Letters

FASB 123R Is Good News
I was glad to see a positive article on stock option accounting (“No Longer an ‘Option,’” JofA, Apr.05). Lost in all of the discussions of valuation models and politics is the fact that FASB Statement no. 123R is good accounting.

My small, private company, due to an innocent clause in its plan document, was required to follow rules-based, variable intrinsic option accounting, repeatedly remeasuring net income for a transaction completed years ago. While we forwardly adjusted financial statements for the past transaction, we did not record a liability for the put option on the issuable shares likely to be redeemed for cash. Imagine a CFO’s having to explain this accounting rule to his shareholders. Imagine also having to explain that while we account for future cash redemptions of a separately maintained stock appreciation rights (SARs) plan, we ignore reporting the similar obligation for future redemptions of the put in the option plan.

Statement no. 123R, combined with forthcoming FASB guidance on liabilities and equity, cures this bad, rules-based accounting, replacing it with a measurement that faithfully represents underlying economic transactions and events. In spite of all of the hoopla about valuation models, my private company—since it issues SARs—has been using fair value anyway. Now, with the newer, better accounting, my shareholders can see in the financial statements the value of the options given up and the expensing of the employee services consumed. Then, in future financial statements, the cash redemption value of the put will be recognized as the fair value changes—exactly as it was with the SARs plan.

For my company Statement no. 123R combined with the liabilities/equity project is an unqualified success, faithfully measuring and reporting the underlying reality.

Those calling for separate accounting standards for private companies should recognize that what may seem useless to them is good, solid work by the FASB for those of us who have suffered through old, arbitrary rules.

E. Anson Thrower, CFO
Contec Inc.
Spartanburg, S.C.

Keep It Simple
“A Gap in Insurance GAAP?” (JofA, Mar.05) is a very nice article—really clever, perhaps even brilliant. But therein is its difficulty. It adds a lot of complexity to the process of valuing a life insurance policy for little return—probably insignificant in any one entity. How much difference does it really make? What would the calculations cost? Would we need to hire an actuary?

If the result were significant, it probably would be in a closely held company. There the cost of compliance is an unneeded burden. It would not improve, but distort the financial picture for such a company’s business purposes.

Would its lenders rely on capitalized payments as the policy value or would they insist on cash value? If the company were sold, would the buyer pay for it, or would we have another set of special-purpose statements to prepare?

In considering the probability of a payoff using life expectancies, the article ignores all the other contingencies. If the policy is discontinued, I imagine recognizing a loss for the difference between premiums paid and cash value received. There are many ways it might be discontinued—retirement, disability, quitting or the company’s being sold. Conclusion: The payoff isn’t really very likely.

Putting it all together, let’s leave things as they are. The simplest solution is usually best, and in this case it would provide a more realistic picture of a company’s condition than the methods proposed.

Michael D. Woods, CPA
Kernersville, N.C.

Slippery Slope?
I read the article, “Frame a Travel Strategy” (JofA, Mar.05), and was troubled by one of the lines in the case study that reads, “To sidestep the limits that corporate-card vendors set on monthly charges, [the principal partner] applied for the cards in his own name and assumed personal responsibility for the payments.”

I’m no fan of credit card companies, with their blizzard of easy-credit schemes, sky-high interest rates, sale of personal information and refusal to accept any responsibility for burgeoning consumer debt and resulting bankruptcies. But neither do I believe integrity should be based on what the other guy is doing.

Sidestepping the limits sounds like a small thing, but first steps off the straight and narrow often are. Just ask Arthur Andersen.

Lorri Carpenter, CPA
Ocala, Fla.

Editor’s note: Perhaps our use of the word “sidestep” gave the wrong impression in this case, and if so, we apologize to our readers and to Bruce Malott, the subject of our case study. Malott’s use of a personal credit card to make purchases for the firm is hardly “stepping off the straight and narrow.” Credit card companies set lower limits on corporate cards to protect themselves in case the company goes out of business, and higher ones for individuals who are willing to assume personal responsibility for charges—as Malott did. His clever use of the card, in fact, benefited his firm, his clients and the credit card company.

What About Profit-Sharing Plans?
I was disappointed that the article “IRAs and 401(k)s: How to Pick the Best Plan” (JofA, Mar.05) did not even mention defined contribution/profit-sharing plans. These allow an owner to pick an amount each year and have limits on contributions of up to 100% of compensation vs. the 25% limit in an SEP.

John J. Jurcago, CPA
Strongsville, Ohio