December meeting results

The FASB & IASB met again to discuss leases on Dec. 13 & 14. Significant decisions reached include:

Cancellable leases
If both the lessee and the lessor have the right to cancel the lease (without termination penalties) such that the minimum term, including any non-cancellable period and any notice period, is 12 months or less, it meets the definition of a short-term lease. The key here is that either side can cancel; if one side can require renewal, then normal lease accounting applies.

Investment properties
Rental income from property accounted for (under IFRS 40) as investment property will not be capitalized, as such property is out of scope of the new leasing standard. However, the boards still chose how to recognize rental income: straight line, or another systematic basis if more representative of use of the asset.

Disclosures for these lessor leases are to include:

• Maturity analysis of future rents (at least 5 years by year, then the rest combined). This is not to be combined with the maturity analysis for capitalized leases.
• Separate entries for minimum contractual rents and variable lease payments
• Cost, carrying amount, and accumulated depreciation on leases
• Narrative information about lease arrangement

Future meetings
The staff listed the following items to be redeliberated:

• the definition of investment property (which is scoped out of this standard)
• the "lessee accounting model"--as mentioned in a Wall Street Journal article that I commented on previously, the boards are going to discuss further a way to recognize level expense over the life of a lease, even though they rejected this earlier
• additional disclosure items
  

My Banker, My Friend

When I first read an article warning that banks are changing standard mortgage wording to allow them to apply mortgage payments to other forms of debt, I was skeptical.  After all, a mortgage payment is a mortgage payment and a credit card payment is a credit card payment.  There is no ambiguity.

Then I received a letter from my credit card provider (see below) that says:

"In any of the above categories (a) to (d), those amounts with the lowest rate(s) of interest will be paid first before those amounts with the higher rate(s) of interest."

Now that's just mean.  Basic financial advice is that you pay down the debt with the highest rate of interest first.  It only makes sense.  And in troubled financial times, we all have to pay attention to basic financial advice.  Is it really in the bank's best long term interest to treat customers this way?  Here's what MNBA says:  http://www.mbna.ca/about_company_conductcommitment.html  I'll let you be the judge of whether this practice is "top quality customer service."

Codes of Conduct and Public Commitment

MBNA, a division of The Toronto-Dominion Bank and Canada's largest MasterCard issuer, is committed to providing top quality customer service. What sets us apart is our commitment to finding the right customers and keeping them.

Voluntary Codes of Conduct and Public Commitments are non-legislated commitments, voluntarily made by companies, that ensure a high level of service while helping them remain competitive. At MBNA we adhere to the following voluntary codes and public commitment designed to protect our customers.

Code of Conduct for the Credit and Debit Card Industry in Canada
Promotes fair business practices and ensures that merchants and consumers understand the costs and benefits associated with credit and debit cards.

Call to Action

I'm not going to rant about unfairness or counsel you to complain to the authorities, the ombudsman or the courts.  Yes, class action lawsuits and government intervention have happened over this kind of issue, but it's a long road.  My simple advice is to keep all of your eggs in different baskets.  The old advice was to have a relationship with your banker.  Keep all your services under one roof so they could get to know you and offer you the best deal.  Those days are gone.  Now you can have your mortgage with one company, your credit cards with two other companies and your retirement savings with yet another firm.  Divide and survive!

November meeting results

Sorry, I'm behind again. This is from a month ago; I'll post the results of December's meeting as quickly as possible. This is from the FASB & IASB joint board meetings of Nov. 15 & 16, 2011:

Leases in business combinations
An acquired lessee lease is set up as if it is a new lease at the acquisition date, except that the asset is to be adjusted for any "off-market" terms in the lease; that is, if the rent due is substantially above or below market rents, the difference between market (present valued) and contract is folded into the asset.

This is a significant change from current accounting, which calls for a fair value calculation for both the asset and the obligation at the date of acquisition, with the result that the two are normally different at the acquisition date. Now the normal case will be equal asset and liability at acquisition, unless the rent is considered off-market.

An acquired lessor lease, using the receivable & residual approach, is set up as if it is a new lease at the acquisition date for purposes of calculating the receivable. The residual is the difference between the receivable and the fair value of the asset.

An acquired lessor lease that is treated as investment property or a short-term lease (originally or according to the remaining life at acquisition) is handled according to current rules under IFRS 3 and FASB Topic 805 for acquired operating leases. (However, I don't actually see anything explicitly talking about operating leases in Topic 805 or its original source, FAS 141, so I'm not sure what that means.)

Transition
If a lessee has a previously recognized intangible asset or liability to reflect (un)favorable terms in an operating lease, that should be folded into the right-to-use asset.

Currently, the sale of operating lease receivables by a lessor cannot be treated as a sale; instead, it is accounted for as a secured borrowing (because the receivable is not recognized on the balance sheet to begin with). The boards discussed whether to permit sale treatment at transition. Requiring it was seen as onerous; permitting it as an option would reduce comparability. The boards decided to permit it on a prospective basis only.

First-time adopters of IFRS generally would apply the same transitional rules as other companies, except that they are to use fair value determinations for a right-to-use asset.

Sound, Practical Financial Advice From a Bank??

A round of applause to the bank president who wants the Federal Government to reduce the maximum mortgage limit from 30 years back to 25. (I guess he doesn't realize that he could order his own people to do just that.)

Without getting into a bunch of financial mumbo jumbo, I look at it this way: you get the big mortgage when you need the space for a growing family. With the cost of university education being as high as it is, you need the mortgage paid off by the time the kids go there. A 30 year mortgage leaves you caught in a financial squeeze.

Unfortunately, bank employees don't talk in those terms when you sit down to negotiate your finances. They tell you that you can afford a bigger house with a 30 year mortgage. While not technically a lie, it is hardly a responsible practice either.

So, Mr. Clark, put your bank where your mouth is and give your young customers solid, practical financial advice. You don't need Federal Government approval for that.

http://www.theglobeandmail.com/globe-investor/mortgage-rules-should-be-stricter-td-chief-says/article2271588/

Fighting on the expense profile

According to a Wall Street Journal article in yesterday's edition (available online only by subscription), most companies are resigned to the new lease accounting standard putting leases on the balance sheet. The primary issue they're pushing back on is the front-loading of expenses (which happens because interest is higher in the early years of a repayment schedule, while the depreciation remains straight-line throughout the lease term). The boards briefly considered, then rejected, a proposal earlier this year to make the expense profile straight-line by making the depreciation expense equal to the obligation repayment in each payment period; they didn't like the way the depreciation would look, and felt it was inconsistent with other aspects of accounting.

