Enron/Andersen Scandal Updates on May 10, 2002
Bob Jensen at Trinity University

Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm 

Kentucky distillery Maker's Mark has agreed to remove billboards for its product, which pokes fun at the troubles currently facing the accounting profession. The billboards, showing a bourbon bottle turned over on its side, read, "Disappears faster than a Big Five accounting firm." 
http://www.accountingweb.com/item/79472 

Enron Accounting Bill Passes House - House approves legislation in attempt to deal with accounting and corporate failures.

Tips For Your First Post-Enron Audit Committee Meeting from Ralph Ward’s Boardroom Insider.

Enron: An Accounting Analysis of How SPEs Were Used to Conceal Debt and Avoid Losses

Andersen replies Andersen's letter to the U.S. Department of Justice

Washington Update Weekly updates on legislative activities and actions of the various Congressional committees investigating the Enron crisis.

Legislation Tracker

A Modest Proposal for Dealing with the Enron Crisis Authored by Martin Lipton and Jay W. Lorsch

Implications of Enron on Executive and Director Compensation

Summary of SEC Expanded Disclosure Regarding Enron - From Mayer Brown.

New Audit Committee and Board Guidance

We're the Front Line for Shareholders FEI CEO Phil Livingston's recent editorial. Also view his letter to all financial officers on being proactive within their own company.

Enron Case Summary PowerPoint review of what happened, possible ramifications and suggested reforms, by FEI CEO Phil Livingston.

Special Purpose Entities: Understanding the Guidelines FEI researchers examine role of the special purpose entity (SPE) in business, a key element in the unfolding story of Enron.

Enron: What Happened and Implications The archive of this webcast is now available (replay is free to those that have already registered). Just log-in to your account to view the archive.

Corporate Governance System in Need of Reform Says Deloitte & Touche CEO Copeland
Investigative Body Needed for Financial Failures --- http://www.deloitte.com/vc/0,1029,sid=1000&cid=3909,00.html 

Detroit, April 29, 2002 - Saying that the American financial system stands at a crossroads, the chief executive officer of Deloitte & Touche LLP called for a series of reforms to benefit the capital markets and other initiatives to enhance the auditing profession.

"Today, we stand at a crossroads for the U.S. capital markets. As a result of events at Enron and Andersen, we have what we hope is a once in a lifetime opportunity for comprehensive, lasting reform," said James E. Copeland, Jr., the chief executive of Deloitte & Touche and its global organization, Deloitte Touche Tohmatsu.

In remarks prepared for a major address today to the Detroit Economic Club, a forum for thought leadership and public policy, Copeland said the opportunity for an improved system must be coupled with a "higher standard of accountability." In a series of addresses this spring, Copeland has encouraged all participants in the capital markets system to help find ways to protect the public interest. Among the major initiatives he explored in his address was creation of an organization similar to the National Transportation Safety Board to investigate the causes of business failures.

The NTSB and the process it follows help restore public confidence, according to Copeland. "After an airline disaster, for example, the NTSB conducts an exhaustive, independent investigation to piece together the events that led to catastrophe. From its analysis, the NTSB recommends changes in policies and procedures to help prevent another disaster from happening for the same reasons.

"Using this example," Copeland said, "the President could create, perhaps by Executive Order, a similar board to investigate business and financial failures."

According to Copeland, the board's members would represent all of the appropriate federal regulatory agencies, including the SEC, Comptroller of the Currency, Federal Reserve, among others. A relatively small permanent staff would have deep expertise in a range of competencies. Investigative teams would be drawn on an ad hoc basis from industry. The size of the teams would depend on the scope and complexity of the financial failure.

Copeland said that "the board should have the power to demand cooperation with investigations. It could levy monetary penalties for failure to do so. If criminal activity were suspected, the board would turn control of the criminal aspects of the investigation over to the Justice Department. Professional misbehavior could be referred to disciplinary bodies."

The new board would release its findings to the public. It would also make recommendations to Congress and regulators for changes when necessary. "Compared to the uncoordinated, costly, and often counter-productive manner in which financial failures are currently investigated, an NTSB-like organization would represent a real step toward rebuilding the confidence in our capital markets."

Copeland concluded, "While all of us carefully consider each other's well-intended recommendations to reform our capital market system in general and my own profession in particular, we should remember one simple fact: When all of the systems and controls and regulations and laws have been put in place, success or failure will boil down to one thing-personal integrity-or the lack of it.

