June seems like it just whizzed by, right? The heat swelters across the Forty Acres; time seems like it is merely an illusion, as days pass by like water under the Congress St. Bridge while minutes by the lake linger lazily on. Perfect for a cup of coffee and a little bit of review.
The week was not completely eventless though:
Lorenzo Charles (NCST)
I was heartbroken to read about the death of Lorenzo Charles on Monday. Charles was known for his saving dunk, leading the NC State Wolfpack to a surprise NCAA Men’s Basketball Championship in 1983 after nearly not making the tournament. NC State beat an incredibly talented Houston Squad called the Phi Slamma Jamma, featuring the likes of Clyde Drexler and Akeem Olajuwon.
The moment for me served as an inspiration, as it symbolized a capstone on persistence and redemption. As they were the ultimate underdogs against the ultimate favorites, they prepared and executed with the utmost confidence to the final second of the game, never relenting and always fighting. Thus, that moment of nearly thirty years ago will always be one of my favorite moments in the history of the sport.
Buddy Holly
NPR released an article covering the release of a CD compiling songs of the late Buddy Holly by current artists (although, I am not sure I would still consider Paul McCartney necessarily current anymore). Buddy Holly was a native Texan out of Lubbock and died in a well-known plane crash in 1959, along with Ritchie Valens and “The Big Bopper.” Holly is known for songs such as “Peggy Sue,” “Maybe Baby,” “Oh Boy!” “That’ll be the Day,” and many more. He would serve as an inspiration for later bands such as the Beatles, and his music is a testimony to Rock and Roll all on its own.
Brown v. Entertainment Merchants Association
Monday, the Supreme Court overturned a ban on violent video games for children. The California legislature passed a law that would fine a merchant for selling a violent video game to a minor without parental consent. The high court said it would hurt the freedom of speech protected under the first amendment. Justice Scalia, who wrote the opinion of the court, wrote that the way that this law was written nearly went so far as “to create a wholly new category of content-based regulation that is permissible for speech directed at children. [It] is unprecedented and mistaken. ‘[M]inors are entitled to a significant measure of First Amendment protection, and only in relatively narrow and well-defined circumstances may the government bar public dissemination of protected materials to them.” In essence, the government may regulate speech, but only in very specific and dire situations—obscenity, indictment, and fighting words. Additionally, the notion of creating a separate class for speech protection was something the court was not willing to allow.
Indirectly, the ruling established video games as its own art form, similar to books, television, and cinema. Scalia, in defending the court’s opinion, lists Snow White, The Iliad and The Odyssey, Inferno, Hansel and Gretel, and other books—not to mention Bugs Bunny and Wile E. Coyote—as art forms that depict violence but are not considered to be excessively suggestive to children who watch these shows or read these books.
Scalia concluded the opinion by noting that the manner in which the law was structured probably would not have even been effective in achieving its goal (because of the manner in which enforcement would be executed). He did clarify, however, that the decision had more to do with the fact that this type of regulation was out of the scope of the government as opposed to what any of the California legislature or any of the justices felt ought to be done to protect children. Here is the opinion.
What does this have to do with business?
Electronic Arts (ERTS) is one of the largest public video game companies. Monday, it opened at $21.77; today, it closed at $23.60. That represents a rise in stock price of a tad over 8% in less than a week. The market was very receptive to this type of case, and, as such, the outlook for companies and their abilities to sell their products freely, has been reflected in market prices.
Speaking of fair value…
Summer Review: SFAS No. 157
SFAS No. 157 always gets such a bad reputation from students, and I neither know why nor feel it is justified. This pronouncement merely formalizes some of the principles that were already floating around in the accounting cosmos.
Transactions are always initially accounted for at fair value. This may seem counterintuitive at first because when you go to the store to buy groceries, you never catch yourself with a financial calculator trying to find the present value of a bunch of bananas. Fair value does not mean you necessarily need to discount cash flows to find the fair value of an asset (or liability); fair value just means an asset (or liability) is worth $x at a given point in time.
So why do we end up having to do crazy stuff any time the term “fair value” is uttered in class? Sometimes relevance is given up for some reliability. Hence, when you buy some land or a building or office furniture, it is not as easy to ascertain the value of those items thirty years after the purchase, and that is when you just leave something on the books at “historical cost.” Mind you, the FASB will tell you exactly which assets to leave at historical cost and which ones to mark to fair value. Conversely, if you buy some stock, it is easy to find its current worth if it is traded frequently everyday on the market.
If you think about it, marking something to fair value is probably the most relevant you can get, ever. The rub lies in the fact that it may not be cost efficient to always ascertain the values of every asset (or liability). That is, the research that you might have to do in order to find a good amount of comps to value that piece of land may not be worth just keeping it at the price you paid for it. If you could though, your balance sheet would probably more accurately reflect economic reality and give more information.
That is, depending on the information you use in your calculation…
SFAS No. 157 lists the three approaches—market, income, and cost—but also says that priority is given based on the inputs that are put into your evaluation. Any finance professor will always tell you, “Garbage in, garbage out”; so in this case, the more reliable figures you have, the more certain you can be that you end up with the right number in the end. Thus, if you can get all of your numbers directly from the stock market, that number will be more reliable (and verifiable) than the one you had to extract a cap rate and growth rate from a sample of comps to estimate. Not surprisingly, the FASB has you disclose which figures are at which levels of fair value; this allows the user to know just how he should assess the numbers in the financials.
Final Thoughts
Fair value is your friend. While at times you may need to reassess the risk, and thus calculate present value all over again, do not let the words lend a negative connotation. FAS 157 does not offer a lot of technical skill, but in understanding this framework for fair value, a lot of accounting is tied together. Standards such as those for goodwill impairment or derivatives make a lot more sense when you understand the motive behind them, and they lie with fair value, the concept. When envisioning fair value from the perspective of the user, financial statements are much more useful and informative. Thus, embrace this standard which is basically one which defines which data eventually leads to good information.