However, the topic hasn't died, and the article says that the FASB & IASB staff plan to revisit the issue with the boards, perhaps next month.

The article notes that the front-loaded profile is particularly problematic for retailers, who typically have lower revenues in the first years a store is open. Chains that are rapidly opening up new stores would be especially hard hit. The article indicates that investors also consider the expense front-loading unhelpful.

The article speculates that companies might shorten the life of their leases to reduce the impact of front-loading, but notes that that could cause problems for landlords who depend on long-term leases to guarantee their loans.

In other news, I realized I missed commenting on a November 1 meeting:

The boards worked through lessor disclosures, including:

• A table of all lease related income items, listing separately profit at lease commencement, interest income on the receivable, interest income on the residual, variable payments, and short-term lease income.
• Information about variable lease terms, renewal options, and purchase options
• A reconciliation of the right to receive payments and residual assets (showing beginning balance, additions, payments or residual accretion, terminations, and ending balance)
• A maturity analysis of future rent payments, by year for at least five years with the remainder as a lump sum
• Information about how the lessor manages risks on the underlying asset

The boards decided that a lessor doesn't need to disclose:

• Initial direct costs
• The weighted average or range of interest rates on leases
• "Fair values" of the receivable or residual (a term of art that requires determining a market price for sale)

Sale/leaseback transition

• An existing sale/leaseback transaction that resulted in a capital/finance lease will continue to be accounted for with no adjustments.
• A sale/leaseback with an operating lease or with no recognition of sale would be reevaluated based on the criteria for transfer of control of an asset in the proposed revenue standard (which presumably will be finalized no later than the leases standard; its exposure draft was put out Nov. 14). If met, the lease would transition like other operating leases.

Additionally, the FASB clarified that an exception from lease accounting under EITF 01-8, applicable to certain transactions entered into before May 2003, will not be retained, and such transactions will need to be accounted for as leases under the new standard.

Value of external audit to retail investors

This is an interesting article with regard to the value of external audit to retail investors in Singapore. Please refer to the link:

http://bizdaily.com.sg/newsite/most-singapore-retail-investors-find-value-in-external-audit-survey/

A survey was conducted by the Association of Chartered Certified Accountants (ACCA) and Securities Investors Association (Singapore) (SIAS), who sent out survenys to their own 390 members. As evient from the link above, 80% of the respondents opined that audited financial statement is important sources of information to guide their investment decisions.

In addition, the respondents also commented that the scope of audit should be extended, especially for two main areas:specific assurance on a company’s internal controls and a report on the adequacy and effectiveness of a company’s risk management programme.

In our opinion, the internal controls and risk management programme is especially important to prevent future unfavorable against the entity, and minimise the risks that the entity is been exposed to. Retail investor may feel more comfortable with their own investment if the investee has a strong internal controls in-place and effective risk management assessment programme.

For instance, the investee ( i.e. a entity listed on a stock exchange) may find an opportunity to invest in certain projects. A stringent risk assessment programme may help to evaluate the risks involved in the projects to ensure that all risks are been considered while making investment decisions.

If you have any comments, please feel free to contact us at myauditing@gmail.com

Olympus scandal: hid investment losses in the past 20 years

Japanese company, Olympus Corp has finally admitted that they used inflated acquisition costs ( specifically: advisory fees) to hide investment losses incurred in the past 20 years.

Earlier on, the market was vigorously discussing on the scandalous US$687 million payment for financial advice and expensive acquisition of companies unrelated to its mainstream businesses.

Olympus issued a statement saying that an independent panel investigating the allegations had found that the acquisitions were used to cover up losses on investments dating to the 1990s. During that time in Japan known as the "Lost Decade," many Japanese companies took to making speculative investments in securities to offset sluggish sales following the bursting of Japan's economic bubble.

Olympus Corp's president, Takayama also confessed that the corporation needed higher level of corporate governance to ensure that similar things will not happen in the future.

Audit considerations for Japan real estate companies

According to report from Standard & Poor’s with regard to Japan’s property market:

“ Diversified real estate companies had strong condominium sales in fiscal 2010 but at the expense of margins. Companies cut selling prices to clear inventory despite unrealized losses on fixed assets. Earnings could come under further pressure in fiscal 2011 because of possible delays in construction completions or sales slippage due to the earthquake. Japanese real estate investment trusts have turned acquisitive after recapitalizing their balance sheets, and this has”

[Note: the paragraph above was quoted from Standard & Poor’s]

If you are the auditor of a real estate companies in country, where the economy is suffering from the global slow down, please take note of the marketing strategy adopted by your audit client. As evident above, certain real estated companies are cutting their selling prices of the properties developed at the expense of profit margins. In worst case scenario, the real estate may even incur a negative margin (ie. selling the property at losses).

There are a number of reasons, where a real estate developer may conduct the sales transactions in above patterns:

- to meet the cash flow/ working capital demand (i.e. to pay off debt due / repay vendors)

- to meet the analyst’ expectation on sales revenue; the drop in GP Margin might not be evidenced obviously, as the real estate companies may have earned positive GP Margin in previous quarters / from other projects (i.e. cushion effect)

- to minimize the risks that the inventory might not be sold in a slowing-down market

- to avoid the actual and economic costs of holding on to inventory

What will be the implication for the audit for the above scenario? There are risks that the real estate company may end up in a gross loss position from this project, if margin is too thin. “Provision for foreseeable losses” need to be recognised immediately.

How to estimate the “Provision for Foreseeable Losses”:

(a) Determine the remaining quantified (of properties) to be sold;
(b) Determine the projected / estimated selling prices and compare that to the cost-to-build for each property; if it’s a gross loss position, then provision need to be provided
(c) Total provision to be provided = remaining quantities x gross loss estimated

Please apply professional judgement and maintain professional susceptibility while reviewing the working prepared by client to ensure that all costs have been considered.

Implication of Bangkok's floods to Company's financials

Earlier on, Thailand Finance Minister commented that the devastating floods in Bangkok could lower Thailand's Gross Domestic Products. The floods have caused damage to equipment in the flooded industril plant.

Your audit client may have a plants / factories located in the areas affected by the massive flood. In this instance, a proper check need to be performed to assess if the audit client's plants / factories are affected.

Assuming that the plants / factories are affected by the flood, the following procedures need to be performed, including (but not limited to):

- are the machineries and equipments been damaged in the flood. Should impairment been recorded given that the machineries and equipments are damaged?
- are there any going concern issue, given that the operations are likely to be stop?
- is your audit client able to produce financials on time for reporting?
- is there any penalty on contracts with customer if audit client is not able to deliver agreed items on time?
- is your audit client able to collect outstanding debts from customers who maybe affected as well?