To enhance the auditing profession, Mr. Copeland embraced the creation of a new regulatory body, dominated by individuals from outside the profession, to oversee the profession, perform quality reviews of the practices of public company auditors, and discipline those auditors and their firms when appropriate. The quality reviews would replace the current "peer review" process.

Bob Jensen's threads on proposed reforms of the accounting profession are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

Note the last sentence quoted below:
Enron Makes Ethics a Lively Topic in College Classes in Texas --- http://www.smartpros.com/x33907.xml 

"There hasn't been an issue as important in accounting as this in years," said Dr. Vincent Apilado, professor and chairman of the department of finance and real estate at the University of Texas at Arlington.

The Enron and Andersen crashes may go down as the most expensive business meltdowns ever, and many have alleged that a cover-up of key financial losses at Enron was the source of the company's bankruptcy.

But while the scandal has only recently sparked public interest in the industry's ethics, local finance and accounting professors say they've been teaching students about workplace ethics for years.

"Ethics have really become an issue over the last decade or so, and we've tried to institutionalize a course in ethical treatment, both at the undergraduate level and the graduate level," Dr. Apilado said.

Undergraduate seniors in UTA's finance program can enroll in a course called Business in Society, and senior-level graduate students can choose between an advanced Business in Society course or a class entitled Legal Environment of Business.

Dr. Apilado said the decision to teach finance students about ethical quandaries they may face on the job was made after insider trading scandals in the 1980s.

The Enron collapse is a perfect instructional tool for students on how not to manage a company's finances or audit its books, he said.

"If that information isn't transparent or accurate, how can accurate decisions be made in terms of investing and financing?" he asked. "So the Enron/Andersen situation fits at the very bottom of business decision-making."

Dr. Frederick Wu, professor of accounting and department chairman at the University of North Texas, said UNT does not offer formal business ethics courses but encourages instructors to weave ethics discussions into regular classes.

"We cover very substantive subjects about ethics in accounting," he said. "The case of Enron will eventually be a business case to be studied."

But Dr. Wu said UNT professors refrain from telling their students exactly how they should act in a given situation.

"They have to make that judgment, and they have to decide what action to take," he said. "We're not going to tell them what action to take because values differ from person to person."

But in a case such as Enron, where a lack of full disclosure of vital financial data has been the chief complaint lodged against Enron and Andersen, instructors must make it clear that accountants have a duty to be honest, Dr. Wu said.

"Disclosure is a basic accounting principle," he said. "Any basic transactions which will affect financial information should be disclosed. In the case of Enron, the accountants should speak up."

Part of the problem is that accountants pushed into an ethical corner may have to choose between their integrity and their jobs, said Mark Anderson, assistant professor of accounting and information management at the University of Texas at Dallas.

"Your livelihood depends on pleasing the boss, and yet from a bigger perspective, you're put in a situation where you're really compromised," he said. "We encourage our students to think hard about whether what they're doing is shading the truth or providing fair disclosure."

Mr. Anderson said he occasionally hears from alumni or graduate students working as accountants that they're facing a similar ethical dilemma.

Continued at  http://www.smartpros.com/x33907.xml  

Deloitte & Touche LLP and Arthur Andersen LLP Sign Understanding on Tax Professionals --- http://www.deloitte.com/vc/0,1029,sid=1000&cid=3844,00.html 

Arthur Andersen has signed a tentative agreement with staffing and placement firm Robert Half International (RHI) for RHI to hire a substantial majority of partners and other employees within Andersen's U.S. business risk consulting practices with an anticipated closing date of as early as April 30 --- http://www.smartpros.com/x33877.xml 

Facing a May 6 court date for felony obstruction of justice charges, Big Five firm Andersen attempted to negotiate a settlement with the Department of Justice late last week. Andersen also requested a delay of a month or more for the start date of the trial, claiming that leaks of information from the government about the type of information they have are unfairly influencing potential jurors. Both requests were denied. http://www.accountingweb.com/item/79367 

For a complete index of Andersen stories, see: http://www.accountingweb.com/item/76481 

For a list of Andersen client defections, see: http://www.accountingweb.com/item/74745 

For a list of Andersen Worldwide Network firm mergers, see: http://www.accountingweb.com/item/76820 

From The Wall Street Journal Educators' Review on May 2, 2002

A jury was selected on April 29 and on April 30 opening arguments were presented in a trial that is expected to last two to three months. Arthur Andersen LLP is being sued by a trust for the Baptist Foundation of Arizona after the Big Five firm signed off on audits of the organization for 15 years. The Baptist Foundation's bankruptcy, the largest not-for-profit bankruptcy in U.S. history, surprised thousands of investors. http://www.accountingweb.com/item/79591 

