To read more about the changes, you can go here. To quote from that site's article,
"That means huge liabilities could suddenly drop like a bomb onto balance sheets, putting any deficits squarely in the public view and possibly throwing some lending agreements into question because it may lead to sharp drops in corporate net worth.
Figuring out if any maneuvering is going on won't be an easy task. Investors will have to closely watch companies' assumptions for such things as health care and wage inflation that are used to determine the costs of defined benefit plans, which promise retirees a monthly check and often medical coverage.
For years, companies have gotten off easy by agreeing to such benefits without having to immediately set aside ample assets to cover them. Standard & Poor's estimates that the companies in its benchmark index offering such benefits held assets worth only $1.409 trillion in 2005 to cover $1.870 trillion in pension and other retiree-benefit obligations, resulting in a record deficit of $461 billion."
A Reuters article further noted,
"Investors may see some of the biggest changes in the balance sheets of companies like General Motors Corp., Ford Motor Co., Goodyear Tire & Rubber Co. and Exxon Mobil Corp., which maintain some of the largest U.S. pension and other post-retirement benefit plans.
Automakers, airlines, steelmakers and other manufacturing companies are likely to face the biggest obligations because of histories with unions and legacy costs, according to accounting analysts at Bear Stearns."
Let me note that all of this harks back to one of my earliest posts, from last September, about the long-lasting effects of the mutually-flawed bargains struck beginning 50+ years ago between American corporate and labor union leaders.
If the companies in question see their stock prices change materially from this FASB decision, then it suggests that the analyst corps was never doing an adequate job of understanding the true financial positions of these companies. If, on the other hand, the stock prices do not change materially, then it suggests that the existing measures weren't really all that useful to begin with, because they were in error, yet still in cited.
Analysts can't have it both ways, can they?
Late last week on CNBC, in an interview with an equity analyst, the first effect mentioned was that of screwing up traditional stock evaluation measures.
My own early work on valuation taught me about the inadequacy of measures such as Price/Earnings and Market/Book ratios, and other point-in-time balance sheet or income statement measures.
Now, it appears that those measures will have a permanently disjointed history that cannot be smoothed or calculated away. Furthermore, their future behaviors may now result in calculation-inhibiting values. This was always the case with using earnings, which can dip below zero, making growth calculations effectively insoluble. Now, even some balance sheet staples like basic Shareholder Equity will be unusable.
This is why I use simpler scalers with a time dimension in my analysis of companies' performances. Specifically, revenue growth and total return. No ratios.
I learned years ago, grappling with the more conventional ratios and snapshot measures, that they are subject to incomprehensible results, and, sometimes, literally incalculable ones.
By focusing on the quantitative expressions of a company's ability to consistently acquire and retain customers, at appropriate prices for the products and services they sell, i.e., revenue growth, and matching these values with investors' judgments on the adequacy of the resulting financial results, i.e., consistently superior total returns, my methods free me from the risk of accounting distortions.
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