Energy Deals Derailed by Obscure Accounting Rule

Nearly a decade after the most elaborate exercise in accounting fraud in America’s history ended in bankruptcy and prison sentences, the U.S. energy industry has yet to escape Enron’s ghost.
Now, courtesy of esoteric changes in accounting standards being implemented by the Financial Accounting Standards Board (FASB), we can add energy efficiency and clean energy to the list of casualties killed in the name of transparency.
FASB and the International Accounting Standards Board (IASB) develop financial accounting standards for beancounters. In the wake of the Enron debacle, FASB launched an effort to develop new rules for the treatment of lease transactions. In December, FASB released a joint exposure draft for these new rules, which will soon be ready for prime time.
The new guidelines would alter reporting obligations for clean energy and energy-efficiency transactions. In short, businesses would have to bring all of these lease transactions onto their balance sheets. That sucks. Still worse, in the case of energy efficiency and clean energy, the rules will not necessarily benefit the public. Ironically, it may do the opposite by distorting high-priority environmental and energy security policy objectives endorsed by legislators locally and nationally.
Currently, businesses only include capital leases as assets on their balance sheets. By contrast, in an operating lease, the lessee can use an asset without having to assume the responsibility of ownership. The new rules would require all companies to list leases transactions as assets and liabilities on their balance sheets.
This requirement will significantly deter energy-efficiency investments for developers, companies and non-profits by souring the benefits of sale leasebacks and power purchase agreements (PPAs). PPAs are currently treated as service contracts. FASB’s new rule would require PPAs to be treated as leases rather than service contracts, which would appear on a company’s balance sheet.
Although the financial mechanics of these transactions will remain unchanged, companies who pursue energy efficiency or clean energy will have heavier balance sheets and risk being perceived as having higher leverage than they otherwise would. This could make debt more expensive for companies who perform lease transactions. And that is only one penalty for those who pursue clean energy or energy efficiencies who will also likely have higher tax exposure, more extensive disclosure requirements and steeper annual accounting costs.
Simply put, in the tragic tradition of regulatory overreaction epitomized by Sarbanes-Oxley, the “proposed” FASB rule will burn the barn to roast the pig.
Ironically, unlike Enron, companies and institutions investing in clean energy and energy efficiency are not trying to bake the books. Rather, they are pursuing a perfectly legitimate institutional objective – buying electricity or reducing energy costs – and outsourcing the hassle of owning the actual system. After all, most companies and institutions are not in the energy business but dependent on it.

FASB Releases Accounting Standards Update for Repurchase Agreements

The Financial Accounting Standards Board issued Accounting Standards Update No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The Update is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.
“The Board revisited its standards on transfers and servicing to respond to concerns from financial statement users who felt the criteria for determining effective control for such transactions should be improved,” said FASB Chairman Leslie Seidman. “The new guidance improves transparency by eliminating consideration of the transferor’s ability to fulfill its contractual rights and obligations from the criteria in determining effective control.”
In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.
The amendments remove the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets from the assessment of effective control, as well as implementation guidance related to that criterion.
The ED is available at http://www.fasb.org/.
Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants.

Midsize Companies See Growth Ahead

Growth dominates the agendas of midsize companies, a new survey by Deloitte indicates. About 80% of respondents see their company's revenues and profits growing this year, and nearly 70% plan to hire, according to the survey of 527 top managers at U.S.-based firms with between $50 million and $1 billion in revenues.
But economic uncertainty and weak market demand continue to be top concerns. Few of those surveyed expect outsized growth in the economy as a whole, with most anticipating an increase in gross domestic product of 3.5% or less. The survey results show "a great deal of optimism grounded in some level of caution," says Tom McGee, managing partner of Deloitte Growth Enterprise Services.
So where will the growth come from? The most popular growth strategy for midsize companies remains expanding within U.S. markets, named by 56% of respondents. Along those lines, about 35% said they were likely to make an acquisition in the coming year, mainly in the United States.
Source: CFO.com