Thursday, September 03, 2009

I sometimes scratch my head at how accountants think

I went to listen to Stan Ross give a talk at lunch--as always, it was very good. Among other things, Stan taught me how banks are required to impair troubled long-term assets.

It turns out that they forecast undiscounted cash flows and compare them to the loan balance. (This is indeed what FAS Statement 121 says). If the undiscounted cash flows are greater than the balance, they are not required to mark down the troubled loan. This makes no sense to me, and also implies that bank balance sheets are worse then they appear.

1 comment:

Independent Accountant said...

Many accountants don't think. In my experience, the vast majority do not comprehend discounted cash flow analysis among their many failings.