Wednesday, April 29, 2009

Mark-to-market accounting IV

IMHO, the move toward mark-to-market accounting, a gradual process through much of the 1990s and into this century, was a good idea, driven by business realities and, in its final stages, by a sensible reaction to the ludicrous bookkeeping of the late Enron Corp.

If a management's valuation model relates to reality it ought to be possible to get quotes backing that up. If it is not possible, then it is very likely management is either trying to pull something at the expense of somebody or has deluded itself, and neither possibility sounds like a sound basis for accounting rules.

"Oh, but some assets can't be sold right away except at fire sale prices!"

Market-based valuation doesn't require immediate sale. It is my understanding that conversations between corporate folk (CF) and auditors looking for GAAP compliance often go something like this.

CF: We can't mark these assets to market.

A: Why not?

CF: Nobody's buying them. So there's no market except a fire sale one.

A. How long do you think it might take you to get a non-fire sale price?

CF: Maybe six months.

A: So how much do you think you might be getting if you had started asking around for quotes six months ago?

That dialog comes (adapted by yours truly) from Einhorn's recent book.

With this, I leave the issue of mark-to-market accounting, and I'll try to get back to the chronicling of proxy fights next week.

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