good summary but i want to comment on the accounting part. generally accountants aim to create financial statements that are useful to most readers under normal circumstances. fuzzy concepts like “useful”, “readers” and “normal” mean this goal is complicated and involves trade offs. accountants recognize these trade offs and financial statements include notes to try and explain how they were created and include numbers that help users create different statements for different circumstances. a few related points:
- there are several financial statements that are interconnected. changing the balance sheet automatically changes the income statement and the cash flow statement. making the balance sheet “more useful” can have the unwanted effect of making the income statement and cash flow statement “less useful” - for example, “mark to market” on the balance sheet means creating “unrealized gains and losses” on the other statements. most users (and accountants) refer to these as “fake gains and loses” and hate them. most of the time they are not useful, but once in a while they become very important - creating financial statements that are “more useful” during rare events like a bank run could mean having “less useful” financial statements the rest of the time
accounting rules evolve over time mostly in response to changes in what readers think is useful. bank runs are not a new phenomenon so i’d be surprised if it suddenly becomes more useful to show mark to market assets on the balance sheet. accounting rules can also be changed by regulation, but this is mostly bad, since it means implementing rules that are not useful. i think fears that accountants create rules to favor specific industries or companies at the expense of readers is unfounded. however, it’s true that most readers of financial statements are in the financial industry, and it’s plausible that “normal people” would prefer different rules (if they ever read financial statements).
generally accountants aim to create financial statements that are useful to most readers under normal circumstances.
I would expect accountants mostly care about making finanical statements that are useful to those that pay those accountants instead of the readers of the statements.
I don’t think that anglo-american accounting standards won over more traditional German accounting standards because they are more useful. They won because of geopolitical power.
I strongly agree and wanted to share a similar sentiment.
It is not as simple as “the market says the asset or liability is worth X, so you should too.” Businesses are usually going-concerns and it is not really that useful for the company to report itself as merely how things would go down if they were to liquidate today (though obviously considering that possibility is useful, especially if your business could be “runny,” and recording the fair value of HTM securities in a note to the financial statements allows readers, like Raging Capital Ventures, to contemplate that). Those liquidation values continue to require subjectivity (e.g., depends on the spreads for the assets and what if the blowup situation we’re talking about would spark fear and government intervention that would actually support the assets’ values?! [which is exactly what happened with SVB’s assets actually]), and of course are not even perfectly reflected by MTM values, so their utility is not as straightforward as it may seem at first blush.
In fact, the FASB (1993) explicitly stated in explaining its rule-making...
that extremely remote “disaster scenarios” (such as a run on a bank or an insurance company) would not be anticipated by an enterprise in deciding whether it had the positive intent and ability to hold a debt security to maturity.
The managers (evidenced by pursuing more capital) and the market (in reaction to that) obviously started to consider that possibility as much less remote, which became a self-fulfilling prophecy. But “disaster valuation” might not be a great default way to account when your business is generally conducted under non-disaster conditions.
good summary but i want to comment on the accounting part. generally accountants aim to create financial statements that are useful to most readers under normal circumstances. fuzzy concepts like “useful”, “readers” and “normal” mean this goal is complicated and involves trade offs. accountants recognize these trade offs and financial statements include notes to try and explain how they were created and include numbers that help users create different statements for different circumstances. a few related points:
- there are several financial statements that are interconnected. changing the balance sheet automatically changes the income statement and the cash flow statement. making the balance sheet “more useful” can have the unwanted effect of making the income statement and cash flow statement “less useful”
- for example, “mark to market” on the balance sheet means creating “unrealized gains and losses” on the other statements. most users (and accountants) refer to these as “fake gains and loses” and hate them. most of the time they are not useful, but once in a while they become very important
- creating financial statements that are “more useful” during rare events like a bank run could mean having “less useful” financial statements the rest of the time
accounting rules evolve over time mostly in response to changes in what readers think is useful. bank runs are not a new phenomenon so i’d be surprised if it suddenly becomes more useful to show mark to market assets on the balance sheet. accounting rules can also be changed by regulation, but this is mostly bad, since it means implementing rules that are not useful. i think fears that accountants create rules to favor specific industries or companies at the expense of readers is unfounded. however, it’s true that most readers of financial statements are in the financial industry, and it’s plausible that “normal people” would prefer different rules (if they ever read financial statements).
I would expect accountants mostly care about making finanical statements that are useful to those that pay those accountants instead of the readers of the statements.
I don’t think that anglo-american accounting standards won over more traditional German accounting standards because they are more useful. They won because of geopolitical power.
I strongly agree and wanted to share a similar sentiment.
It is not as simple as “the market says the asset or liability is worth X, so you should too.” Businesses are usually going-concerns and it is not really that useful for the company to report itself as merely how things would go down if they were to liquidate today (though obviously considering that possibility is useful, especially if your business could be “runny,” and recording the fair value of HTM securities in a note to the financial statements allows readers, like Raging Capital Ventures, to contemplate that). Those liquidation values continue to require subjectivity (e.g., depends on the spreads for the assets and what if the blowup situation we’re talking about would spark fear and government intervention that would actually support the assets’ values?! [which is exactly what happened with SVB’s assets actually]), and of course are not even perfectly reflected by MTM values, so their utility is not as straightforward as it may seem at first blush.
In fact, the FASB (1993) explicitly stated in explaining its rule-making...
The managers (evidenced by pursuing more capital) and the market (in reaction to that) obviously started to consider that possibility as much less remote, which became a self-fulfilling prophecy. But “disaster valuation” might not be a great default way to account when your business is generally conducted under non-disaster conditions.