A thorough understanding of the floods, and how will that affect the operations are required to determine the nature and extent of audit procedures to tackle the impact of floods.

This month's boards meeting

On Oct. 19, the FASB & IASB again met to discuss the new lease accounting standard. In a marathon session (scheduled for 5 hours), they reached a number of decisions in several areas. (Note: in the discussion below, and elsewhere in discussions about this standard, "effective date" is the date companies must start reporting under the new standard, while "date of initial application" is the date, normally two years earlier for U.S. companies, as of which leases must be treated as capital once the new standard takes effect, due to the requirement to restate years shown as comparables in the annual report.)

Lessee transition

• All existing capital leases will be carried over with no changes required. Previously, they had planned to require restatement of capital leases with variable payments or renewal options that would be treated differently under the new standard. They decided the benefit wasn't worth the cost, because in most cases the differences would be small (particularly given recent decisions to reduce recognition of variable payments and options).
• The incremental borrowing rate to use for operating leases to be capitalized will be a single company-wide rate, not based on the individual characteristics of each transitioning lease.
• Operating leases can be recalculated using either a "full" or a "modified" retrospective methodology. The same methodology must be chosen for all leases. Full means going back to lease inception and calculating the lease as capital. Modified is different from what was in the original Exposure Draft; I described it last month. They have clarified that the difference between asset and liability generated by this method is to be booked to retained earnings (no P&L impact).
• The simplifications ("reliefs") mentioned last month were all confirmed: leases that terminate before the effective date of the new standard won't have to be restated, even if they start after the date of initial application; initial direct costs are excluded during the same period; and preparers may use hindsight to set up the leases.

Lessor transition

• Capital leases other than leveraged leases can be carried over with no adjustments.
  
• Leveraged lease accounting is eliminated. Such leases will have to be restated.
• Current operating leases will have a receivable and residual set up using the present value of the rents and expected residual value at date of initial application, the interest rate being the rate charged in the lease as of lease inception; the underlying asset is derecognized. Lessors also have the option of full retrospective application.

Lessor receivables held for sale

• A proposal to report receivables held for sale at fair value was rejected. While this would superficially be consistent with IFRS 9 and the FASB's Accounting for Financial Instruments project, it was felt that it added complexity, was inconsistent with the rest of the leasing standard, offered opportunities for structuring, and would add more variability in profit and loss. Instead, any gain or loss would be recognized when a sale of the receivable is completed.

Variable payments for lessors

• If the rate a lessor charges a lessee assumes "reasonably assured" variable lease payments will be made, the residual asset (which by default contains the value of those payments, since the value is not in the receivable) will be adjusted by recognizing an adjustment to the residual. The adjustment is the variable lease payment divided by the fair value of the underlying asset, times its carrying amount.

Lessor receivable and residual

• Investment property is excluded from the lease standard scope. This keeps those properties under IAS 40 for companies using IFRS. The FASB is working on a project to create the same standard for the U.S. (which presumably will be complete by the time the lease standard takes effect).
• Profit on the residual will not be recognized until the asset is sold or re-leased.
• The residual is initially booked at the present value of the residual. The value is accreted, with interest income recognized for the accretion, using the same interest rate as for the receivable.
  

Exposure Draft delayed to 2012

The FASB & IASB have updated their project schedules to indicate that the revised exposure draft (RED) will be released in Q1 2012. That's another delay of three months from what was expected when they announced in July that a RED would be released. The Equipment Lease and Financing Association is reporting that the comment period will be a full 120 days; there had been speculation that the comment period might be shorter the second time around. That means that the comment period won't end until near the end of Q2. With time for redeliberation, that suggests that the final standard won't be out until late in 2012.

It's yet the latest delay in an oft-delayed project. When originally announced back in 2006, the boards expected to be done in 2009. The latest delay could affect the implementation date; speculation recently has focused on 2015 as the implementation date, but given the planned requirement to restate the prior two years of comparable financials, that means there could be just weeks between the release of the standard and when (1/1/2013) leases will effectively need to be reported under it. During those two years until actual implementation, bookings will be done under current standards, but companies will need to make sure they keep complete information on their leases to enable recreating their accounting under the new methodology. Of course, with the active consideration of full retrospective accounting (though probably not to be required, just optional), it would be good to be keeping information right now on any leases that you expect to remain active into 2015. (It is expected that leases that expire before implementation won't need to be recalculated.)

The boards held a lengthy meeting this week on leases, but I don't have time to review the 5 hours of recordings, and my normal sources haven't yet posted summaries of the events.

#107- Audit tips on reviewing legal expenses

This post intend to share with our Accouting & Auditing blogs readers on a number of tips while performing the review of audit client's legal expense account, as follows:

a) Review the invoice & billing details sent by the audit client's lawyer to identify any law suits / legal cases that's against the audit client [ note: disclosure is required in the financial statement, if the exposure is material]

b) To investigate further if there's vague and inadequate descriptions on the billings from the lawyers.

c) Review the engagement letter / contract entereted into by audit client with the lawyers to find out how detailed the firms’ fee bills should be.

d) From internal control perspective, audit client should have adequate and consistent policy for reviewing legal fee bills once they came in. [ i.e. determination of the verifier and reviewers of the legal fee bills, etc]

e) Please obtain confirmation from audit client's lawyer on the on-going legal cases/ law suits to identify if there's any material exposure.

European Commission plan to curb Big 4 Oligoply

It is reported that European Commission is expected to release a law, which could shake up the Big 4 audit firm's oligoply situation. Big 4 audit firms include: KPMG, Deloitte & Touche, Pricewaterhouse Coopers and Ernst & Young

It's propsing that auditors be banned from providing consulting services to firms that they audit, to avoid the conflict of interest issue. From Accounting & Auditing blog's point of view, it is mandatory to maintain independence.

The said proposed plan also includes a requirement for the companies to change auditors every 9 years. In most of the european area, change of auditors rarely occur.

It's likely that the proposed plan will open up the competition within the auditing industry.

Working hours of Big 4 Auditors in ASEAN Countries

This post intends to give everyone a general idea of the working hours of Big 4 auditors in ASEAN.

Based on our talks and discussion with auditors in ASEAN.

During peak season, generally it falls on January- February of every year in ASEAN countries, auditors would stay up till at least 10.00p.m. till beyond midnight to complete the engagement. They are quite a number of Big 4 auditors have the experience of working overnight in office during peak season.

During off-peak season, auditors may leave the office earlier, generally at approximately 8.00pm till 10.00p.m.

