Capgemini released its Q1-2009 results with revenues of €2,205 million, up 0.9% compared to Q1-2009 of €2,205 million but down 0.3% at constant exchange rates.
Outsourcing Services increased 1.1% and Technology Services edged up 0.4%;
Sogeti declined 0.7% while newly-formed Consulting Services dropped 9.8%.
By geography, United Kingdom & Ireland rose strongly at 7.0%, France and Benelux revenues dropped 0.8% and 0.6%, respectively. North America sales had the worst results, falling 6.9% than Q1-2008.
Q1-2009 bookings were €2,221 million versus €2,172 million in Q1-2008, but results across service lines were mixed: Outsourcing Services grew a dramatic 40%, while Consulting, Technology and Local Professional Services bookings dropped 9%
Capgemini said, “These results are in line with expectations and bolster the Group's confidence in its guidance for the first half of 2009 that like-for-like revenues would see a modest decline of around 2% and that operating margin should remain above 6.5% (first-half 2008 operating margin was 7.6%).”
Our take:
Q1-2009 holds up for Capgemini, revenues are actually up modestly and operating margin should drop by about 1%, but some of all this was expected
North America drop shows the dramatic decline for consulting services demand in the US, but Europe seems to be doing fairly well
Outsourcing booking increase demonstrates that clients continue to cut costs and look for cheaper alternatives. Drop in consulting bookings shows hesitancy to engage in large scale consulting or IT engagements.
Capgemini seems comfortable with their original guidance, no surprises here, at least at this moment. From WSJ, “The guidance is positive given the current climate," said one analyst from WestLB Jonathan Crozier.
This echoes somewhat what we saw from Q2-2009 results from Accenture, but with a slightly more positive outcome. Different from Accenture, where investors pounded the stock down 9% on earnings announcements, Capgemini’s stock was up 3.2% in early trading as investors liked what they saw and expressed their enthusiasm by buying up the stock.
Thursday, April 30, 2009
Wednesday, April 29, 2009
NVCA Wants to Broaden Big Four to Global Six
The National Venture Capital Association (NVCA) has come up with four key recommendations to help US venture-backed companies, to kick start the IPO market, which decreased in 2008 to only 6 IPOs in the United States. Taking recommendations from capital market leaders, the NVCA focuses on the venture capital industry, investment banking, accounting professions, law firms, stock exchanges and the government to to restore a vibrant IPO environment once the economy comes back.
Recognizing that today’s market environment is challenging especially for small cap IPOs, due to the high costs of going public, the constituents involved in the process, and the restrictions placed on potential public companies. To fix these issues, the NVCA has come up its “Four Pillar Plan” to restore the Venture-Backed IPO Market. We want to discuss the first pillar in detail as it deals specifically with the Big4 accounting firms.
But first pillars 2 to 4 in brief:
Pillar II: Enhanced Liquidity Paths
Since the distribution system connecting sellers and buyers of venture-backed company new issues is broken, the NVCA endorses concepts such as Inside Venture, Portal Alliance (NASDAQ), SecondMarket and Xchange., where “cross-over investors” commit to hold stock for the long term. Another point of interest, the NVCA will help raise awareness about proactive M&A roll up strategies of smaller portfolio companies to achieve IPO critical mass and global alternatives to the U.S. public markets.
Pillar III: Tax Incentives
The U.S. government must maintain tax policies to encourage VC investment to stimulate the pipeline of promising IPOs, further, Congress should consider adopting new tax incentives which would stimulate IPOs, at least in the short term.
Pillar IV: Regulatory Review
The NVCA will advocate for a full systematic review by the SEC of recent regulations which impact small cap companies, including interpretations of SOX, pre-IPO financial reporting requirements, the separation of analyst and investment banking functions, and private placement requirements, since recent sweeping financial regulations have created unintended consequences for small pre-public and public companies.
