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    A Conversation with Bob Herz
    announcement posted July 8, 2011 by AAA HQ, last edited July 14, 2011 by Judy Cothern, tagged Home Page Announcement 
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    A Conversation with Bob Herz

    Bob Herz

    Bob Herz is looking for your questions to address in his presentation.

    Monday's plenary session on August 8, 2011 will be an arm-chair discussion with former FASB Chairman Robert H. Herz on issues of most interest to AAA members. Click here for more on Robert H. Herz.

    We invite everyone to submit a question to Bob Herz by Monday, August 1. For additional information on submitting your question, click on the green "Submit" button below.

    Bob Herz



    • Robert E Jensen

      Teaching case from The Wall Street Journal Accounting Weekly Review on July 27, 2012

      Microsoft Posts Rare Loss
      by: Shira Ovide
      Jul 20, 2012
      Click here to view the full article on
      Click here to view the video on 

      TOPICS: Goodwill, Impairment

      SUMMARY: "Microsoft posted a rare loss due to a charge for its Internet business, but still showed signs of strength in selling software to corporations." According to the related video, the $6.2 billion charge amounts to almost the entire $6.3 billion purchase price of aQuantive in a 2007 business combination. The video also includes discussion of the interpretation of a goodwill impairment charge in layman's terms.

      CLASSROOM APPLICATION: The article is useful to introduce the reporting implications of goodwill impairment charges. NOTE TO INSTRUCTORS: YOU SHOULD DELETE THIS SECTION OF THE SUMMARY BEFORE DISTRIBUTING TO STUDENTS AS IT CONTAINS ANSWERS TO QUESTIONS BELOW. ASC references: ASC 350-20-35-1 through 35-19 provides the overall requirements for goodwill impairment assessment (under the subsequent measurement category). ASC 350-20-35-3c (subsequent measurement related to Goodwill) covers the events and circumstances that should be used in evaluating whether it is more likely that not that the fair value of a reporting unit is less than its carrying amount.

      1. (Introductory) Based on the description in the article, summarize the results reported by Microsoft for the quarter ended June 30, 2012? What is your sense of the overall implications of these results for the company's business?

      2. (Introductory) Have you used the Microsoft Bing search engine? How does it compare to other search engines you use?

      3. (Advanced) Access the Microsoft filing on Form 8-K for the announcement of their operating results for the quarter ended June 30, 2012 made on July 19, 2012 and available on the SEC web site at How large was the goodwill impairment charge relative to their overall operations? Clearly state how you assess the size of this charge.

      4. (Advanced) Scroll down the report to review the Fourth Quarter Financial Highlights. What operating segments does MicroSoft report?

      5. (Introductory) In which operating segment was the goodwill impairment charge recorded? How large was the charge relative to this operating segment? As in question 1 above, clearly state how you assess the size of this charge.

      6. (Introductory) Summarize the accounting process for determining a goodwill impairment charge. In your answer, include a reference to the required assessment of events and circumstances frequently leading to asset impairment charges. Also include a reference the FASB Accounting Standards Codification (ASC) sections supporting your answer.

      7. (Advanced) What particular factors led Micrsoft to report this impairment charge? How do those factors compare to the requirements under the FASB ASC?

      8. (Introductory) Refer to the related video. What is the meaning of the term non-cash charge? How do these journalists interpret this write down?

      Reviewed By: Judy Beckman, University of Rhode Island


      "Microsoft Posts Rare Loss," by Shira Ovide, The Wall Street Journal, July 20, 2012 ---

      Microsoft Corp.posted a rare quarterly loss because of a previously announced charge for its money-losing Internet business, but the software giant continued to show signs of strength in selling software to corporations.

      The $492 million loss reflected a $6.19 billion charge for Microsoft's online division, which includes the Bing search engine business and MSN Web portal. The unit hasn't met the company's expectations for advertising sales and the company opted to write down the value of a major acquisition.

      Microsoft's total revenue rose nearly 4%, while revenue in the unit that sells software for server systems and related products rose nearly 13%. The division posted a 24% jump in operating income.

      "I feel very good about the enterprise demand for our products," said Peter Klein, Microsoft's chief financial officer, in an interview.

