Generally Accepted Accounting Principles – Rauen Sales Thu, 10 Jun 2021 15:07:40 +0000 en-US hourly 1 CSA Publish Non-GAAP Final Rule and Other Financial Measures | Blake, Cassels & Graydon LLP Thu, 10 Jun 2021 14:01:05 +0000

On May 27, 2021, the Canadian Securities Administrators (CSA) released the final forms for National standard 52-112 Non-GAAP Information and Other Financial Measures (Regulation 52-112) and its related policy (Companion Policy), which provide binding disclosure requirements and related guidance for non-GAAP (generally accepted accounting principles) and certain other financial measures disclosed by reporting issuers and certain other issuers.

NI 52-112 and Policy Statement will replace the current CSA guidance on the disclosure of non-GAAP financial measures in CSA Staff Notice 52-306 (revised) Non-GAAP financial measures (SN 52-306) and are expected to come into force on August 25, 2021. The transitional provisions of the final version of Regulation 52-112 state that it will not apply to information provided by reporting issuers in respect of documents. filed for fiscal years ending before October 15, 2021, as well as certain information provided by non-reporting issuers until after December 31, 2021.

For reporting issuers whose upcoming fiscal year ends on October 31, November 30 or December 31, 2021 (and thereafter), this means that NI 52-112 will apply immediately, effective August 25. 2021, to any subsequent disclosure with respect to those fiscal years (or any interim period during such fiscal year), despite the fact that NI 52-112 does not apply to prior information regarding such fiscal years (or any interim period ) made before 25 August 2021 (for example, with regard to the first and second quarters of 2021)).


On February 13, 2020, the CSA issued revised proposals for NI 52-112 and Companion Policy (collectively, the revised proposals), which contained substantial changes to the original CSA proposals for NI 52-112 and the Companion Policy. Supplementary Instruction, which were first posted for comment on September 6, 2018. For more information see our February 2020 Blake Bulletin: CSA Proposes Revised Non-GAAP Rule and Other Financial Measures.

In their May 27, 2021 publication, the CSA state that the final versions of NI 52-112 and Companion Policy contain targeted and not significant changes from the revised proposals, which are intended to clarify and streamline the application of the Regulation. Regulation 52-112. and the disclosure requirements contained therein. As NI 52-112 and Policy Statement have been issued in final form, there is no further comment period on them.
Regulation 52-112 applies to:

  1. all reporting issuers (other than investment funds, “designated foreign issuers” or “foreign SEC issuers”) with respect to the disclosure of non-GAAP financial measures (historical or prospective), ratios non-GAAP, the total of industry measures, capital management measures and additional financial measures (collectively, the specified financial measures) in a document that is intended to be, or reasonably likely to be, made available from the public, and
  2. non-reporting issuers with respect to the disclosure of financial measures determined in a document made available to the public and subject to prospectus requirements, filed with the securities regulatory authorities in connection with a distribution of securities made on the basis of on the exemption offering memorandum, or submitted to a recognized stock exchange in the context of an eligible transaction, a reverse takeover, a change of activity, a request for listing, a significant acquisition or similar transaction.


As a result of its stakeholder awareness and engagement process with respect to the revised proposals, the CSA made the following changes to the revised proposals in the final versions of NI 52-112 and Companion Policy:

  • Introduction of new exceptions to the scope of Regulation 52-112;

  • Various restricted and clarified definitions and disclosure requirements;

  • Incorporation by reference for certain (but not all) required information relating to specified financial measures included in an earnings press release;

  • Enlarged incorporation by reference in the issuer’s MD&A for certain information required for all specified financial measures; and

  • Improved readability.

Additional exceptions to the application of Regulation 52-112

In addition to the scope exceptions that were included in the revised proposals, the final form of NI 52-112 will not apply:

  1. the disclosure of a financial measure specified by an issuer where the calculation of that measure is derived from a financial commitment in a written agreement to which the issuer is a party (ie a credit agreement);
  2. reports prepared by a person or company, other than the issuer that is the subject of the specified financial measure (for example, the specified financial measures contained in valuation reports or fairness opinions prepared by a third party that are filed or incorporated by reference into a document filed by an issuer), although any specified financial actions arising from third party reports that are taken and disclosed by the issuer are subject to NI 52-112; and
  3. disclosure of financial measures specified by registered dealers, advisers or investment fund managers (collectively, listed companies), if the document in which a disclosure is made is intended to be, or is reasonably likely to be, made available to a client or prospect client of the registered firm and the measure does not relate to the financial performance, condition or cash flow of the registered firm.