Finally, Pillar I: Ecosystem Partners
Here’s the exact language from the NVCA press release” Within the last decade, venture-backed companies have been faced with fewer choices as it relates to investment banks and accounting firms that will assist in the IPO process. While the major investment banks continue to operate, the “four horsemen” boutique investment banks of the 1990’s (Alex Brown, Hambrecht & Quist, Montgomery Securities, and Robertson Stephens), which specialized in IPOs of venture-backed companies, no longer exist. Further, the fall of Arthur Andersen and the resulting pressure placed on the Big Four accounting firms has, in many markets, left a void in terms of quality auditing services available for these smaller companies.
Against this backdrop, the NVCA believes that the venture capital industry must do more
to promote alternative ecosystem partners while engaging with existing members to
identify ways to better serve the needs of emerging growth companies. The Association
has begun to engage in talks with boutique and major investment banks as well as the Big
Four and other public accounting firms about how they can also better serve the needs of
small cap companies. The NVCA also intends to encourage the use of a broader array of
service providers such as the “Global Six” including Deloitte LLP, Ernst & Young LLP,
Grant Thornton LLP, KPMG LLP, PricewaterhouseCoopers LLP and BDO Seidman LLP.”
Our take on this Pillar:
The fall of Andersen has certainly reduced the choice for all public companies, and much more so for smaller companies. Earlier, companies could choose from one of five global auditing firms, leaving ample choice among the remaining four for tax and advisory consultants. Andersen’s demise and Sarbox has drastically cut down both these avenues for larger companies, and as the Big4 firms have grown dramatically over the past few years, they have gravitated away from smaller companies, not always by choice.
The NVCA points out that out of 21 IPOs from November 2007 to February 2009, Big4 firms were involved in 16 and non-Big4 firms were involved in 5 of these IPOs. So, the
NVCA wants to increase the population of global accounting firms to include Grant Thornton and BDO Seidman and call it the new moniker “The Global Six”. While this does increase the sheer number of providers, the Big4 firms are huge compared to GT and BDO, and there is inherent inertia among VC firms to select name-brand firms to (hopefully) maximize their outcome from the IPO. Despite all good intentions and eventual efficient outcome, we think it will be a while before the Big Four move to the Global Six.
The NVCA “intends to encourage the use of a broader array of service providers” – we applaud this, but is a tough challenge to change public perceptions, and we’ll be watching if they do succeed in this effort.
Of course, there are many views on this, some quite opposite ours, and we welcome comments from our readers – what have you experienced? where do you think this is headed?
Recognizing that today’s market environment is challenging especially for small cap IPOs, due to the high costs of going public, the constituents involved in the process, and the restrictions placed on potential public companies. To fix these issues, the NVCA has come up its “Four Pillar Plan” to restore the Venture-Backed IPO Market. We want to discuss the first pillar in detail as it deals specifically with the Big4 accounting firms.
But first pillars 2 to 4 in brief:
Pillar II: Enhanced Liquidity Paths
Since the distribution system connecting sellers and buyers of venture-backed company new issues is broken, the NVCA endorses concepts such as Inside Venture, Portal Alliance (NASDAQ), SecondMarket and Xchange., where “cross-over investors” commit to hold stock for the long term. Another point of interest, the NVCA will help raise awareness about proactive M&A roll up strategies of smaller portfolio companies to achieve IPO critical mass and global alternatives to the U.S. public markets.
Pillar III: Tax Incentives
The U.S. government must maintain tax policies to encourage VC investment to stimulate the pipeline of promising IPOs, further, Congress should consider adopting new tax incentives which would stimulate IPOs, at least in the short term.
Pillar IV: Regulatory Review
The NVCA will advocate for a full systematic review by the SEC of recent regulations which impact small cap companies, including interpretations of SOX, pre-IPO financial reporting requirements, the separation of analyst and investment banking functions, and private placement requirements, since recent sweeping financial regulations have created unintended consequences for small pre-public and public companies.
Finally, Pillar I: Ecosystem Partners
Here’s the exact language from the NVCA press release” Within the last decade, venture-backed companies have been faced with fewer choices as it relates to investment banks and accounting firms that will assist in the IPO process. While the major investment banks continue to operate, the “four horsemen” boutique investment banks of the 1990’s (Alex Brown, Hambrecht & Quist, Montgomery Securities, and Robertson Stephens), which specialized in IPOs of venture-backed companies, no longer exist. Further, the fall of Arthur Andersen and the resulting pressure placed on the Big Four accounting firms has, in many markets, left a void in terms of quality auditing services available for these smaller companies.