      Revenue for the company's Windows division declined by nearly 13%, after subtracting about $540 million in deferred revenue—tied to an offer to give buyers of personal computers the option to upgrade their machines to Windows 8, the next version of Microsoft's computer operating system.

      The loss for the fiscal period ended June 30 came to six cents a share. In the year-earlier period, Microsoft posted net income of $5.9 billion, or 69 cents a share. Revenue rose to $18.1 billion from $17.4 billion.

      For Microsoft and Chief Executive Steve Ballmer, the fourth quarter is a transition period ahead of several milestone product launches. Starting this fall, Microsoft is rolling out new versions of two of its biggest cash cows, Windows and the Office bundle of email and document software, along with an overhaul of programs for computer servers and for Microsoft's fledgling Windows Phone software.

      The stakes are high for Microsoft to prove it can catch up to rivals such as Apple Inc. AAPL +2.58% that have a head start in fast-growing computing areas such as tablets.

      By contrast, Microsoft said the market for personal computers was roughly flat in the fourth quarter, with sales of business PCs up 1% and consumer PCs down 2%. Its comments echo what third-party research firms and some other computing companies have been saying in recent weeks.

      Operating income in the division that includes the Windows operating system fell 17.5%. Some analysts believe consumers and businesses may be holding off on buying new PCs ahead of this October's launch of Windows 8, Microsoft's first operating software designed with touch-screen computing devices in mind.

      In the division anchored by the Office line of email and document software, operating income rose 9%. Microsoft's Internet division, and the business that includes the Xbox videogame console, again were money-losers during the fiscal fourth quarter.

      Microsoft said it kept a tight lid on expenses, helping boost profit growth higher than revenue growth.

      For the fiscal year ending next summer, Microsoft said it expects Windows revenue to essentially match the overall PC market. The company said its estimate excludes deferred revenue for a Windows 8 upgrade, and excludes sales of the recently announced Surface tablet computer, Microsoft's first foray into making a computer on its own.

      Continued in article

      Jensen Comment
      One problem with reports focusing on profits or losses is that the IASB and the FASB accounting standard setters adopted a balance sheet focus that turned the income statement into a black hole. The IASB and FASB can no longer even define profits and losses.

      This led Bob Herz, when he was Chairman of the FASB, to suggest that perhaps we should use disaggregated reporting without reporting bottom line profits and losses. Perhaps this applies to the way IBM income statements should be presented ---

      No Bottom Line

      Is a major overhaul of accounting standards on the way?

      There may no longer be the tried and untrusted earnings per share number to report!
      It would be interesting to see a documentation of the academic research, if any, that the FASB relied upon to commence this blockbuster initiative. I recommend that some astute researcher commence to probe into the thinking behind this proposal.

      "Profit as We Know It Could Be Lost With New Accounting Statements," by David Reilly, The Wall Street Journal, May 12, 2007; Page A1 ---

      Pretty soon the bottom line may not be, well, the bottom line.

      In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.

      It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.

      Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.


      Get a glimpse of what new financial statements could look like, according to an early draft recently provided by the Financial Accounting Standards Board to one of its advisory groups. The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.

      The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting -- from clerks to chief executives -- to relearn how to compile and analyze information that shows what is happening in a business.

      This is likely to come as a shock, even if many investors and executives acknowledge that net income has flaws. "If there was no bottom line, I'd want to have a sense of what other indicators I ought to be looking at to get a sense of the comprehensive health of the company," says Katrina Presti, a part-time independent health-care contractor and stay-at-home mom who is part of a 12-woman investment club in Pueblo, Colo. "Net income might be a false indicator, but what would I look at if it goes away?"

      The effort to redo financial statements reflects changes in who uses them and for what purposes. Financial statements were originally crafted with bankers and lenders in mind. Their biggest question: Is the business solvent and what's left if it fails? Stock investors care more about a business's current and future profits, so the net-income line takes on added significance for them.

      Indeed, that single profit number, particularly when it is divided by the number of shares outstanding, provides the most popular measure of a company's valuation: the price-to-earnings ratio. A company that trades at $10 a share, and which has net profit of $1 a share, has a P/E of 10.

