Subjects of Substance

Your issue of May 2008 may well stand among the best journalism in our profession, with not only the codification of GAAP (“Framing the Future,” page 40) but a thorough discussion of the late crisis in the subprime mortgage market and the role of accounting there (“The Role of Fair Value Accounting in the Subprime Mortgage Meltdown,” page 34).

Michael R. Young is right on point that the conservative standards of reporting have brought the valuation issue to immediate attention. That is what reconciles both Paul B.W. Miller’s (conservative) fair value accounting of the balance sheet to Eugene H. Flegm’s historical (and inclusive) income statement. The difference, “unrecognized losses” after income from operations, maintains the integrity of both the income statement and the balance sheet. Some competence on the part of the user is necessary to understand this; it simply cannot be “dumbed down” any further.

But, the real issue is brought out quite clearly by Kenneth F. Fick (“Securitized Profits,” page 54) in his final paragraph: FASB will likely “address the removal” of “special-purpose entities.” Enron immediately comes to mind. “Special-purpose entities” are forms to move substance off the balance sheet. SPEs are subsidiaries or related parties which must be included and reported on the balance sheet in the classical manner. When do we learn?

Thank you again for a superb issue, and I look forward to more of the same.

Samuel H. Coppock, CPA
Chandler, Ariz.