TITLE: Andersen Trial With Baptist Foundation Is Set to Begin 
REPORTER: Jonathan Weil 
DATE: Apr 29, 2002 
PAGE: C1 
LINK: http://online.wsj.com/article/0,,SB1020029459874572840.djm,00.html  
TOPICS: Audit Quality, Auditing, Auditor/Client Disagreements, Legal Liability, Accounting

SUMMARY: The issues surrounding Arthur Andersen LLP and its audit of the Baptist Foundation of Arizona is discussed in a series of related articles. Questions focus on auditor legal liability and related defenses.

QUESTIONS: 
1.) Who is suing Arthur Andersen? What are the allegations against Arthur Andersen? Did the plaintiffs have a contract with Arthur Andersen? Why can the plaintiffs sue Arthur Andersen?

2.) What is the difference between common law and statutory law? Is Arthur Andersen being sued under common law or statutory law?

3.) Discuss the standard of due care to which an auditor is held. Does it appear that Arthur Andersen violated the standard of due care required by an auditor? Support your answer.

4.) What are the typical defenses available to an auditor? What defenses are being used by Arthur Andersen?

5.) What is joint and several liability? What is separate and proportionate liability? If Andersen loses the case, which would they prefer? Support your answer.

6.) What is a Ponzi scheme? If Arthur Andersen knew about the alleged Ponzi scheme, what should they have done? Would it be possible for a company to engage in a Ponzi scheme and receive an unqualified opinion? Support your answer.

Reviewed By: Judy Beckman, University of Rhode Island 
Reviewed By: Benson Wier, Virginia Commonwealth University 
Reviewed By: Kimberly Dunn, Florida Atlantic University

--- RELATED ARTICLES --- 

TITLE: Lawyer Says Investors Trusted Andersen's Word 
REPORTER: Anne Brady 
AGE: C17 |
ISSUE: May 01, 2002 
LINK: http://online.wsj.com/article/0,,SB1020208980691533440.djm,00.html 

TITLE: Andersen Says Foundation Sued The Wrong Party 
REPORTER: Anne Brady 
PAGE: C12 
ISSUE: Apr 30, 2002 
LINK: http://online.wsj.com/article/0,,SB1020117061967893600.djm,00.html 

TITLE: Tauzin Bill Aims to Bolster FASB with Firms' Fees 
REPORTER: Michael Schroeder 
DATE: Apr 30, 2002 
PAGE: A4 LINK: http://online.wsj.com/article/0,,SB1020129717545574000.djm,00.html  
TOPICS: Accounting, Disclosure Requirements, Financial Accounting, Financial Accounting Standards Board, Regulation, Securities and Exchange Commission, Standard Setting

SUMMARY: In an effort to increase the independence of the Financial Accounting Standards Board (FASB), Billy Tauzin is proposing a house bill that would require the U.S. Treasury to collect fees from companies and accounting firms. The fees collected by the U.S. Treasury would be used to fund the FASB.

QUESTIONS: 
1.) How does the FASB currently generate revenues to fund its operations? Would Tauzin's proposal increase the independence of the FASB? Support your answer. Discuss any possible downsides to Tauzin's proposal.

2.) Compare and contrast the role of the FASB and the Securities and Exchange Commission in financial accounting. How would Tauzin's proposal alter these roles?

3.) Tauzin's proposal "would order the standards board to make sure its rules are clear so that there is no question about compliance." Is this directive practical? Support your answer.

4.) Tauzin's proposal would also "require that corporate financial reports are comprehensible." What does comprehensible mean? To whom should financial reports be comprehensible? Is this directive practical? Support your answer.

Reviewed By: Judy Beckman, University of Rhode Island 
Reviewed By: Benson Wier, Virginia Commonwealth University 
Reviewed By: Kimberly Dunn, Florida Atlantic University

From InformationWeek Daily on May 9, 2002

KPMG Consulting Makes Offer For Andersen Units

With one foot on the throttle and the other covering the brake, KPMG Consulting on Wednesday revealed its intent to acquire up to 23 of Andersen's business consulting units worldwide for $284 million.

The move could add as many as 8,000 employees to KPMG Consulting's ranks and about $1.4 billion to its till. KPMG Consulting, which had $2.9 billion in revenue last year and has 10,000 employees, has structured the deal contingent upon Andersen's legal problems surrounding Enron Corp. being resolved and at least 90% of Andersen's partners making the transition.