      But giving that much power to one number has long been a recipe for fraud and stock-market excesses. Many major accounting scandals earlier this decade centered on manipulation of net income. The stock-market bubble of the 1990s was largely based on investors' assumption that net profit for stocks would grow rapidly for years to come. And the game of beating a quarterly earnings number became a distraction or worse for companies' managers and investors. Obviously it isn't known whether the new format would cut down on attempts to game the numbers, but companies would have to give a more detailed breakdown of what is going on.

      The goal of the accounting-rule makers is to better reflect how businesses are actually run and divert attention from the one number. "I know the world likes single bottom-line numbers and all of that, but complicated businesses are hard to translate into just one number," says Robert Herz, chairman of the Financial Accounting Standards Board, the U.S. rule-making body that is one of several groups working on the changes.

      At the same time, public companies today are more global than local, and as likely to be involved in services or lines of business that involve intellectual property such as software rather than the plants and equipment that defined the manufacturing age. "The income statement today looks a lot like it did when I started out in this profession," says William Parrett, the retiring CEO of accounting firm Deloitte Touche Tohmatsu, who started as a junior accountant in 1967. "But the kind of information that goes into it is completely different."

      Along the way, figures such as net income have become muddied. That is in part because more and more of the items used to calculate net profit are based on management estimates, such as the value of items that don't trade in active markets and the direction of interest rates. Also, over the years rule makers agreed to corporate demands to account for some things, such as day-to-day changes in the value of pension plans or financial instruments used to protect against changes in interest rates, in ways that keep them from causing swings in net income.

      Rule makers hope reformatting financial statements will address some of these issues, while giving investors more information about what is happening in different parts of a business to better assess its value. The project is being managed jointly by the FASB in the U.S. and the London-based International Accounting Standards Board, and involves accounting bodies in Japan, other parts of Asia and individual European nations.

      The entire process of adopting the revised approach could take a few years to play out, so much could yet change. Plus, once rule makers adopt the changes, they would have to be ratified by regulatory authorities, such as the Securities and Exchange Commission in the U.S. and the European Commission in Europe, before public companies would be required to follow them.

      As a first step, rule makers expect later this year to publish a document outlining their preliminary views on what new form financial statements might take. But already they have given hints of what's in store. In March, the FASB provided draft, new financial statements at the end of a 32-page handout for members of an advisory group. (See an example.)

      Although likely to change, this preview showed an income statement that has separate segments for the company's operating business, its financing activities, investing activities and tax payments. Each area has an income subtotal for that particular segment.

      There is also a "total comprehensive income" category that is wider ranging than net profit as it is known today, and so wouldn't be directly comparable. That is because this total would likely include gains and losses now kept in other parts of the financial statements. These include some currency fluctuations and changes in the value of financial instruments used to hedge against other items.

      Comprehensive income could also eventually include short-term changes in the value of corporate pension plans, which currently are smoothed out over a number of years. As a result, comprehensive income could be a lot more difficult to predict and could be volatile from quarter to quarter or year to year.

      As for the balance sheet, the new version would group assets and liabilities together according to similar categories of operating, investing and financing activities, although it does provide a section for shareholders equity. Currently, a balance sheet is broken down between assets and liabilities, rather than by operating categories.

      Such drastic change isn't likely to happen without a fight. Efforts to bring now-excluded figures into the income statement could prompt battles with companies that fear their profit will be subject to big swings. Companies may also balk at the expense involved.

      "The cost of this change could be monumental," says Gary John Previts, an accounting professor at Case Western Reserve University in Cleveland. "All the textbooks are going to have to change, every contract and every bank arrangement will have to change." Investors in Europe and Asia, meanwhile, have opposed the idea of dropping net profit as it appears today, David Tweedie, the IASB's chairman, said in an interview earlier this year.

      Analysts in the London office of UBS AG recently published a report arguing this very point -- that even if net income is a "simplistic measure," that doesn't mean it isn't a valid "starting point in valuation" and that "its widespread use is justification enough for its retention."

