Wednesday, March 16, 2011

Accounting Shift Clears Past and Present

Business will always have losses. No matter what the industry, it is just part of a business’ life cycle to incur losses and do everything it can to earn those losses back. Even the biggest multinational companies are not spared from this naturally occurring event.

However, a more interesting accounting change has been born. It is called mark-to-market accounting. Today, high profile companies are beginning to move towards this method and in effect, they no longer have to report billions of dollars in losses.

The accounting change works in a rather simple way. Companies are allowed to change their past financial accounts retroactively and make it seem like the losses were incurred in the previous years. AT&T, Verizon, and Honeywell did the same. AT&T had a total of $17 billion in losses. Verizon had losses of $22 million dollars while Honeywell had $7.5 million dollars in losses. Without the accounting change, mark-to-market accounting, the losses would have been spread over many years in losses. At least, by this way, the losses are traced sooner and the effects are not as widespread.

The mark-to-market accounting system is a response to what has been aspired and that is to have converging global accounting standards.

Jonathan Waite, Director of Investment Management Advice and Chief of Management Advice, said, “Effective implementation of some of their investment and hedging strategies would work better without the smoothing mechanisms.”

This has been agreed and seconded by Verizon CFO, Fran Shammo, saying that the new accounting policy makes financial reporting easier to understand and it allows for transparency in operations.

Businesses will never prosper if the accounting system being used is not effective. The management depends on how efficient the accounting system is. So even if your company or business is only at its infant stage, it still pays to use the latest accounting policy, the mark-to-market accounting policy.

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