KPMG Consulting has set a high threshold for the deal, says Marshall Cooper, president of Kennedy Information, a research and publishing firm that tracks the management consulting market. "If the terms of the deal are met, it's a good deal for KMPG," Cooper says. The move is also likely to be a good one for Andersen clients who have remained with the firm. Now, he says, the clients' default is to stay with a known entity from the same Big Five mold.

A group of retired Andersen partners has requested a restraining order to prevent rival firms from making deals to buy Andersen's business units at less than fair value and hire its partners despite non-compete contracts. The retired partners are seeking emergency arbitration to enforce non-compete and member firm contracts and secure the funding of their pensions and other retiree benefits. http://www.accountingweb.com/item/79585 

Topic:
Questions and Answers Related to Derivative Financial Instruments Held or Entered into by a Qualifying Special-Purpose Entity (SPE) --- http://accounting.rutgers.edu/raw/fasb/draft/q&a140_supplement.pdf 

In September 2000, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The FASB staff determined that the following questions and answers should be issued as an aid to understanding and implementing Statement 140 because of certain inquiries received on specific aspects of that Statement. 

The Board reviewed the following questions and answers in a public meeting and did not object to their issuance. The questions and answers will be included in a future edition of the FASB Staff Implementation

Bob Jensen's SPE threads are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm 

Bob Jensen's threads on derivative financial instruments are at http://www.trinity.edu/rjensen/caseans/000index.htm

Also the FASB released FAS 145 (This is not a free document) 
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. 
The Statement updates, clarifies and simplifies existing accounting pronouncements

Statement 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. Statement 64 amended Statement 4, and is no longer necessary because Statement 4 has been rescinded.

Statement 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Because the transition has been completed, Statement 44 is no longer necessary.

Statement 145 amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with the FASB’s goal of requiring similar accounting treatment for transactions that have similar economic effects.

This Statement also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice.

Statement 145 may be ordered from the FASB website at www.fasb.org  or by telephoning the FASB’s Order Department at 800-748-0659.

April 2002 Document on SPEs and Enron from the International Accounting Standards Board (This Document is Free)

WRITTEN EVIDENCE OF SIR DAVID TWEEDIE CHAIRMAN, INTERNATIONAL ACCOUNTING STANDARDS BOARD TO THE TREASURY COMMITTEE  --- http://www.iasc.org.uk/docs/speeches/020405-dpt.pdf 

An excerpt is shown below:

Consolidations 

Of the 16 topics on our research agenda, one warrants special mention here. For several years, there has been an international debate on the topic of consolidation policy. The failure to consolidate some entities has been identified as a significant issue in the restatement of Enron’s financial statements. Accountants use the term consolidation policy as shorthand for the principles that govern the preparation of consolidated financial statements that include the assets and liabilities of a parent company and its subsidiaries. For an example of consolidation, consider the simple example known to every accounting student. Company A operates a branch office in Edinburgh. Company B also operates a branch office in Edinburgh, but organises the branch as a corporation owned by Company B. Every accounting student knows that the financial statements of each company should report all of the assets and liabilities of their respective Edinburgh operations, without regard to the legal form surrounding those operations. 

Of course, real life is seldom as straightforward as textbook examples. Companies often own less than 100 per cent of a company that might be included in the consolidated group. Some special purpose entities (SPEs) may not be organised in traditional corporate form. The challenge for accountants is to determine which entities should be included in consolidated financial statements. 

There is a broad consensus among accounting standard-setters that the decision to consolidate should be based on whether one entity controls another. However, there is much disagreement over how control should be defined and translated into accounting guidance. In some jurisdictions accounting standards and practice seem to have gravitated toward a legal or ownership notion of control, usually based on direct or indirect ownership of over 50 per cent of the outstanding voting shares. In contrast, both international standards and the standards in some national jurisdictions are based on a broader notion of control that includes ownership, but extends to control over financial and operating policies, power to appoint or remove a majority of the board of directors, and power to cast a majority of votes at meetings of the board of directors. 

A number of commentators, including many in the USA, have questioned whether the control principle is consistently applied. The IASB and its partner standard-setters are committed to an ongoing review of the effectiveness of our standards. If they do not work as well as they should, we want to find out why and fix the problem. Last summer we asked the UK ASB to help us by researching the various national standards on consolidation and identifying any inconsistencies or implementation problems. It has completed the first stage of that effort and is moving now to more difficult questions. 