However, the hours mentioned above is based on the average hours of the Big 4 auditors we have surveyed. We, genuinely believe that the working hours largely depends on the engagement been allocated.

If you have any ideas / comments on the working hours or you would like to share with us of your working hours as an auditor, kindly leave a comment and / or drop us an email at myauditing@gmail.com

Boards get back to work, timeline slips further?

When the FASB and IASB decided in July to prepare a second Exposure Draft for the proposed new lease accounting standard, they expected to finish all the loose ends in September and release the RED (Revised Exposure Draft) soon after. Oops, here we go again. The whole history of this new standard has been one of delays: when the project was announced in 2006, it was supposed to be completed in 2009.

Even before the meeting, the boards realized they weren't going to be able to do everything this month. (There was no joint meeting in August; it's not clear whether the month off was considered in their July timeline.) But the agenda for this month included the plan to bring "all remaining redeliberation issues to the boards in the October joint board meeting." Now Asset Finance International is reporting that the boards want more time to redeliberate the remaining issues, and that it might take until next February to issue the RED, with a final standard of course being several months after that (to allow time for public comment, then redeliberation). It's not clear what their basis is for this projection; the FASB's Technical Plan still has a Q4 estimated publication date for the RED (with the notation that this was updated 9/23/11), though it doesn't list any date for the final standard. However, some decisions due this month were either completely deferred or have loose ends dangling.

Decisions made at the Sep. 19 and Sep. 21 joint board meetings:

Scope - inventory
Some people had suggested that the right-of-use asset for a lease could in some cases also meet the definition of inventory, and would be subject to potentially conflicting standards. The boards decided that the situation doesn't really seem possible, and therefore there's no need to prepare guidance to distinguish.

Financial asset guidance application to lessor's right to receive payments
A major concern of the boards is keeping accounting consistent between different types of transactions. The lessor's right to receive rent payments could be considered a financial asset. The boards decided that such standards (specifically, IFRS 9, IAS 39, and US GAAP Topic 825) should not apply to regular measurement of the receivable, but would apply to impairment. This also confirms the previous decision that fair value measurement/revision is not permitted for the receivable.

Lessor impairment
For the lessor receivable, the impairment standard for the applicable GAAP environment (Topic 310 for U.S. preparers, IAS 39 for IFRS) applies. For the residual asset, IAS 36 and Topic 360 apply; for US preparers, this indicates impairment is handled in a manner congruent with property, plant, & equipment, rather than intangibles. This is basically the same as lessee treatment.

Lessor balance sheet presentation
Lessors will be required to report all their leased assets, both receivables and residuals, as a "Lease Assets" line in PP&E. Lessors may choose whether to separate the receivables and residuals in the balance sheet, or footnote the detail. Sublease assets should be shown separately.

Subsequent adjustments of variable rents, lessor
The recalculation of variable rent payments due to changes in a rate or index (such as changes in LIBOR or the CPI) can result in a gain or loss. That is to be recognized immediately in profit & loss, rather than being rolled into the asset (as is largely the case for lessees).

Lessor accounting for residual value guarantees
The boards agreed that a residual value guarantee would not be separately recognized (whether provided by the lessee or a third party). It would be taken into account in determining the value of the residual asset, including testing for impairment.

Lessor cash flow statement
Lease payments are classified as operating (not investing) activities. An exception was made, however, for cash flows related to securitized receivables, which would be accounted for under existing guidance.

Transition, lessees
The ED called for lessees to capitalize the remaining rents on all operating leases, with an equal asset and liability set up at the date of initial application. (Note: the effective date is when the standard takes effect; the date of initial application is the date, two years prior for most US companies, as of which leases have to be treated as capital for comparison purposes.) The problem with this for the income statement is that because it treats all (formerly operating) leases as new on the date of initial application, all of those leases will be at the beginning of the interest amortization curve, when the interest recognized is highest. This means that all lessees would face considerably higher expenses than rent payment as of initial application (with expenses dropping over time, as the principal is paid down and interest correspondingly declines).

It was recognized that this results in artificial swings in expenses. For a lessee with a mix of leases starting and ending roughly evenly from year to year, the overall lease expense profile should be relatively flat, even as each individual lease shows more expense in the early years and less in the later years.

In looking for ways to mitigate this, the staffs presented to the boards two alternatives:
1) full retrospective approach
2) modified retrospective approach (distinguished from the ED's "simplified retrospective approach")

Full retrospective is seen as theoretically preferable. However, it is recognized that for some preparers, this may be difficult to execute. One particularly challenging scenario is leases that have been acquired in a business combination, where the original information for the lease may no longer be available. Long-lived leases may have similar issues. Therefore, the staffs proposed a modified methodology, where the liability would be calculated as the ED specified (present value of remaining rents, using the incremental borrowing rate at the date of initial application), and the asset would use the same calculation back to inception, then recognize the fractional amount of the lease term remaining.

Transition example (provided in Agenda Paper 2G/203):
(Please note: I calculate slightly different present values, using an HP12C or Excel, than the agenda paper presents. In the example below, I list first their calculation, then my calculation in parentheses with an asterisk.)
10 year lease, payments of 1000 CU (generic Currency Units) yearly in arrears
interest rate of 5.7%
date of initial application: beginning of 5th year (i.e., 6 years remaining)

present value of rents at inception: 7,472 (*7,466)
present value of rents at application: 4,967 (*4,964)
asset at application: 7,472 * 6 / 10 = 4,483 (*4,479)

The difference between the asset and obligation would be taken as a "cumulative catch-up adjustment." I believe this would be booked directly to retained earnings, not recognized in profit and loss. Because of the way the interest method works, every lease (except possibly a lease that has lower rents at the end of its life) will book a charge to retained earnings to be set up, so the cost of reducing the impact to the income statement is increasing the impact on the balance sheet (debt/equity ratios will balloon even further). Pick your poison.

The boards, however, didn't pick their poison. They deferred the decision to next month, asking to combine the decision with transition rules for lessors and subleases.

The staffs also suggested a few simplifications: 1) leases that terminate between the date of initial application and the effective date would not have to be restated; 2) exclude initial direct costs for leases that start before the effective date; 3) allow use of hindsight in estimating such lease characteristics as variable lease payments, renewals, and impairment. These will be considered as part of the entire transition package.

This kind of continued change is why no software publisher can claim to be compliant with the new lease accounting standard yet. It's a moving target. But we'll update EZ13 once decisions are finalized; in the meantime, EZ13 allows you to treat operating leases as capital, either from inception or as of a specified cutover date as specified in the original ED, to estimate what your exposure is.

