A post about Accounting?

What? Accounting? But this is a sexy finance/economics blog! We don't want to hear about dusty old accounting jibber jabber!

Or do we?

Considering one of accounting's primary purposes is to make everything understandable and consistent for financiers to make educated decisions, big changes in accounting are pretty important for everyone. And it just so happens that there are some pretty drastic changes occuring in the US.

Back in November, the SEC announced that foreign companies posting in US exchanges don't have to reconcile to US GAAP (for you finance majors, and Miles, here's a wiki def). Then, a few weeks ago, Chris Cox announced that the US will be dropping US GAAP, and completely switching to IFRS GAAP.

What's the difference? Why the change? Your accounting classes will tell you IFRS is "principles based" accounting, while US GAAP is "rules based." Your accounting classes will probably also tell you that the rules in the US are long, complicated, and very inefficient in their attempt to create consistency in reporting standards. All of the trouble people go to figuring out how to account for complicated leases and such costs a lot - and can be very difficult and timely to properly figure out, as well as adjust for when the SEC tells you you've done it all wrong.

This change means different reporting standards - and thus different market multiples and valuations for NPV, PV of cash flows, etc. Don't worry about the big financial institutions - I'm pretty sure Citadel will figure themselves out. The concern is amongst all you noise traders not understanding the new statements. You will need to learn how things have changed, and take them into account in your investment research in the coming years.

So read up. More to come...