Against this backdrop, the NVCA believes that the venture capital industry must do more
to promote alternative ecosystem partners while engaging with existing members to
identify ways to better serve the needs of emerging growth companies. The Association
has begun to engage in talks with boutique and major investment banks as well as the Big
Four and other public accounting firms about how they can also better serve the needs of
small cap companies. The NVCA also intends to encourage the use of a broader array of
service providers such as the “Global Six” including Deloitte LLP, Ernst & Young LLP,
Grant Thornton LLP, KPMG LLP, PricewaterhouseCoopers LLP and BDO Seidman LLP.”
Our take on this Pillar:
The fall of Andersen has certainly reduced the choice for all public companies, and much more so for smaller companies. Earlier, companies could choose from one of five global auditing firms, leaving ample choice among the remaining four for tax and advisory consultants. Andersen’s demise and Sarbox has drastically cut down both these avenues for larger companies, and as the Big4 firms have grown dramatically over the past few years, they have gravitated away from smaller companies, not always by choice.
The NVCA points out that out of 21 IPOs from November 2007 to February 2009, Big4 firms were involved in 16 and non-Big4 firms were involved in 5 of these IPOs. So, the
NVCA wants to increase the population of global accounting firms to include Grant Thornton and BDO Seidman and call it the new moniker “The Global Six”. While this does increase the sheer number of providers, the Big4 firms are huge compared to GT and BDO, and there is inherent inertia among VC firms to select name-brand firms to (hopefully) maximize their outcome from the IPO. Despite all good intentions and eventual efficient outcome, we think it will be a while before the Big Four move to the Global Six.
The NVCA “intends to encourage the use of a broader array of service providers” – we applaud this, but is a tough challenge to change public perceptions, and we’ll be watching if they do succeed in this effort.
Of course, there are many views on this, some quite opposite ours, and we welcome comments from our readers – what have you experienced? where do you think this is headed?
Monday, April 20, 2009
Big4 Firms Make Top 250 in Latest Fortune 500 List
Fortune Magazine just released its Fortune 500 list of top US companies by revenue for the year 2008. Not surprisingly, the top companies in this list were oil giant Exxon at a staggering $443 billion, followed by ubiquitous Walmart at $406 billion, multinational oil companies Chevron at $263 billion & Chevron Phillips at $231 billion and international conglomerate GE at $183 billion. After the top ten, there is a steep drop with number 11 Bank of America at $113 billion and then down the list, number 50 Safeway with $44 billion, and then number 90 Alcoa with $28 billion.
And where do the giant Big4 accounting and consulting firms stand in this list? Now, given that these are private partnerships (except Accenture and Capgemini) and not the US publicly traded companies which are in the Fortune 500 list, but it is interesting to see that four of the Big4 firms made it to the top 100 and all six made it to the top 250.
Leading the Big4 list, PricewaterhouseCoopers with 2008 revenues of $28.2 billion stands tall between hospital operator number 88 HCA and chicken producer number 89 Tyson Foods. Close on PwC’s heels is Deloitte & Touche with 2008 revenues of $27.4 billion, between oil & gas producer number 93 Murphy Oil and electrical conglomerate number 94 Emerson Electric. Third in line is public company Accenture (which would have made this list, but its HQ is Hamilton, Bermuda, which is outside the USA) with 2008 revenues of $25.3 billion, ranked between electrical conglomerate number 94 Emerson Electric and industrial manufacturer number 95 3M. Just behind Accenture is Ernst & Young with 2008 revenues of $24.5 billion placing between paper giant number 97 International Paper and oil producer number 98 Occidental Petroleum.
Below the top 100 ranks are KPMG and Capgemini. KPMG, the smallest of the Big4 Accounting Firms with 2008 revenues of $22.7 billion stands between pharmaceutical company number 110 Wyeth and US airline number 111 Delta Airlines. Far below, but still in the top 250 rank is Capgemini with 2008 revenue of $11.6 billion between telecom company number 229 ITT and natural gas producer number 230 Chesapeake Energy.
