAP, IFRSs and other national standards, the world’s capital markets will have a set of global accounting standards that investors can trust.”

The push for harmonization was lauded by the SEC applauded. Commission Chairman Harvey Pitt noted: “This is a positive step for investors in the U.S. and around the world. It means that reducing the differences in two widely used sets of accounting standards will receive consideration by both boards, as they work to improve accounting principles and address issues in financial reporting.”

SEC Commissioner Roel C. Campos, who has been the Commission’s participant in recent meetings of the International Organization of Securities Commissions, added, “I find it encouraging that interested parties in all countries can contribute their thinking. It is clear that investors globally could benefit to the extent that transparency and high quality information might be provided by a common worldwide approach.”

Nothing Ventured, Nothing Lost

The new economy hangover continues to undercut the financing needs of small, fledgling companies.

Total venture capital investments totaled $4.5 billion in the third quarter of 2002. That’s down 26 percent from the prior quarter, according to the PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey.

All told, venture capitalists plunked down $6 billion in the second quarter and $6.4 billion in the first quarter of 2002.

Just 647 companies received funding during the September period compared with 838 in the prior quarter.

The last time quarterly venture capital investments came in below $5 billion was the first quarter of 1998, when venture cap inflows amounted to $4.2 billion, according to the survey.

The steady erosion in venture capital investments is not surprising. The poor performance in the stock market, as well as the decline in corporate technology spending, has made venture investing a risky proposition.

“Venture capitalists have concerns regarding the front-end and back-end of the deals they are evaluating,” said Mark Heesen, president of the National Venture Capital Association.

“On the front-end, they are concerned that young companies are going to have difficulty gaining traction in terms of customers and revenues due to the decline in technology spending,” he explained. “On the back-end, they are concerned about sobering valuations and illiquidity. Both sets of concerns are resulting in an increasingly cautious venture community.”

Added Tracy Lefteroff, global managing partner of the venture capital practice at PwC: “Neither the venture capitalists nor the entrepreneurs are impervious to business cycles or the public markets. Earlier this month, the Dow was at its lowest level since October 1997; the Nasdaq, its lowest since August 1996. Entrepreneurs must recognize the fact that only the most fundamentally sound deals get done.”

All major industries experienced declines in venture capital financing.

Interestingly, the software sector — historically the leading recipient of venture backing — saw a 10 percent drop in VC money from the prior quarter (down to $993 million and 180 deals). Nevertheless, the sector accounted for 22 percent of all venture capital investments during Q3.

Not surprisingly, the struggling telecom industry, the second largest industry category, witnessed a huge dropoff in venture backing during the quarter. VC financing in the sector declined 32 percent ($555 million invested in 67 companies). The networking group declined by 34 percent ( $341 million in 39 deals).

Even though venture capitalists appear to be sitting on their cash, it’s not impossible for companies to receive funding — particularly if they’ve never tapped the market in the past, or at an early stage of development.

A total of 159 companies received venture capital for the first time in the third quarter. That was down from 214 companies in the second quarter.

Expansion stage companies received 56 percent of all capital invested and 55 percent of the number of deals in the third quarter.

Companies in the “formative” stages of development (early stage and startup/seed) received similar levels as the prior quarter — 23 percent of dollars invested and 30 percent of the number of deals. “This stability in earlier stage investing indicates venture capital firms continue to take longer-term views,” the report noted.

Later stage investing only accounted for 20 percent of the dollars invested and 15 percent of the number of deals.

That’s understandable, given the current market. “Venture funds that focus on later stage deals are finding fewer traditional later stage opportunities — that is, deals a couple of years from exit — because the time to exit has lengthened,” noted Jesse Reyes, vice president at Thomson Venture Economics.

As a result, Reyes says VCs are finding that the only new investments that fit their focus are expansion stage deals that require even more time to mature before exit is a possibility.

Nicor Gas to Restate Earnings

Nicor Gas said it will restate earnings by $15 million to $35 million between 1999 and 2002. The plan to rejigger the company’s financials comes after an independent special committee found that the company overcharged customers.

The report concluded that there was no evidence of criminal conduct or fraud, according to Nicor. It blamed inadvertent accounting errors, sometimes to the benefit of customers and sometimes to the benefit of Nicor Gas.

One error identified in the report by the special committee was a 1999 wholesale transfer of natural gas from Nicor Gas’ storage inventory. That transfer increased customers’ gas costs by approximately $6.75 million. The report also found that operational transfers of natural gas between Nicor Gas’ storage fields were not consistently accounted for under the performance-based rate (PBR).

“This report is the first step toward improving Nicor Gas’ ability to better serve our customers, which will include providing all appropriate restitution to them, strengthening our policies and procedures, and implementing organizational changes,” said Thomas L. Fisher, Nicor Chairman.

In addition, Nicor and Nicor Gas will restate certain sales and purchases of natural gas inventory between Nicor Gas and independent third-parties that occurred from December 1999 to the present. The restatement will be issued after Nicor consults with its new independent auditor Deloitte & Touche. Those restatements will reflect timing changes in recognition of inventory amounts and accrued gas costs to customers.

Management teams at Nicor and Nicor Gas believe that they will restate prior period recorded assets and liabilities in nearly equal amounts. But the impact will likely vary from quarter to quarter.

In July, Nicor’s board of directors appointed a special committee of non-management directors to investigate Nicor Gas’ natural gas purchases, transportation, and storage activities. The committee was set up after an anonymous fax was sent to the Citizens Utility Board. The fax claimed that there were irregularities in Nicor Gas’ PBR.

Judging by yesterday’s announcement, the sender of the fax was on to something.

GE’s Financials Losing Altitude

Here’s a good example of why it’s very risky to play banker to your customers.

On Tuesday, management at General Electric said the company has $4.4 billion in loans, leases, guarantees and financing commitments to US Airways and United Airlines.

The problem is, US Airways filed for bankruptcy in August. Meanwhile management at UAL, United Airlines’ parent, has indicated that it is considering a similar move.

GE added that individual aircraft or pools of aircraft engines secure the loans, leases and guarantees.

The company’s management said it has been in discussions with both airlines and has made a provision for probable losses.

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