SUMMARIZE EACH IN OWN WORDS PLEASE ASAP!!!

The first example concerns accounting for marketable securities classified as available for sale. Accounting standards in this case (partially) defer to the intent of managers and let unrealized losses and gains be recognized in the stockholders equity section instead of the income statement. In my opinion, deference to management intent creates an opportunity for earnings management. We know that firms report hundreds of billions of dollars of investments in available-for-sale securities, typically, financial services firms. The standard creates an opportunity for firms to time the sale of the securities to recognize gains and losses. As a result, the performance metric for managers becomes a little more challenging both for the boards of directors, as well as for outside shareholders.

The second example pertains to the fair value accounting for liabilities. In my opinion, it does not capture the underlying economics accurately in that firms record gains when the fair values of liabilities decline without regard to the cause for these declines. Often, an increase in credit risk causes a decline in the fair value of the liabilities, and such increase is rarely unrelated to the outlook for equity holders. That is, an increase in credit risk is typically caused by lower probability and/or poor outlook for the main business activity of the firm. Therefore, values of liabilities and shareholders equity are likely to move in tandem, as opposed to offset each other. As a logical implication, the standard on fair value of accounting for liabilities should be tweaked. The standard as it stands currently makes it difficult to understand whether the firm performance has been good (in the sense of asset productivity) or whether equity holders are simply experiencing a wealth transfer from creditors.

The final example is from research I am currently conducting with Nick Guest and Bob Pozen, in which we analyze the association between non-GAAP (generally accepted accounting principles) earnings and CEO pay. Firms routinely disclose non-GAAP earnings in their press releases, in which they incorporate adjustments to GAAP earnings. Managements typically explain non-GAAP earnings adjustments as designed to remove transitory elements from GAAP earnings, thus producing a non-GAAP earnings that is better reflective of the firms core earnings.