This interesting compilation shows that Big4 firms are truly huge partnerships, perhaps some of the largest in the world, and rank among the largest companies in the US. Not only that, they are also extremely profitable with profits usually increasing proportionately with revenue. Compare this with the Fortune 500 whose total profit actually fell 87% from a whopping $645 billion in 2007 to a puny $99 billion in 2008. The Big4 firms clearly have no such troubling trends, the firms actually grew revenue double digits from 2007 to 2008, and while the growth from 2008 to 2009 may not be that high, there are no drastic falls in profits which may encumber some of their corporate peers.
The mega partnership model obviously works mainly in the low-capital intensive professional service sector, and the Big4 firms over a 100 years seem to have evolved a robust business model, which perhaps keeps them out of the Fortune 500 list but also out of the vagaries of profit fluctuations.
Here are the details:
88. HCA $28.4
PwC $28.2
89. Tyson Foods $28.1
93. Murphy Oil $27.5
Deloitte & Touche $27.4
94. Emerson Electric $25.3
94. Emerson Electric $25.3
Accenture $25.3
95. 3M $25.2
97. International Paper $24.8
Ernst & Young $24.5
98. Occidental Petroleum $24 .4
110. Wyeth $22.8
KPMG $22.7
111. Delta Airline $22.6
229. ITT $11.7
Capgemini $11.6
230. Chesapeake Energy $11.6
And where do the giant Big4 accounting and consulting firms stand in this list? Now, given that these are private partnerships (except Accenture and Capgemini) and not the US publicly traded companies which are in the Fortune 500 list, but it is interesting to see that four of the Big4 firms made it to the top 100 and all six made it to the top 250.
Leading the Big4 list, PricewaterhouseCoopers with 2008 revenues of $28.2 billion stands tall between hospital operator number 88 HCA and chicken producer number 89 Tyson Foods. Close on PwC’s heels is Deloitte & Touche with 2008 revenues of $27.4 billion, between oil & gas producer number 93 Murphy Oil and electrical conglomerate number 94 Emerson Electric. Third in line is public company Accenture (which would have made this list, but its HQ is Hamilton, Bermuda, which is outside the USA) with 2008 revenues of $25.3 billion, ranked between electrical conglomerate number 94 Emerson Electric and industrial manufacturer number 95 3M. Just behind Accenture is Ernst & Young with 2008 revenues of $24.5 billion placing between paper giant number 97 International Paper and oil producer number 98 Occidental Petroleum.
Below the top 100 ranks are KPMG and Capgemini. KPMG, the smallest of the Big4 Accounting Firms with 2008 revenues of $22.7 billion stands between pharmaceutical company number 110 Wyeth and US airline number 111 Delta Airlines. Far below, but still in the top 250 rank is Capgemini with 2008 revenue of $11.6 billion between telecom company number 229 ITT and natural gas producer number 230 Chesapeake Energy.
This interesting compilation shows that Big4 firms are truly huge partnerships, perhaps some of the largest in the world, and rank among the largest companies in the US. Not only that, they are also extremely profitable with profits usually increasing proportionately with revenue. Compare this with the Fortune 500 whose total profit actually fell 87% from a whopping $645 billion in 2007 to a puny $99 billion in 2008. The Big4 firms clearly have no such troubling trends, the firms actually grew revenue double digits from 2007 to 2008, and while the growth from 2008 to 2009 may not be that high, there are no drastic falls in profits which may encumber some of their corporate peers.
The mega partnership model obviously works mainly in the low-capital intensive professional service sector, and the Big4 firms over a 100 years seem to have evolved a robust business model, which perhaps keeps them out of the Fortune 500 list but also out of the vagaries of profit fluctuations.
