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Sounds to me like the Financial Accounting Standards Board is on another one of its intellectually stimulating but oh-so-impractical tangents in testing its new format for financial statements (“A New Vision for Accounting,” February). Before companies are forced to pursue this expensive exercise in futility, FASB needs to be reminded of Rule #1 for financial statements: their primary intent is to provide timely, accurate, and useful information to users.
FASB needs to ask users what they find really useful in financial statements, rather than what strikes accountants’ fancy. I think users and providers of financial statements would be far better served if FASB spent its time defining EBITDA. Every fundamental analysis of a business starts or ends with this metric. But FASB and the Securities and Exchange Commission seem to suffer from NIH (“Not Invented Here”) Syndrome. Again, they need to get their heads out of the theoretical sky and put their feet on the ground where financial-statement users — that is, their constituency — have to operate.
The Difference Between RECs and Offsets
I applaud January’s cover story “Carbon Trading” for attempting to bring some common business sense to one of the hottest corporate-social-responsibility tools du jour: voluntary carbon offsetting. However, as an active participant in the carbon market, I must take offense at the author’s treatment of Renewable Energy Certificates (RECs) and carbon offsets as identical, interchangeable goods: they are decidedly not.
The key difference between these two intangible environmental commodities is so-called additionality (that is, the assurance that the credited emission reductions would not have occurred in a “business-as-usual” scenario). Carbon offsets are certified as representing real, additional reductions; RECs are not.
Given the deep confusion in this marketplace, it is essential that the press clearly report on integral policy differentiations. While additionality might seem like a trivial nuance to some readers, the concept is actually the very crux of carbon offsetting.
The Price You Pay
It’s pretty amazing what can be done when Big Brother (in this case, shareholders and Sarbanes-Oxley) isn’t watching every move you make in order to pounce on the thinnest hint of impropriety (On the Record, January).
Koch Industries’s Steve Feilmeier offers an engaging description of the main benefit of private ownership — the creation of long-term value precipitated by internal entrepreneurialism. If Koch were a public company, perhaps it would have been driven more by quarterly reports than by solid, sustainable growth and would not have achieved its current level of success. Public ownership is a wonderful way to raise revenue and to cash out, but it also sacrifices the spirit of independence. And that’s a rather large price to pay.
Sparta, New Jersey
Round and Round on VSOE
Allocating multiple deliverables such as software to revenue is tough enough, but now throw in a customer solution that contains leasing, a situation that any CFO with a captive finance company faces (“Why VSOE Spells Trouble,” January). Under FAS 13, the finance rate to be allocated is a function of equipment fair value, which, arguably, could be a function of the finance rate (and also is effected by the value of software, maintenance, and other services). The whole thing becomes very circular and difficult to implement, as Xerox unhappily discovered.
The Alta Group
Salt Lake City
Keeping 401(k) Plans on Track
Reading “The New Mix” (December 2007) brings to mind the issue of monitoring the “correct” investment choices. The selection, approval, and documentation process can be as important as the actual investment choices.
The board of directors should empower an investment committee, made up of a cross section of corporate disciplines, with the fiduciary authority and responsibility to monitor and change the investment structure of the 401(k) program. This committee should have an investment policy statement that outlines strategic investment guidelines for the investments. Then, periodically, the committee should monitor and document the review and any changes to the investment aspects of the program.
Ernest A. Liébré
Cambridge Financial Services Group
Thinking about the Box
Your article on real estate markets (“A Tale of Six Cities,” December 2007) was accurate, but it oversimplified corporate real estate decisions. In our experience, many companies have not considered the full impact of real estate deals beyond a lease rate and a broker’s market analysis.
Your story cites a clever CFO who negotiated a fixed purchase option on a lease and turned a handsome profit. A fixed purchase option potentially creates a capital lease, which may or may not be in the best interest of the company. Additionally, a fixed purchase option can have an adverse effect on the lease rate because a landlord will price in the risk of giving up value at the option date. Finally, trying to time your business needs to the ups and downs of the real estate market can be a risky proposition.
Corporate leaders should not lose sight of the fact that real estate is more than a box for their operations. There are a number of financial, operational, and strategic issues that must be considered beyond the lease rate and term. More often than not, we find that our clients can get a higher return on investment in their operating business than in their real estate.
Cascades Advisory Group
The Purpose of Sustainability Reports
I enjoyed your article “Earth in the Balance Sheet” (December 2007). There is one issue you alluded to but did not address directly: If sustainability reports are intended to influence investment decisions, is the information, by definition, material and thus subject to SEC disclosure? If not, what is the purpose of these reports? As socially responsible investing goes more mainstream and pension funds continue to pressure the SEC, I believe the importance of this legal issue will increase.
In the January Topline story “IFO Sightings,” we identified the CFO of the U.S. Postal Service, H. Glen Walker, as David Walker.
“‘Partial’ Success,” our February Deals column, incorrectly stated that Hewlett-Packard and IBM received shares in the IPO of VMware. In fact, neither did.