UBS CEO has resigned after unauthorized trading incident

UBS CEO Oswald Grübel has resigned on 24 September 2011, after the recent unauthorized trading scandal, which has caused the bank to suffer from US$2.3billion losses arising from unauthorized transactions. Sergio Ermotti, a veteran Merrill Lynch executive, has been named as the interim CEO to lead the company.

Despite achieving impressive turn-around and strengthened UBS’ fundamentals during his tenure, Oswald Grübel stepped down after the unauthorized trading done by the rogue trader, 31-year-old Kweke Adoboli.

The board and the management of this Swiss bank are in the midst of investigating this scandal.

This entire incident re-emphasized the importance of having a strong internal controls system in place. CEO might not be the individual designate the internal controls in-place. However, a CEO needs to ensure that strong internal controls are in place to prevent/ identify unauthorized transactions. Hence, it appears to the public that Oswald Grübel has stepped down as he assumed the responsibility of unauthorized trading occurred.

There are five key elements in an internal control system, namely:
a. control environment,
b. risk assessment,
c. control procedures,
d. information & communication, and
e. monitoring

It’s evident that CEO need to be heavily involved in “information & communication” and “monitoring” components. To illustrate, there must be proper channel for all necessary information to be heard / listened by senior management,. It’s also crucial to ensure that appropriate level of monitoring activities been carried out.

#106- Stock-take for entities with incident / experiene of fraud

Management of certain companies may encounter incidents of stocks losses due to misappropriation of assets by its employees, i.e. their employees stole the company’s stocks for personal benefit (i.e. personal usage/ personal profits after selling it out).

Let us discuss together on What Could Go Wrongs (“WCGW”) in the internal control system that may result in the entity exposure to the risk of fraud:

- stock take is not conducted on a regular basis (i.e. stock take on a half-yearly basis)
- quantities and movement of provision stocks / obsolete stocks are not kept tracked (note: these stocks usually carry scrap value, and might be misappropriated if there’s no proper record)
- physical stocks are not stored in safety area
- CCTVs not installed in warehouse
- ineffective procedure in updating inwards/outwards of stocks into stocks record

The list above is not exhaustive and it is for reference only

From management perspective, there are a few areas / procedures need to be carried out when they had experienced / encountered fraud with regard to their physical stocks:

- improve accountability of the employees by assigning different area of stocks of different employees
- impose penalty on all warehouse employees while there’s material stock differences ( e.g. penalty on warehouse employees if stock-take difference is greater than 0.5% of total stocks)
- employ strict security access to the warehouse
- install CCTV in the warehouse and perform random check on certain time slots
- security guard to perform check on employee’s bags before allowing the employees to leave the premises
- ensure that stock-take is conducted on a regular basis and any stock-take difference is investigated


Please feel free to email us Kauditor at myauditing@gmaill.com if you have any comments or you would like to find out more. Kauditor at Accounting & Auditing Blog is an experienced subject matter expert.

Catching up on June results

June 13 meeting results:

Short-term Lessee Leases

The boards agreed to operating lease accounting for lessee leases with a maximum lease term (including renewal options) of 12 months or less. No asset or liability need be placed on the balance sheet, and rent expense is recognized on a straight-line basis over the lease term. (Lessees may choose to do full finance lease accounting if they wish. How likely is that?) Disclosure of current rent and how representative that's likely to be of the future was discussed.

Subleases

A head lease and sublease are to be accounted for as separate transactions, using normal lessee accounting for the head lease and lessor accounting for the sublease (using the right-of-use asset as the fundamental asset for the transaction, not the original underlying asset).

June 1 meeting results:

Foreign Exchange Differences and Impairment

Both of these are to be recognized in accordance with existing guidance, which is somewhat different between FASB and IASB.

Residual Value Guarantees

The new standard calls for recognizing only the portion of any residual value guarantee that is expected to be payable, rather than the maximum amount. If there is a significant change in the expected RVG payable, an adjustment is required; the portion that applies to current or prior periods is recognized in profit or loss, while the right-of-use asset is adjusted for the portion applying to future periods.

Second Exposure Draft coming

I need to catch up on the boards' activity over the last two months. I've taken a summer hiatus, but they didn't...

The most important news is that at the July 21 meeting, the boards unanimously decided to release a second Exposure Draft. The changes to the proposed standard from the original Exposure Draft are so significant that they felt it important to get feedback from interested parties. Some decisions remain to be made before the new Draft can be released; they expect to complete those deliberations during Q3, with a new Draft released soon after. The wording seems to suggest that the Draft would come out in early October.

Additional decisions reached this month:

Lessor Accounting

The performance obligation model has been scrapped. All leases (except for short-term leases) will be accounted for using a "receivable and residual" model, which is essentially the same as the "derecognition approach" described in the Exposure Draft. Main points of this model:

* The lessor recognizes a right to receive lease payments (matching the lessee's obligation to make payments) and a residual asset.

* The discount rate to present value the payments is the "rate the lessor charges the lessee" (the internal rate of return, based on the asset's value).

* The residual asset accretes (increases using the interest method, same interest rate) over the lease's life.

* If the asset's carrying amount is lower than the lease's value, a profit (on the portion of the asset represented by the lease receivable) can be recognized at commencement of the lease if reasonably assured.

Short-term leases, defined as those with a maximum term of 12 months or less, will be accounted for as operating leases (no balance sheet effect, just income recognized over the lease term on a systematic basis, usually level). This will protect against needing to do convoluted accounting for things like rental cars and hotel rooms.

Operating lease accounting will also be permitted for leases of investment property measured at fair value. This is currently only available under IFRS (IAS 40). But the FASB is working on a proposed investment property standard which would be similar, with an Exposure Draft scheduled for Q3 2011.

Contingent Rents Dependent on an Index or Rate

While other contingent rents are excluded from the capitalized calculation of leases, those that depend on an index or rate have to be included. An example would be a lease whose rent is based on CPI or LIBOR. Such leases are to be initially measured based on the index/rate at the commencement of the lease, then recalculated at the end of each reporting period using the new index/rate. The change is booked to net income if it applies to the current reporting period, or as an adjustment to the right-to-use asset (for a lessee) for adjustments that relate to future periods. Lessors would recognize an adjustment in the receivable in profit or loss.

This is a potentially significant cause of recalculations on leases; many real estate leases have CPI escalators that adjust every year. The boards decided that the benefit of more accurate presentation of actual rents due outweighs the effort required.