Here are the details:
88. HCA $28.4
PwC $28.2
89. Tyson Foods $28.1
93. Murphy Oil $27.5
Deloitte & Touche $27.4
94. Emerson Electric $25.3
94. Emerson Electric $25.3
Accenture $25.3
95. 3M $25.2
97. International Paper $24.8
Ernst & Young $24.5
98. Occidental Petroleum $24 .4
110. Wyeth $22.8
KPMG $22.7
111. Delta Airline $22.6
229. ITT $11.7
Capgemini $11.6
230. Chesapeake Energy $11.6
Thursday, April 09, 2009
Capgemini Has New SBU – Consulting, Largest in Europe, 4,000 Consultants
Capgemini just announced a new Strategic Business Unit, Capgemini Consulting Services with revenues of EUR 700 million (8 % of Capgemini 2008 revenues of EUR 8.7 Billion) and over 4,000 expert strategy and management consultants in more than 30 countries as part of a corporate reorganization.
The firm appears to be responding to clients’ need for “action-oriented business
transformation, from strategy to execution to enable them to transform and perform
through technologies”. With this, Capgemini claims that its Consulting unit will become the largest European consulting firm. In addition, it enhances the brand, much like Deloitte Consulting, and brings together existing country-focused consulting units into a global umbrella in order to provide clients with seamless industry-specific or issue-related expertise from a common single platform.
The intent: help clients better manage through this unprecedented economic crisis with an integrated approach.
There are three Global Practice Networks in this structure, all focused on “Transformation”:
Strategy & Transformation: helps clients adapt their strategy and business to radical shifts in the market;
Operations Transformation: optimizes processes in Marketing, Sales & Service (MSS), Finance & Employee Transformation (FET) and Supply Chain Management (SCM);
Technology Transformation: help choose right technology IT levers and in IT transformation
One point we found of interest is that Capgemini will help clients with “Social Networking tools and communities, which enable both direct collaboration between clients and the relevant Capgemini experts..”
Interestingly, the 4,000 consultants comprise about 4% of the 91,000 Capgemini staff but account for 8% of the revenues, which indicates that these professionals have generally higher billing rates than the average, as also that they are a select few within the larger organization.
This brings together several elements which we have seen before in other consulting organizations:
Brand identity: A new name, new organization and a new start, much like Deloitte Consulting
Globalize: Bring disparate country-focused consultants into a worldwide organization
Match Multinational Clients: Provide a single point solution to increasingly global and complex needs of international clients
Thought Leadership: Enable real consultants to craft unique solutions to client issues and win engagement at the C-level
Separate from Outsourcing: Distinguish higher-end Consulting from lower-end Outsourcing, much like Accenture
This is somewhat new ground for Capgemini and they are quite open that it is in response to client needs in a tough economic environment. The challenge is now to bring together all the pieces in an integrated way, build brand-identity with clients and start to compete more head to head with some established players in this space.
We’ll see how this plays out in the marketplace.
If there are Capgemini Consulting folks out there, we would love to hear your comments on this change.
The firm appears to be responding to clients’ need for “action-oriented business
transformation, from strategy to execution to enable them to transform and perform
through technologies”. With this, Capgemini claims that its Consulting unit will become the largest European consulting firm. In addition, it enhances the brand, much like Deloitte Consulting, and brings together existing country-focused consulting units into a global umbrella in order to provide clients with seamless industry-specific or issue-related expertise from a common single platform.
The intent: help clients better manage through this unprecedented economic crisis with an integrated approach.
There are three Global Practice Networks in this structure, all focused on “Transformation”:
Strategy & Transformation: helps clients adapt their strategy and business to radical shifts in the market;
Operations Transformation: optimizes processes in Marketing, Sales & Service (MSS), Finance & Employee Transformation (FET) and Supply Chain Management (SCM);
Technology Transformation: help choose right technology IT levers and in IT transformation
One point we found of interest is that Capgemini will help clients with “Social Networking tools and communities, which enable both direct collaboration between clients and the relevant Capgemini experts..”
Interestingly, the 4,000 consultants comprise about 4% of the 91,000 Capgemini staff but account for 8% of the revenues, which indicates that these professionals have generally higher billing rates than the average, as also that they are a select few within the larger organization.
