McCombs TODAY

On Oct. 13, the MPA Distinguished Speaker Lyceum hosted Tom Linsmeier (left), a member of the Financial Accounting Standards Board (FASB). Fifth-year MPA student Doug Bedell shared this dispatch from Linsmeier’s talk, which he says was “one of the most riveting” Lyceum talks yet:

Dr. Linsmeier’s speech passionately defended fair-value accounting, a subject that, as of late, has been subject to much scrutiny and criticism.

Fair-value accounting requires financial statement presenters to periodically mark certain assets and liabilities to a value that could be settled in current transactions between willing parties. This is in contrast to historical-cost accounting, which allows presenters to record assets and liabilities at original prices and subsequently change the values using a pre-determined algorithm (e.g. depreciation and amortization schedules). Proponents of fair-value accounting believe that the method gives users of financial statements a fairer presentation of a company’s underlying economics.

Dr. Linsmeier explained in his speech that fair-value accounting has recently been attacked as having worsened the recent economic crisis. Many people contend that, by forcing banks to write-down balance sheet accounts, fair-value contributed to untimely bank failures and subsequent market instability. Dr. Linsmeier convincingly argued that fair-value was not an instigator of these problems, but rather it properly communicated poor decisions made by some of the leading financial institutions.

Faced with political pressure from Congress, the FASB Board members have been encouraged to suspend some of these progressive accounting policies in order to protect banks from reporting excessive losses. Dr. Linsmeier, however, believes this to be an inappropriate response to the problems faced by this industry, as it would simply allow companies to understate the actual severity of their financial positions.He cited the fact that, immediately before collapsing, many banks were considered “well-capitalized” under historical cost models. This problem suggests a mismatch between financial statement presentation and a company’s actual economic reality. If the purpose of accounting is to deliver useful information, then this mismatch is unacceptable.

Dr. Linsmeier and the FASB have proposed an accounting model requiring companies to report fair value changes in financial instruments to either the income statement or comprehensive income (an account with no direct effect on a company’s disclosed profit). Deciding where to classify these changes will depend on how a company generally manages groups of these instruments. The proposed system would appease more audiences, creating better economic presentation without forcing companies to take direct losses from instruments that will likely recover value over time. Most importantly, the model continues the FASB’s objective to improve the usefulness of accounting information through fair-value policies.

I found Dr. Linsmeier’s speech to be one of the most riveting we have experienced in the Lyceum so far. He challenged me to critically examine existing accounting practices and consider progressive solutions. It is my hope that McCombs continues to attract speakers like Dr. Linsmeier in the future.