Lessee disclosures

The boards approved a lengthy set of disclosures for lessees:

* Reconciliation of opening & closing balance of right-to-use assets, disaggregated by class of underlying asset
* Reconciliation of opening & closing balance of lease liabilities (no disaggregation required)
* Future rent commitments, similarly to current FAS 13 requirements (by year for five years, then all remaining, then subtracting interest to reconcile to the liability balance). Note that this is different from current IFRS requirements. Preparers would have the option to disclose by year for more than 5 years, if that would provide better information.
* Information about leases signed but not yet started if they create "significant" rights and obligations
* Information about contingent rentals and options
* A table of expenses: amortization, interest, variable payments, and short-term rents, plus a breakdown of principal and interest paid
* Information regarding any expected material changes in short-term rentals

However, they explicitly are not requiring disclosure of discount rates, fair value of liabilities, purchase options, or initial direct costs.

They also explicitly forbid combining interest and amortization expenses and presenting the total as lease or rent expense.

The boards split over whether or not to disclose future commitments for services and other non-lease components; the FASB wants such disclosure (which is already required by the SEC in the unaudited portion of the financial statements), while IASB does not. Presumably this will be reconciled at a later date (perhaps after the Exposure Draft is released and reviewed).

Lessee primary financial statements presentation

Lease right-of-use asssets and liabilities either must be presented separately in the Statement of Financial Position (balance sheet), or shown separately in footnote disclosures. The right-of-use asset is to be presented according to the type of underlying asset (land leases with land owned assets, etc.). They have decided not to define whether the right-of-use asset is tangible or intangible. This is a question that affects some regulated industries for tax and other purposes. The boards have decided to let the relevant regulatory bodies make the determination appropriate to their purposes.

The Statement of Cash Flows would show principal and interest payments in accordance with requirements for other financing. Variable lease payments (not capitalized) and short-term rentals are operating cash flows. New leases (creating a new asset & liability) would be an additional non-cash disclosure.

June meeting results in next post...

#105- What can an auditor do?

Below is the query raised by one of our blog's readers:

" Somehow I came across ur blog online. I'm curious to know the difference between a auditor n accountant. I'm stuck in a situation where my company's accounts was done using MYOB Software to keep records, then when the YAs ended, we will send to our accounts auditor to do for us. but the problem nw is, when our accounts does not tally, they did not help to check for us n throw back to us to do all checking. I mean, we are not certified accountants( we onli used the MYOB software) to keep our accounts records. Now our accounts is stuck. Does it means tat auditor do not do accounting jobs? "

Our view are as belows:

Strictly speaking, auditor is not allowed to investigate the discrepancies for the book-keeper. Auditor is bound by the principle of independence, which means that auditor is allowed to reviewed and checked the account and provide opinion on the true and fairness of the account they are auditing. Auditor is strictly prohibited from investigating the difference and helping you to tally.

In short, to answer your question, auditor is not allowed to perform accounting jobs.

However, if the difference is not material, you may highlight to auditor that the amount is immaterial and they may consider to discharge.

The pendulum swings again

The big news last month was that the FASB & IASB decided to reinstate a close cousin of operating lease accounting for lessees, with a level expense recognition pattern (though the leases would still be reported on the balance sheet). It was a sharply divided vote. Now, a few members of each board have switched sides, and in another divided vote, the boards have decided to ditch the "other-than-finance" lease category and account for all lessee leases the same way, as finance leases. This means a forward-leaning expense profile (depreciation is equal over the life of the lease, but interest is higher at the beginning of the lease, just like with a mortgage), which many respondents to the Exposure Draft vehemently protested. One reason given was that board members didn't like the options for how to account for the level expense recognition.

The boards also informally voted to eliminate the exemption of short-term leases (12 months or less maximum lease term, including renewal options) from the requirements of the standard that was agreed to in March. However, that will be reviewed and finalized at a later meeting.


Options

In another backtrack that most lessees won't like, the boards have increased the likelihood that options will need to be included in the lease term. In deciding whether to include an option, one must decide if there is a "significant economic incentive" to renew. A prior meeting decided that only economic factors should be considered in this determination (including contract-based factors such as below-market rents or penalties for non-renewal, and asset-based factors such as the existence of large leasehold improvements that would normally be amortized over a longer period). The boards have now decided to include "entity-specific factors," such as historical practice of the company or industry and management intention. The boards noted that a single factor does not have to be determinative, but the door is still opened up to an increase in subjectivity and need for ongoing review.

Lessor accounting

The boards haven't decided if lessors will use one or two approaches to accounting for their leases. So they made decisions for either possibility:

One approach

If all leases are treated the same way, the partial derecognition model will be used, with the residual value accreted over the life of the lease. This is, I believe, basically the same as current finance lease accounting (sales type accounting under FAS 13).

Two approaches

If two methods of accounting are used, leases will be distinguished based on whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. This is the concept underlying both FAS 13 and IAS 17. The boards clarified that among the indicators would be comparing rent to fair value and the existence of variable rent (the latter would be an indication that risks have been transferred to the lessee). Existence of embedded or integral services would not be considered in the determination.

For leases that transfer substantially all of the risks and rewards of ownership, the entire asset would be derecognized, with the residual initially measured at its present value and accreted over the life of the lease.

For other leases, the boards could not come to an agreement. The IASB preferred derecognition, while the FASB preferred current operating lease accounting. This will be revisited at a future meeting. (Neither board, though, preferred the Performance Obligation (PO) method that was presented in the Exposure Draft. That seems to be dead.)

Lease modifications

The boards decided that a "substantive change" in a lease agreement would result in treating the modified agreement as a new contract. This applies if the new terms would change the determination of whether the contract is or contains a lease, or the determination of whether substantially all the risks & rewards of ownership are transferred to the lessee. A change in circumstances (not of the contract itself) can cause reassessment of whether the contract is or contains a lease, but not whether risks & rewards of ownership are transferred.

Discount rate

The interest rate used to present value the rents and amortize the principal (obligation or receivable, depending on whether it's the lessee or lessor) will not be reassessed if the lease payments don't change. However, if a lease is extended because an option needs to be included (either because an option is exercised, or it is deemed to be includible because of a newly recognized "significant economic incentive"), the discount rate (which is typically the incremental borrowing rate for lessees) is to be reassessed, using the current rate, and the present value of the remaining rents is then recalculated.

#104- EBITDA ( Practical Guidance on how to compute)

EBITDA stands for Earning before Interest, Tax, Depreciation and Amortisation.