The particular consolidation problems posed by SPEs were addressed by the IASB’s former Standing Interpretations Committee in SIC-12. There are some kinds of SPE that pose particular problems for both an ownership approach and a control-based approach to consolidations. It is not uncommon for SPEs to have minimal capital, held by a third party, that bears little if any of the risks and rewards usually associated with share ownership. The activities of some SPEs are

so precisely prescribed in the documents that establish them that no active exercise of day-to-day control is needed or allowed. These kinds of SPEs are commonly referred to as running on ‘auto-pilot’. In these cases, control is exercised in a passive way. To discover who has control it is necessary to look at which party receives the benefits and risks of the SPE. 

SIC-12 sets out four particular circumstances that may indicate that an SPE should be consolidated:

(a) in substance, the activities of the SPE are being conducted on behalf of the enterprise according to its specific business needs so that the enterprise obtains benefits from the SPE’s operation. 

(b) in substance, the enterprise has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an ‘autopilot’ mechanism, the enterprise has delegated these decision-making powers. 

(c) in substance, the enterprise has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incidental to the activities of the SPE. 

(d) in substance, the enterprise retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities.

The IASB recognises that we may be able to improve our approach to SPEs. With this in mind, we have already asked our interpretations committee if there are any ways in which the rules need to be strengthened or clarified.

Current criticisms and concerns about financial reporting 

There some common threads that pass through most of the topics on our active and research agendas. Each represents a broad topic that has occupied the best accounting minds for several years. It is time to bring many of these issues to a conclusion. 

Off balance sheet items 

When a manufacturer sells a car or a dishwasher, the inventory is removed from the balance sheet (a process that accountants refer to as derecognition) because the manufacturer no longerowns the item. Similarly, when a company repays a loan, it no longer reports that loan as a liability. However, the last 20 years have seen a number of attempts by companies to remove assets and liabilities from balance sheets through transactions that may obscure the economic substance of the company’s financial position. There are four areas that warrant mention here, each of which has the potential to obscure the extent of a company’s assets and liabilities. 

Leasing transactions

A company that owns an asset, say an aircraft, and finances that asset with debt reports an asset (the aircraft) and a liability (the debt). Under existing accounting standards in most jurisdictions (including ASB and IASB standards), a company that operates the same asset under a lease structured as an operating lease reports neither the asset nor the liability. It is possible to operate a company, say an airline, without reporting any of the company’s principal assets (aircraft) on the balance sheet. A balance sheet that presents an airline without any aircraft is clearly not a faithful representation of economic reality.

Our predecessor body, working in conjunction with our partners in Australia, Canada, New Zealand, the UK and the USA, published a research paper that invited comments on accounting for leases. The UK ASB is continuing work on this topic and we are monitoring its work carefully. As noted above, we expect to move accounting for leases to our active agenda at some point in the future. There is a distinct possibility that such a project would lead us to propose that companies recognise assets and related lease obligations for all leases.

 Securitisation transactions

Under existing accounting standards in many jurisdictions, a company that transfers assets (like loans or credit-card balances) through a securitisation transaction recognises the transaction as a sale and removes the amounts from its balance sheet. Some securitisations are appropriately accounted for as sales, but many continue to expose the transferor to many of the significant risks and rewards inherent in the transferred assets. In our project on improvements to IAS 39 (page 5), we plan to propose an approach that will clarify international standards governing a company’s ability to derecognise assets in a securitisation. Our approach, which will not allow sale treatment when the ‘seller’ has a continuing involvement with the assets, will be significantly different from the one found in the existing standards of most jurisdictions.

Creation of unconsolidated entities 

Under existing accounting standards in many jurisdictions, a company that transfers assets and liabilities to a subsidiary company must consolidate that subsidiary in the parent company’s financial statements (see page 6). However, in some cases (often involving the use of an SPE), the transferor may be able (in some jurisdictions) to escape the requirement to consolidate. Standards governing the consolidation of SPEs are described on page 7. 

Pension obligations

Under existing standards in many jurisdictions (including existing international standards) a company’s obligation to a defined benefit pension plan is reported on the company’s balance sheet. However, the amount reported is not the current obligation, based on current information and assumptions, but instead represents the result of a series of devices designed to spread changes over several years. In contrast, the UK standard (FRS 17) has attracted significant recent attention because it does not include a smoothing mechanism. The IASB plans to examine the differences among the various national accounting standards for pensions (in particular, the smoothing mechanism), as part of our ongoing work on convergence.