Compared to the revised proposals, the final version of NI 52-112 also contains a partial exception for certain specified financial measures that must be disclosed under Form 51-102A6 Executive compensation statement (form 51-102F6) or form 51-102F6V Statement of Executive Compensation – Venture Issuers. However, in deviation from the current requirements of Form 51-102F6 regarding the disclosure of performance objectives or similar conditions that are non-GAAP financial measures, Regulation 52-112 will require applicable reporting issuers, close to the first disclosure of every historical non-GAAP financial measure, total industry measures and any capital management measure that is not disclosed as a ratio, fraction, percentage or similar representation, disclose (directly or by incorporating by reference of their MD&A) in the format, a quantitative reconciliation of the measure to the most directly comparable financial measure disclosed in the issuer’s main financial statements.

Incorporation by reference

While the revised proposals allowed issuers to incorporate by reference certain separate information (including quantitative reconciliations) from the issuer’s MD&A, the revised proposals did not allow such incorporation by reference for press releases on the issuer. results filed by an issuer. The final version of NI 52-112 allows issuers to incorporate by reference in their MD&A most of the required information (but not the quantitative reconciliations) with respect to specified financial measures included in their earnings press releases . As such, reporting issuers will now be required to include full quantitative reconciliations of non-GAAP financial measures, total industry measures and capital management measures, as well as a description of any material differences between a prospective non-GAAP financial measure. GAAP and its historical equivalent, in their earnings press releases. In our experience, this will be a change for many issuers who, until now, have simply referred the reader to this information in their MD&A.

Finally, the final version of NI 52-112 also specifies that issuers cannot incorporate by reference the information required with respect to specific financial measures from one MD&A to another.


Regulation 52-112 and Companion Policy are expected to come into force on August 25, 2021, provided all necessary ministerial approvals are obtained. As noted above, NI 52-112 will apply to applicable disclosures of non-GAAP financial measures and other financial measures specified by reporting issuers in respect of fiscal years ending on or after October 15, 2021 and by non-reporting issuers applicable after December 31. 2021. Prior to the application of NI 52-112 and the Companion Policy, issuers should continue to follow the guidelines of NI 52-306, which will be withdrawn following the transition to NI 52-112 and Companion Policy. finished.

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UiPath Stock Slips After First Earnings Report Since IPO Tue, 08 Jun 2021 21:24:00 +0000

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Global insurers face high costs of $ 15 billion to $ 20 billion to implement IFRS 17: WTW Tue, 08 Jun 2021 15:12:26 +0000

The total cost facing the global insurance industry to implement IFRS 17 is estimated to be between $ 15 billion and $ 20 billion, according to a new global survey from Willis Towers Watson.

Although the estimated costs vary widely depending on the size of the insurer, the average cost of the program for 24 of the largest multinationals surveyed is expected to be $ 175-200 million each, and $ 20 million each for the remaining 288 insurers. said Willis Towers Watson. , which surveyed 312 insurers from 50 countries.

With a transition date of January 2023, IFRS 17 is an international financial reporting standard, which was issued by the International Accounting Standards Board in May 2017.

Kamran Foroughi

“This is an extraordinary number that will naturally lead to many questions from boards of directors and investors,” said Kamran Foroughi, Global IFRS 17 Advisory Leader at Willis Towers Watson.

“For many, significant improvements will also be needed in business processes and financial operations to effectively implement IFRS 17 and link to other measures,” he added.

WTW said the survey not only gave insurers the opportunity to benchmark their programs against their industry peers, but also revealed the key challenges insurers expect to successfully implement IFRS 17 – in the areas of people, data, systems and processes.

Other main findings of the survey include:

  • More than 10,000 full-time equivalent employees will be required to implement IFRS 17 for global insurers, presenting major challenges for their recruitment and retention strategies, both within and beyond their IFRS 17 programs.
  • Only 52% of respondents believe that IFRS 17 earnings / equity will be slightly or much more useful than current GAAP earnings / equity, and 54% believe the need for non-GAAP reporting will increase slightly or significantly. (See below for more comments on how GAAP, or generally accepted accounting principles, fit into IFRS).
  • Only 6% of companies in 2020 had a good understanding of the business implications of IFRS 17, but that number has now risen to 17%. Insurers believe the impact on the majority of key performance indicators (KPIs) is likely to be low. The KPIs considered most affected are those related to measuring earnings, new business, and return on equity / equity, WTW said.
  • Large multinationals made more progress on a scale of 0 to 5 (average: 3.5) than other insurers (average: 2.6), with the highest progress in EMEA (average: 2.9) and the lowest in APAC (average: 2.4).