Here is a step by step guidance on how to compute a Company's EBITDA based on a financial statement:

1. Take the Profit before Tax number (from income statement)
2. Add: Interest (usually, this number can be found in cash flow statement.
3. Add: Depreciation ( most likely: depreciation number can be found in notes to account of Property, Plant & Equipment/ cash flow statement)
4. Add: Amortisation ( most likely: amortisation number can be found in notes to account of Intangible Assets/ cash flow statement)

#103- Provision for Doubtful Debt

We received queries from one of our blog readers in relation to provision for doubtul debt. We will summarize her queries as below:

a. Is general provision for doubtul debts still allowable? If a client provides an allowance of 60k per year as doubtful debt where the double entry is Dr. bad debts Cr. Provision for doubtful debts - is this practice still allowable?

b. Which IAS standard govern this area

Response from myauditing.blogspot.com

a. No. General provision is no longer allowed. IAS 39 states provision for doubtful debt is required when there's objective evidence that the receivable amount is no longer recoverable. As such, only specific provision is allowed. For accounting entries, it is Dr. Bad Debts Expense, Cr. Provision for Doubtful Debt

b. IAS 39

Dear Donut

Dear Donut,

Our relationship goes back a long way. I feel like you’ve become a big part of me. You used to be such a treat, but now, I fear you’ve become a bad habit. Three-thirty in the afternoon rolls around and suddenly you’re there, demanding my attention. It wasn’t supposed to be this way.

I don’t know how to say this without hurting your feelings, but let’s face it. You lied to me. You were supposed to be a snack, a burst of energy, a friend to carry me through until dinner. But that’s not what happened. Sure, the anticipation of meeting you was exquisite. Your softness against my lips. Your sweet taste . . .

But I digress. The sad thing was that after all that foreplay, you didn’t hold up your end of the bargain. After you were gone, I felt tired, not energized. In fact, worse than if I hadn’t had you at all. I put up with it for a while, but it has gone too far. This relationship has to end.

I’m sorry if I’ve never mentioned this before. I know you mean well. I appreciate the kind thought, but no, I really don’t think there’s anything you can do. No, another layer of frosting isn’t going to make a difference. Really. Yes, a fruit filling might make you more romantic, but that just doesn’t deal with the issue. We just weren’t made for each other.

Well, I wasn’t going to mention this to you, but yes, there is someone else. She’s from a different country. No, not Danish! She goes down smooth and gives me lasting energy. No, this isn’t about liking salty more than sweet. Besides, she’s a lot less salty now, more earthy, I’d say. She’s a vegetable juice.

No need to get personal! Vegetables may not be sexy, but they’re smart, and I have come to appreciate how much I like that. You know, I thought you would be a difficult habit to give up, but it turned out that you were easy to replace with something smart.

Look, let’s not part as enemies. You’re sweet. You’re fun, particularly when you’re fresh. And we have known each other a long time. Can't we just be friends?


Bill

Guest's article: Debt Consolidation Loans

Pros & Cons of Debt Consolidation Loans

Before you look into the pros and cons of a debt consolidation loan, know that your financial situation is unique from everyone else & what is beneficial for one person may not be beneficial for you. You need to find a debt consolidation loan that is right for you. Before applying, weigh up the pros and cons of using these loans. How much debt you have, the type of debt it is and the overwhelming need to be out of debt (or not) is what will help you determine the best option to take. The good news is debt consolidation loans are one of the best ways to position for financial success in the long term.

Benefits of Debt Consolidation Loans
Depending on the type of loan you get, the benefits may vary. However here are some aspects to consider:
• One easy manageable repayment. People who have serious financial issues usually have multiple debts, which mean that each month you have many debts to remember to pay. The more debts you have the more likely you are to miss a repayment. With one payment it is far easier to manage your debt repayments.
• Getting a lower interest rate can save you thousands of dollars. Some home equity loans, or other secured loans can charge a rate that is half of what a typical credit card company charges. In the long term, you could be saving thousands of dollars with just a few percentages of difference in interest.
• You may qualify for lower monthly payments on your debt consolidation loan. Consolidating all your debts into one loan may result in a lower monthly repayment due to the lower interest rate. You can take advantage of this by making extra repayments each month and therefore saving even more money in the long term.

These benefits make debt consolidation worth considering, however if mismanaged there can be downsides to debt consolidation.

Draw Backs
Debt consolidation loans can have a few cons, too. Consider how these would affect you.
• It is easy to get into even more debt. As you now have a lower monthly repayment and no longer paying multiple debts, it easy for you to go back to bad spending habits. Debt consolidation along with other debt solutions needs to be used with better money management & responsibility.
• You could lose assets. If you get a home equity loan to consolidate debt and end up in financial trouble again, your house could be in jeopardy. Because the house is backing up the value of the money you owe, creditors can repossess the home if you default on the loan.
• It might take you longer to pay off the debt. Depending on the terms you set up for the debt consolidation loan you applied for, you might end up repaying that debt for a longer period. For example, a home equity loan could be paid off over ten, fifteen or more years, which would extend the debt out. Depending on the situation, you could be paying more in interest because of the extended term of the loan. A good way to avoid this problem, though, is to make extra repayments.
You should take the cons of a debt consolidation loan seriously before applying.

What Debt Solution is right for you?
Are debt consolidation loans the right option for you? For many people, they do help to get out of debt quickly, but are they right for you? Consider your financial situation, your likelihood of getting into debt again and the benefits of having just one loan to pay. Take steps to protect yourself too, such as repaying debts ahead of schedule and keeping interest rates low. Doing these things can protect you in the long term.

#102- Auditing operating cost- understanding cost drivers

Auditing operating costs is always not an easy task. A good audit procedure requires auditor to develp a thorough understanding of the nature of the cost,determination of fixed / variable costs, understand the cost drivers of the costs (especially for variable costs),understand the linkage between the costs and the revenues.

Significant assertion of auditing an operating cost is to ensure that the cost recorded is complete (i.e. completeness).

First of all, we need to understand the nature of the costs (i.e. what type of costs, when was the costs incurred, is the individual amount incurred significant, etc). After develop the understanding of the nature of the costs, we need to understand whether the costs is a fixed costs, or variable costs.

Then, we need to understand the cost driver of the costs. This procedure is especially important for variable costs component. Auditor need to understand what are the factors that drive the cost (for instance, transportation cost could be significant to a trading house). The cost driver for transportation cost is the level of business activities / number of deliveries completed

Auditor can analyze the company's record on number of deliverties completed for the year, and compare our expectation to the cost variation. To illustrate, while number of deliveries go up, we will expect total transportation cost to increase. A good understanding of the cost drivers allow the auditor to have complete understanding of the costs/ and develop a good audit approach to analyze the cost variation.

