I have argued before that the flawed accounting standards of the FASB are superior to those of the IASB. I will argue that again, as IASB has compromised its integrity by giving in to the EC. It is easy to give into pressure as firms with bad balance sheets scream for relief, presuming that markets don’t ignore the accounting, and assume that asset cash flows are inadequate to pay for liabilities.
Following Jack Ciesielski, I have written the FASB on EITF 99-20. Here is what I wrote:
Accounting is properly done using discounted cash flows, rather than management judgment. The value of an asset is the cash flows that it will likely generate, discounted at a rate appropriate for the risks thereof. I am a life actuary, and I believe that where cash flows can be reasonably projected, that forms an adequate basis for calculating the value of assets.
So, don’t change EITF 99-20. It provides better guidance than a management’s judgment would.
David J. Merkel, CFA, FSA
There are no perfect accounting rules, and cheaters will always find a way to abuse the rules. Management judgment can be a good thing where cash flows can’t be reasonably estimated, but where cash flows are clear, managements should discount them at rates appropriate to their risk.