This brings together several elements which we have seen before in other consulting organizations:
Brand identity: A new name, new organization and a new start, much like Deloitte Consulting
Globalize: Bring disparate country-focused consultants into a worldwide organization
Match Multinational Clients: Provide a single point solution to increasingly global and complex needs of international clients
Thought Leadership: Enable real consultants to craft unique solutions to client issues and win engagement at the C-level
Separate from Outsourcing: Distinguish higher-end Consulting from lower-end Outsourcing, much like Accenture
This is somewhat new ground for Capgemini and they are quite open that it is in response to client needs in a tough economic environment. The challenge is now to bring together all the pieces in an integrated way, build brand-identity with clients and start to compete more head to head with some established players in this space.
We’ll see how this plays out in the marketplace.
If there are Capgemini Consulting folks out there, we would love to hear your comments on this change.
Tuesday, April 07, 2009
EY Report Shows Q1-2009 IPO Activity Completely Stalled – Only 50 Worldwide
As widely expected, exit strategies through initial public offerings to investors took a beating in the last three months, testimony to a slow capital market and unenthusiastic investors. Ernst & Young confirms that in its just-released Q1-2009 Global IPO update. There were just 50 IPOs worldwide in Q1-2009 raising about US$1.4 billion in capital, with only 2 deals over US$100 million.
Compare this with 78 IPOs worth US$2.6 billion in Q4-2008 and down a whopping 97% from Q1-2008 where 251 IPOs raised US$41.2 billion in capital (including Visa with US$19.7 billion, largest US IPO in history).
The top 3 IPOs accounted for 75% of capital:
1. Mead Johnson Nutrition - US$828.00 million, NYSE
2. Real Gold Mining Ltd - US$133.01 million, Hong Kong SE
3. Etihad Atheeb Telecommunication Company - US$80 million, Riyadh SE
The balance $350 million was raised by 47 companies or average of just $8 million per company, putting them barely in the small-cap range!
The deal threshold to make the Top-20 list has decreased from US$126.9 million in Q1-2008 to only US$6.84. By number of deals, most active countries were actually in Asia and Central Europe: South Korea (8 IPOs); Japan (7) and Poland (6); with emerging markets accounting for 34 or 68% of the 50 global IPOs.
More ominously for the M&A world, Dealogic indicates that 37 IPOs have been postponed or withdrawn in Q1 2009, following 85 similar in Q4-2008.
This is clearly a sorry state of affairs for all involved in mergers and acquisitions – accountants, transaction service professionals, investment bankers, commercial bankers, lawyers, tax expert and the like. According to E&Y, things are expected to continue along in a similar vein for a while till company performance, markets, confidence and investor sentiment improves.
Gil Forer, E&Y Global Director of IPO Initiatives echoes a hopeful thought: “Past recessions have shown that successful companies often emerge from the toughest times. The recovery of the IPO market will require at least two to three quarters of macroeconomic stability and for confidence to be re-built. However when the markets open and valuations improve, high quality companies will be poised to take advantage.”
More details on E&Y’s website http://ow.ly/2ieb
Compare this with 78 IPOs worth US$2.6 billion in Q4-2008 and down a whopping 97% from Q1-2008 where 251 IPOs raised US$41.2 billion in capital (including Visa with US$19.7 billion, largest US IPO in history).
The top 3 IPOs accounted for 75% of capital:
1. Mead Johnson Nutrition - US$828.00 million, NYSE
2. Real Gold Mining Ltd - US$133.01 million, Hong Kong SE
3. Etihad Atheeb Telecommunication Company - US$80 million, Riyadh SE
The balance $350 million was raised by 47 companies or average of just $8 million per company, putting them barely in the small-cap range!
The deal threshold to make the Top-20 list has decreased from US$126.9 million in Q1-2008 to only US$6.84. By number of deals, most active countries were actually in Asia and Central Europe: South Korea (8 IPOs); Japan (7) and Poland (6); with emerging markets accounting for 34 or 68% of the 50 global IPOs.
More ominously for the M&A world, Dealogic indicates that 37 IPOs have been postponed or withdrawn in Q1 2009, following 85 similar in Q4-2008.
This is clearly a sorry state of affairs for all involved in mergers and acquisitions – accountants, transaction service professionals, investment bankers, commercial bankers, lawyers, tax expert and the like. According to E&Y, things are expected to continue along in a similar vein for a while till company performance, markets, confidence and investor sentiment improves.