      Such opposition doesn't surprise many accounting experts. Net income is "the basis for bonuses and judgments about what a company's stock is worth," says Stephen A. Zeff, an accounting professor at Rice University. "I just don't know what the markets would do if companies stopped reporting a bottom line somewhere." In the U.S., professional investors and analysts have taken a more nuanced view, perhaps because the manipulation of numbers was more pronounced in U.S. markets.

      That said, net profit has been around for some time. The income statement in use today, along with the balance sheet, generally dates to the 1940s when the SEC laid out regulations on financial disclosure. But many companies have included net profit in one form or another since the 1800s.

      In its fourth annual report, General Electric Co. provided investors with a consolidated balance sheet and consolidated profit-and-loss account for the year ended Jan. 31, 1896. The company, whose board at the time included Thomas Edison, generated "profit of the year" -- what today would be called net income or net profit -- of $1,388,967.46.

      For the moment, net profit will probably exist in some form, although its days are likely numbered. "We've decided in the interim to keep a net-income subtotal, but that's all up for discussion," the FASB's Mr. Herz says.

      Bob Jensen's summary of accounting theory is at

      What do CFO's think of Robert Herz's (Chairman of the FASB) radical proposed  format for financial statements that have more disaggregated financial information and no aggregated bottom line?

      As we moved to fair value accounting for derivative financial instruments (FAS 133) and financial instruments (FAS 157 and 159) coupled with the expected new thrust for fair value reporting on the international scene, we have filled the income statement and the retained earnings statement with more and more instability due to fluctuating unrealized gains and losses.

      I have reservations about fair value reporting ---

      But if we must live with more and more fair value reporting, the bottom line has to go. But CFOs are reluctant to give up the bottom line even if it may distort investing decisions and compensation contracts tied to bottom-line reporting.

      Before reading the article below you may want to first read about radical new changes on the way ---

      "A New Vision for Accounting:  Robert Herz and FASB are preparing a radical new format for financial, CFO Magazine, by Alix Stuart, February 2008, pp. 49-53 ---

      Last summer, McCormick & Co. controller Ken Kelly sliced and diced his financial statements in ways he had never before imagined. For starters, he split the income statement for the $2.7 billion international spice-and-food company into the three categories of the cash-flow statement: operating, financing, and investing. He extracted discontinued operations and income taxes and placed them in separate categories, instead of peppering them throughout the other results. He created a new form to distinguish which changes in income were due to fair value and which to cash. One traditional ingredient, meanwhile, was conspicuous by its absence: net income.

      Kelly wasn't just indulging a whim. Ahead of a public release of a draft of the Financial Accounting Standards Board's new format for financial statements in the second quarter of 2008, the McCormick controller was trying out the financial statements of the future, a radical departure from current conventions. FASB's so-called financial statement presentation project is ostensibly concerned only with the form, or the "face," of financial statements, but it's quickly becoming clear that it will change and expand their content as well. "This is a complete redefinition of the financial statements as we know them," says John Hepp, a former FASB project manager and now senior manager at Grant Thornton.

      Some of the major changes under discussion: reconfiguring the balance sheet and the income statement to follow the three categories of the cash-flow statement, requiring companies to report cash flows with the little-used direct method; and introducing a new reconciliation schedule that would highlight fair-value changes. Companies will also likely have to report more about their segments, possibly down to the same level of detail as they currently report for the consolidated statements. Meanwhile, net income is slated to disappear completely from GAAP financial statements, with no obvious replacement for such commonly used metrics as earnings per share.

      FASB, working with the International Accounting Standards Board (IASB) and accounting standards boards in the United Kingdom and Japan, continues to work out the precise details of the new financial statements. "We are trying to set the stage for what financial statements will look like across the globe for decades to come," says FASB chairman Robert Herz. (Examples of the proposed new financial statements can be viewed at FASB's Website.) If the standard-setters stay their course, CFOs and controllers at every publicly traded company in the world could be following Kelly's lead as soon as 2010.

      It's too early to predict with confidence which changes will ultimately stick. But the mock-up exercise has made Kelly wary. He considers the direct cash-flow statement and reconciliation schedule among the "worst aspects" of the forthcoming proposal, and expects they would require "draconian exercises" from his finance staff, he says. And he questions what would result from the additional details: "If all of a sudden your income statement has 125 lines instead of 25, is that presentation more clarifying, or more confusing?"