Items not included in the profit and loss account 

Under existing accounting standards in some jurisdictions, a company that pays for goods and services through the use of its own shares, options on its shares, or instruments tied to the value of its shares may not record any cost for those goods and services. The most common form of this share-based transaction is the employee share option. In 1995, after what it called an “extraordinarily controversial” debate, the FASB issued a standard that, in most cases in the USA, requires disclosure of the effect of employee share options but does not require recognition in the financial statements. In its Basis for Conclusions, the FASB observed:

The Board chose a disclosure-based solution for stock-based employee compensation to bring closure to the divisive debate on this issue—not because it believes that solution is the best way to improve financial accounting and reporting.

Most jurisdictions, including the UK, do not have any standard on accounting for share-based payment, and the use of this technique is growing outside of the USA. There is a clear need for international accounting guidance. Last autumn, the IASB reopened the comment period on a discussion document Accounting for Share-based Payment. This document was initially published by our predecessor, in concert with standard-setters from Australia, Canada, New Zealand, the UK and the USA. We have now considered the comments received and have begun active deliberation of this project. Accounting measurement

Under existing accounting standards in most jurisdictions, assets and liabilities are reported at amounts based on a mixture of accounting measurements. Some measurements are based on historical transaction prices, perhaps adjusted for depreciation, amortisation, or impairment. Others are based on fair values, using either amounts observed in the marketplace or estimates of fair value. Accountants refer to this as the mixed attribute model. It is increasingly clear that a mixed attribute system creates complexity and opportunities for accounting arbitrage, especially for derivatives and financial instruments. Some have suggested that financial reporting should move to a system that measures all financial instruments at fair value.

Our predecessor body participated in a group of ten accounting standard-setters (the Joint Working Group or JWG) to study the problem of accounting for financial instruments. The JWG proposal (which recommended a change to measuring all financial assets and liabilities at fair value) was published at the end of 2000. Earlier this year the Canadian Accounting Standards Board presented an analysis of comments on that proposal. The IASB has just begun to consider how this effort should move forward. 

Intangible assets

Under existing accounting standards in most jurisdictions, the cost of an intangible asset (a patent, copyright, or the like) purchased from a third party is capitalised as an asset. This is the same as the accounting for acquired tangible assets (buildings and machines) and financial assets (loans and accounts receivable). Existing accounting standards extend this approach to self-constructed tangible assets, so a company that builds its own building capitalises the costs incurred and reports that as the cost of its self-constructed asset. However, a company that develops its own patent for a new drug or process is prohibited from capitalising much (sometimes all) of the costs of creating that intangible asset. Many have criticised this inconsistency, especially at a time when many view intangible assets as significant drivers of company performance.

The accounting recognition and measurement of internally generated intangibles challenges many long-cherished accounting conventions. Applying the discipline of accounting concepts challenges many of the popular conceptions of intangible assets and ‘intellectual capital’. We have this topic on our research agenda. We also note the significant work that the FASB has done on this topic and its recent decision to add a project to develop proposed disclosures about internally generated intangible assets. We plan to monitor those efforts closely.

Bob Jensen's threads on the Enron/Andersen scandals are at http://www.trinity.edu/rjensen/fraud.ht

Bob Jensen's SPE threads are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm 

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm 

And that's the way it was on May 10, 2002 with a little help from my friends.

Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm 

In March 2000, Forbes named AccountantsWorld.com as the Best Website on the Web --- http://accountantsworld.com/.
Some top accountancy links --- http://accountantsworld.com/category.asp?id=Accounting

For accounting news, I prefer AccountingWeb at http://www.accountingweb.com/ 

Another leading accounting site is AccountingEducation.com at http://www.accountingeducation.com/ 

Paul Pacter maintains the best international accounting standards and news Website at http://www.iasplus.com/

How stuff works --- http://www.howstuffworks.com/ 

Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at http://www.cs.trinity.edu/~rjensen/video/ 
Accompanying documentation can be found at http://www.trinity.edu/rjensen/default1.htm and http://www.trinity.edu/rjensen/HelpersVideos.htm 

Professor Robert E. Jensen (Bob) http://www.trinity.edu/rjensen
Jesse H. Jones Distinguished Professor of Business Administration
Trinity University, San Antonio, TX 78212-7200
Voice: 210-999-7347 Fax: 210-999-8134  Email:  rjensen@trinity.edu