#101- Fraud cases in Singapore- China Hongxing and Hongwei Technologies

Accounting irregularities are detected in two S-chip companies in Singapore, namely: China Hongxing Sport and Hongwei Technologies. Coincidentally, the financial auditor of these two companies is Ernst & Young LLP.It's noted that the auditor is facing difficulty in ascertaining certain assets, liabilites, and expenses. Details are as below:

Hongwei Technologies- the auditor is facing difficulty in confirming the cash and bank balances

China Hongxing- the auditor noted irregularities in the cash and bank balances, accounts receivables, accounts payables, and other expenses

The board of directors have engaged independent investigator in resolving the issues highlighted by Ernst & Young LLP.

Are the Banks Responding?

Rob Carrick of the Globe and Mail reports that the banks may be taking more responsibility for people getting themselves in too deep:  http://www.theglobeandmail.com/globe-investor/personal-finance/rob-carrick/banks-can-do-more-to-restrain-runaway-household-debt/article1918234/ 

I'm all for consumer choice and I don't want a paternalistic approach.  At the same time, there needs to be a balance to the marketing messages of spend, spend, spend.

Accounting Crisis Response

Major David Ebel, of the Escondido Salvation Army, is one of the moderators of the Emergency and Disaster Responders Support web site.  I spoke to him about training as a volunteer to help people in crisis.

"You may think of fires and earthquakes when you talk about disaster relief, but if you were in Escondido, I could use your accounting skills right now," he said.  Ebel went on to describe the financial challenges some of the people he serves face.  "If you could help people figure out how to live on $22,000 per year, you would be making a big contribution to their quality of life."

Ebel continued, "Some of the people I work with have never seen a raw potato.  They don't realize that they can buy five pounds of potatoes for the cost of two boxes of processed potato flakes.  They have never made mashed potatoes from scratch in their life."

In the financial area, I see a similar lack of exposure to the basics.  In my grandfather's day, if a young couple came to the bank for a mortgage they couldn't afford, the loan officer would quietly explain the situation to them and refuse to advance the money.  Fast forward to today, where the bank employee will help you minimize your payment by reducing the down payment and extending the amortization period from 20 years to 35 years.  The problem is, they don't tell you the consequences of those decisions.

Let's say you have a $100,000 20 year mortgage at 5%.  Over the course of the mortgage, you will pay $57,710 in interest, at $657 per month.  If you extend that mortgage to 35 years, then you will pay $110,600 in interest (more than the original mortgage!), at $501 per month.  That extra $150 per month makes a huge difference spread over 20 years.  Here's the part they don't tell you:  if you get the 20 year mortgage when you're 20, then it's almost paid off at the time when your children may need college tuition or are considering getting married, etc.  If you go for the 35 year option, then you haven't paid off the house until you're 55 years old!  Who needs that kind of stone around their neck?!

The point of all this is simply that when budgeting for mortgage payments, the right question to ask is "What's the MAXIMUM I can pay?"  As odd as it sounds, reducing mortgage payments makes mortgages LESS affordable, not more.

The sub-prime mess is still with us.  People have been badly wounded and those wounds are no less real for being financial.  Grab your spreadsheets and get out there!  If anyone reading this blog knows of ways to help counsel people or places to volunteer, please note them in the comments.

Making Financial Reports Fundraising Friendly

Charity Accountants:  Have you ever watched potential donors read the financial statements of a charity?  Even sophisticated readers can be puzzled by things like fund accounting ("What do all these different columns mean?"), how endowments are treated ("What are all these transfers?"), or finding the answers to basic questions ("How much of the money raised goes to administration?")

It's a difficult task to stay up to date with the changing accounting rules for charities, disclosing financial results in a way that ties the revenues and expenses directly into the charity's mission and getting everything done in time for the audit.

But it's worth the struggle.  As I look back at all my accounting training, I can't remember devoting a single hour to making financial information easier to read, yet in these days of funding cuts in the charitable sector and increasing direct donor involvement, making the financial story understandable has never been more important. Imagine that each donation has a flag attached to it and the donor of that money needs to know exactly how the donation helps the charity achieve the donor's mission, as well as where the money actually went.

So, as you struggle to get the year end completed and start to think about how the audited statements should look, take a look at what Queen's University is doing about Voluntary Sector Financial Reporting Excellence.  Maybe you should consider entering it this year!

#100- Inventories are non-monetary items - No forex

We received questions from our reader whether inventories need to be translated/ revalued based on year end rate.

IAS 21 “The Effects of Changes in Foreign Exchange Rates” states that non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction. Note: inventories are non-monetary items.

Inventories are non-monetary items and should be translated at their transaction rates if they are denominated in foreign currencies. However, there might be instances where the client might have revalued the inventory wrongly by translating the inventory based on year-end closing rate or the average for the year.

The auditor need to discuss this matter with corporate management, and request management to quantify the error.

Why Aren't They Screaming?

Why aren't the pension plans screaming blue murder?  Why aren't they foaming at the mouth and demanding justice?  Why are there no dire predictions about the millions of retired people who rely on fixed rate investments in an era where interest rates are being kept artificially low to stimulate the economy?

And they are hurting.  Really.  Here is a recent communication from a pension plan to its members (altered only to remove anything to identify the actual plan):

The Pension Board has been carefully monitoring the funded status of the pension plan. As previously announced, the Pension Board’s decision not to increase the pension benefits, although difficult, was necessary to maintain the plan’s “fully funded” status.

The combination of a challenging investment environment, historically low interest rates, and the maturing demographics for the plan means the Pension Board will be examining options and strategies to best ensure the sustainability of the pension plan for the longer term.  The Pension Board has also commissioned an ad-hoc committee to coordinate investment strategies to support the plan’s pension commitments. This committee’s efforts will ensure optimal support for the plan’s long-term sustainability. This systematic approach—in-depth researching of all available options—underscores how seriously the situation is being taken.  The Pension Board is keenly aware of the importance of keeping the benefit meaningful for retirees and of maintaining the affordability of the pension plan.

Keeping plan members informed of all decisions that impact the pension plan is a priority of the Pension Board, and any changes will be fully communicated to members as soon as details are available.

In pension circles, there is talk about how to ease the rules so that employers can take longer to fund the deficits in their plans.  Pension liabilities are increasingly seen as a heavy burden on large employers.  I am seeing an increased emphasis on defined contribution plans as opposed to the traditional defined benefit plans, as employers seek ways of sharing the risk with their staff.

Pension plans are traditionally long term, conservative investors, with as much as 40% of their investments in bonds and other fixed rate interest bearing investments.  The current low interest rates are unfairly punishing their performance, particularly when their pension liabilities, which stretch decades into the future, are being discounted at a different rate than they are earning.

Someone should be screaming!