      Other financial executives share Kelly's skepticism. In a December CFO survey of more than 200 finance executives, only 17 percent said the changes would offer any benefits to their companies or investors (see "Keep the Bottom Line" at the end of this article). Even some who endorsed the basic aim of the project and like the idea of standardizing categories across the three major financial statements were only cautiously optimistic. "It may be OK, or it may be excessive." says David Rickard, CFO of CVS/Caremark. "The devil will be in the details."

      Net Loss From the outset, corporate financial officers have been ambivalent about FASB's seven year-old project, which was originally launched to address concerns that net income was losing relevance amid a proliferation of pro forma numbers. Back in 2001, Financial Executives International "strongly opposed" it, while executives at Philip Morris, Exxon Mobil, Sears Roebuck, and Microsoft protested to FASB as well.

      (Critics then and now point out that FASB will have little control over pro forma reporting no matter what it does. Indeed, nearly 60 percent of respondents to CFO's survey said they would continue to report pro forma numbers after the new format is introduced.)

      Given the project's starting point, it's not surprising that current drafts of the future income statement omit net income. Right now that's by default, since income taxes are recorded in a separate section. But there is a big push among some board members to make a more fundamental change to eliminate net income by design, and promote business income (income from operations) as the preferred basis for investment metrics.

      "If net income stays, it would be a sign that we failed," says Don Young, a FASB board member. In his mind, the project is not merely about getting rid of net income, but rather about capturing all income-related information in a single line (including such volatile items as gains and losses on cash-flow hedges, available-for-sale securities, and foreign-exchange translations) rather than footnoting them in other comprehensive income (OCI) as they are now. "All changes in net assets and liabilities should be included," says Young. "Why should the income statement be incomplete?" He predicts that the new subtotals, namely business income, will present "a much clearer picture of what's going on."

      Board member Thomas Linsmeier agrees. "The rationale for segregating those items [in OCI] is not necessarily obvious, other than the fact that management doesn't want to be held accountable for them in the current period," he says.

      Whether for self-serving or practical reasons, finance chiefs are rallying behind net income. Nearly 70 percent of those polled by CFO in December said it should stay. "I understand their theories that it's not the be-all and end-all measure that it's put up to be, but it is a measure everyone is familiar with, and sophisticated users can adjust from there," says Kelly. Adds Rickard: "They're treating [net income] as if it's the scourge of the earth, which to me is silly. I think the logical conclusion is to make other things available, rather than hiding the one thing people find most useful."

      . . .


      Bob Jensen's threads on this proposed "radical change" in financial reporting are at 

      Jensen Comment
      As we moved to fair value accounting for derivative financial instruments (FAS 133) and financial instruments (FAS 157 and 159) coupled with the expected new thrust for fair value reporting on the international scene, we have filled the income statement and the retained earnings statement with more and more instability due to fluctuating unrealized gains and losses.

      I have reservations about fair value reporting ---

      But if we must live with more and more fair value reporting, the bottom line has to go. But CFOs are reluctant to give up the bottom line even if it may distort investing decisions and compensation contracts tied to bottom-line reporting.

      Bob Jensen's threads on the radical new changes on the way ---


      Bob Jensen's threads on accounting theory are at 

    • Robert E Jensen

      A Curious Case of Negative Goodwill
      "NEED PROFIT? BUY SOMETHING!" by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, July 30, 2012 ---

      We first voiced our concern about an obscure accounting rule that allows companies to “create” profits when purchasing other businesses in the “Curious Case of Miller Energy’s 10-K and Its Huge Bargain Purchase.” The offending tenet relates to the treatment of something called “negative goodwill” which purportedly is created when a company makes an acquisition, and pays less than what the assets are worth. This fantastic “bargain purchase” creates a negative goodwill anomaly because the acquirer supposedly gets more assets than it pays for, as in this example:

      Continued in article

      Jensen Comment
      Yet another illustration of how the FASB and IASB made a black hole out of bottom-line earnings.

      Bob Jensen's threads on the radical new changes on the way ---