FASB: Consolidate This

New ruling on off-balance-sheet entities will add $400 billion in assets, liabilities, to balance sheets of S&P 500, survey says. Plus: PCAOB enlisting help, layoffs down, and why CEOs should be open about their pay.


Forget asset-light.

A rule change governing consolidation of existing off-balance-sheet entities, synthetic leases, and other kinds of units will add almost $400 billion in assets—and liabilities—to the balance sheets of companies in the S&P 500. This according to a Credit Suisse First Boston report cited by Reuters.

The rule change—made in Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities”—took effect at many companies in the new fiscal year starting July 1.

The new rule, which already applies to entities launched after January 31, addresses when a company should include in its financial statements the assets, liabilities, and activities of “variable interest entities.”

What are variable interest entities? While many think the definition refers solely to the type of special-purpose entities or off-balance-sheet structures that led to the Enron debacle, the definition actually applies to many other types of units as well, notes FASB.

Included in the definition: corporations, partnerships, trusts, or other legal structures used for business purposes that don’t have equity investors with voting rights, or those that have equity investors who don’t provide enough financial resources for the entity to support the vehicle’s activities.

The new rule will change how companies account for such units, that’s for sure. Until now, companies have only included other entities in their consolidated financial statements if they had controlling voting interests in the unit.

The rule, however, requires a company to consolidate a variable interest entity if the company is vulnerable to a majority of the entity’s risk of loss, is entitled to get the bulk of the entity’s residual returns, or both.

That could affect a lot of companies—including as many as 234 of the S&P 500, according to CSFB. Among them: Citigroup and General Electric. The two corporations have about $55 billion and $43.6 billion in assets, respectively, that could wind up on their corporate financial statements due to the rule change.

Other companies may enjoy asset boosts of more than $10 billion, according to CSFB, including Bank of America, Ford Motor, General Motors, J.P. Morgan Chase, State Street Corp., and Wachovia.

With many corporations set to report second-quarter earnings, the rule change could add or subtract from earnings per share, cash flow, debt-to-equity ratios, and credit ratings, according to Reuters.

“The combination of weak disclosures and a vague new accounting rule leads us to believe we may be in for a few surprises over the coming weeks and months as companies announce and investors digest the impact” of the rule change, wrote CSFB accounting analyst David Zion.

Expect a few negative surprises, especially from companies bearing “more risk than was known before,” says Zion. He thinks that $377 billion of liabilities will move onto S&P 500 company balance sheets in the third quarter. The liabilities of those companies could mount by 2.4 percent, to $16.2 trillion. Zion believes the rule change will boost the overall assets of S&P 500 constituent companies by about 2 percent, to $19.2 trillion.

Advising the PCAOB

The Public Company Accounting Oversight Board (PCAOB) has adopted a rule enabling it to form one or more advisory groups to help set public audit standards and oversee audits of public companies. The rule is subject to approval by the Securities and Exchange Commission.

The advisory groups will include experts in accounting, auditing, corporate finance, corporate governance, and investing in public companies, according to a PCAOB release. The board has already suggested that no one group will represent more than a third of the group advising it on audit standards, and that any individual or group will be allowed to suggest new accounting standards and treatments.

The American Institute of Certified Public Accountants, which controlled the setting of audit standards for more than half a century, has been attempting to maintain some say in standards setting since the PCAOB stripped it of its role in April (see “Troubled Times at the AICPA). The Big Four accounting firms (Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers) have also reportedly been seeking an advisory role.

Members of the advisory groups would be selected by the PCAOB based on nominations—including self-nominations—by people or organizations. Membership would stay with the member, whose duties and responsibilities could not be delegated to anyone else.

The board also provided details about its proposed standing advisory group (SAG). The group will consist of 25 members, including practicing auditors, preparers of financial statements, investors, state accounting regulators, and academics.

Interestingly, SAG is slated to be chaired by Douglas Carmichael, the PCAOB’s chief auditor and director of professional standards. In recent years, Carmichael has gained a reputation as a tough critic of the audit industry

Layoffs Cool Down

Unemployment may be leveling off—finally.

Or at least that’s the takeaway from a report by headhunters Challenger, Gray & Christmas cited by Reuters. Indeed, the number of layoffs announced by U.S. employers dropped in June to its lowest in 31 months, according to the report.

Planned layoffs at U.S. businesses slipped 13 percent to 59,715 in June from 68,623 in May, according to the report. The year’s job-cut plans so far total 630,532. That’s 14 percent lower than the 2002 midyear total.

For job-market optimists, however, the slowdown in planned layoffs might turn out to be fool’s gold “The fall in job cuts may mean that employers are simply staying with the workers they have, resulting in a stagnant job market,” explains John Challenger, chief executive officer of Challenger, Gray.

CEOs: Come Clean about Pay

Chief executives facing attacks from institutional investors and other critics of fat CEO pay packages might do well to enlist their employees as witnesses for their defense.

That’s one nugget that can be gleaned from recent surveys of employees of public companies done by Clark Consulting, an executive-compensation advice firm. Forty percent of 160 workers, in fact, don’t think their CEOs are fairly paid.

Still, that sympathy for the chiefs might be the product of ignorance: 54 percent of 194 respondents don’t know how much their CEOs make.

Even though uninformed workers might think the best of their CEOs, keeping mum about compensation packages might not be the best plan for chief executives. Tom Wamberg, chairman and CEO of Clark Consulting, cites the case of Donald Carty, the former American Airlines CEO.

Carty, you’ll recall, resigned in April after workers learned he had apparently hidden the details of executive-benefit plans from union leaders while he was negotiating deep concessions from them.

To be sure, at most other public companies the bulk of information about a CEO’s pay can be readily picked up from the proxy statement, notes Wamberg.

Nevertheless, a chief executive “needs to be personally open about pay and demonstrate that he or she has a compensation package that is good for the shareholders [and] employees and is fair,” he said. “Mistakes, as proven by Don Carty…can prove to be incredibly damaging.”

Short Takes

  • Zale Corp., the jewelry retailer, has commenced a Dutch auction tender offer to buy up to 6.4 million shares of the company’s outstanding common stock at a price per share of not less than $42 or more than $48 per share. The aggregate purchase price would thus range up to $307.2 million. The stock in question represents about 20 percent of Zale’s current outstanding shares.
  • Fisher Scientific International, a laboratory-equipment manufacturer, will offer $250 million worth of 2.5 percent convertible senior unsecured notes at a conversion price of $47.46 per share. That price for the notes, which will mature in 2023, represents a 36 percent premium over the $34.90 per share closing price of Fisher common stock on June 30.
  • John R. Schwab has been named CFO of RMH Teleservices, a Newton Square, Pennsylvania-based provider of customer-relationship-management services. From 2000 until earlier this year, Schwab was CFO and executive vice president of Inrange Technologies Corp., a publicly held storage technology company acquired by CNT in May.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>