Gil Forer, E&Y Global Director of IPO Initiatives echoes a hopeful thought: “Past recessions have shown that successful companies often emerge from the toughest times. The recovery of the IPO market will require at least two to three quarters of macroeconomic stability and for confidence to be re-built. However when the markets open and valuations improve, high quality companies will be poised to take advantage.”
More details on E&Y’s website http://ow.ly/2ieb
Thursday, April 02, 2009
Mark-to-Market Accounting Moves to Center Stage
FAS 157, the FASB rule which determines how financial institutions evaluate the value of their financial assets on their balance sheets has been brewing as a hot topic for a while and today moved to center stage based on a meeting of the Financial Standards Accounting Board which relaxed some of the guidelines on how this rule can be applied in the illiquid credit markets that we are now operating in now.
Essentially, FAS 157 indicates how companies should mark their assets to a fair value based on market conditions, which under normal & deep and liquid markets is based on recent transactions, exit prices, and reasonably known standards.
However, when liquidity dries up, counterparties fail and no recent transactions are available, companies are forced to write these assets down to very low values to comply with the strict guidelines of FAS 157. Banks with complex financial assets have been most affected by this and the enormous billions of dollars of writedowns are largely driven by FAS 157 mark to market accounting.
In fact, some like prior FDIC chairman William Isaac have blamed FAS 157 for incorrectly portraying values of bank balance sheets and asked for a holiday period from mark to market guidelines till credit markets return back to health. Others, such as Arthur Levitt, former SEC Chairman have been in full favor of FAS 157.
Today’s FASB meeting relaxations include allowing entities to determine fair value taking into account circumstances and evidence, especially in distressed situations to provide the best translation to an “orderly process”. In addition, FASB allowed companies to take advantage of this in Q2-2009, with some freedom to start this as early as Q1-2009. Banks stocks, which stand to benefit the most soared today 5%+ on this news.
What is FAS 157? Essentially, it is a set of guidelines which companies have to follow to value their assets at fair value, with fair value being determined by the market, rather than the subjective evaluation of the company. We point you to the following for some excellent explanations on this complex topic:
http://en.wikipedia.org/wiki/Mark-to-market_accounting
http://www.fasb.org/st/summary/stsum157.shtml
http://blogs.wsj.com/marketbeat/2007/11/15/a-fas-157-primer/
When complex accounting becomes the hot topic, Big4 firms would not be far behind, expect to hear more from the Big Four firms as this subject moves ahead.
Essentially, FAS 157 indicates how companies should mark their assets to a fair value based on market conditions, which under normal & deep and liquid markets is based on recent transactions, exit prices, and reasonably known standards.
However, when liquidity dries up, counterparties fail and no recent transactions are available, companies are forced to write these assets down to very low values to comply with the strict guidelines of FAS 157. Banks with complex financial assets have been most affected by this and the enormous billions of dollars of writedowns are largely driven by FAS 157 mark to market accounting.
In fact, some like prior FDIC chairman William Isaac have blamed FAS 157 for incorrectly portraying values of bank balance sheets and asked for a holiday period from mark to market guidelines till credit markets return back to health. Others, such as Arthur Levitt, former SEC Chairman have been in full favor of FAS 157.
Today’s FASB meeting relaxations include allowing entities to determine fair value taking into account circumstances and evidence, especially in distressed situations to provide the best translation to an “orderly process”. In addition, FASB allowed companies to take advantage of this in Q2-2009, with some freedom to start this as early as Q1-2009. Banks stocks, which stand to benefit the most soared today 5%+ on this news.
What is FAS 157? Essentially, it is a set of guidelines which companies have to follow to value their assets at fair value, with fair value being determined by the market, rather than the subjective evaluation of the company. We point you to the following for some excellent explanations on this complex topic:
http://en.wikipedia.org/wiki/Mark-to-market_accounting
http://www.fasb.org/st/summary/stsum157.shtml
http://blogs.wsj.com/marketbeat/2007/11/15/a-fas-157-primer/
When complex accounting becomes the hot topic, Big4 firms would not be far behind, expect to hear more from the Big Four firms as this subject moves ahead.
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