Since Willis Towers Watson’s last survey in June 2020, progress has been made in areas such as data and IT workflows, although the establishment of a robust process designed to adhere to timelines. Tight reporting remains a challenge, WTW said in a statement.

However, little progress has been made when it comes to testing, disclosures and automation, WTW said, noting that process automation will be critical to the successful implementation of IFRS 17.

“There are obviously strong doubts as to whether IFRS 17 will lead to a more useful metric than current GAAP / IFRS standards. This is especially true in more mature markets, where we don’t see any improvement in cost-related KPIs, and insurers are actively planning additional new reports to help explain business performance, ”said Foroughi.

A representative from WTW explained via email that while US-domiciled insurers typically report under US GAAP, US subsidiaries of overseas-headquartered companies can also report under IFRS.

In addition, foreign subsidiaries of companies headquartered in the United States may need to use IFRS for that entity, both for local statutory reporting (where in some countries this is mandatory) and for reporting. local results that feed into the consolidated accounts of the group’s parent company.

In addition, the representative said, US GAAP is undergoing its own changes, called Long-Lasting Targeted Improvements (LDTI), which include a number of areas common to IFRS 17.

He noted that of the more than 300 insurers included in the survey, a number were US insurers, but country-by-country figures have not been released externally.

Source: Willis Towers Watson

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Why his great race against rivals FANG could continue – the Madison Leader Gazette Mon, 07 Jun 2021 02:47:29 +0000

Alphabet Inc. Cl A

Alphabet Inc. Cl A


$ 45.99



IBD Stock Analysis

  • Shares grouped together and set up as a flat base entry of 2,431.48
  • Stocks hit their recent high on Friday, providing a buy point earlier
  • Composite rating is now 97 out of a top 99 ranking

Composite assessment

Classification of industrial groups

Emerging model

Flat base

* No real-time data. All displayed data has been entered at
1:27 p.m. EDT on

Shares in Google-parent Alphabet (GOOGL), the IBD stock of the day, rose about 39% in 2021. But the great race of Google stock may not be over, as stocks have taken a new entry point in the middle of its line of relative force reaching new heights.


With the gain of 2021, the Alphabet share outperformed the other FANG shares – Facebook (FB), (AMZN) and Netflix (NFLX) – as well as Apple (AAPL). GOOGL bulls herald a rebound in digital advertising as vaccinations against Covid-19 expand, boosting global economies as industries such as travel normalize.

As the internet search industry continues to drive advertising growth, Google is also benefiting from its cloud computing business and YouTube video website. Unlike Netflix, YouTube’s revenue comes from advertising while also constituting subscription fees.

In e-commerce, Google aims to be a stronger competitor to Amazon through partnerships with Shopify (SHOP) and Square (SQ).

Google Stock: the power of artificial intelligence

Google’s strength in artificial intelligence extends to digital advertising, the Google Cloud platform, YouTube, and consumer hardware products. At a Google developer conference in mid-May, the company demonstrated how it uses AI tools in a wide range of applications, including Google Workspace, Google Maps, virtual reality, voice search, and apps. Pictures.

“We continue to be impressed with Google’s technological innovation and AI leadership,” Bank of America analyst Justin Post said in a review of the I / O Developer Conference at Google.

Google is one of the many artificial intelligence stocks to watch out for.

At the conference, Google also revealed that its Android operating system for mobile devices now has 3 billion users worldwide. GOOGL action hit an all-time high on April 5 after the U.S. Supreme Court ruled in Alphabet’s favor in a copyright dispute with Oracle (ORCL) involving Android mobile software.

Google stock also erupted after Alphabet reported first quarter earnings and revenue that exceeded previous estimates. The company also authorized $ 50 billion in additional GOOGL share buybacks.

GOOGL Stock Forges Base Plate

From a technical standpoint, Google stock has consolidated and forged a flat baseline entry point of 2,431.48. As of June 4, it is trading 2% below this appropriate buy point.

But Google stock traded at one point on Friday above its June 2 high of 2,393.73, giving aggressive investors a buy point earlier. GOOGL stock has withstood a test of its 10-week moving average. He’s also back on top of his tight three-week entry. Shares climbed 2% on Friday to close at 2,393.57.

Google stock has an IBD composite rating of 97 out of 99.

The Composite Rating is a blend of the other five IBD ratings: Earnings Per Share or EPS Rating, Relative Price Strength Rating, Accumulation / Distribution Rating, Industry Group Relative Strength Rating, and SMR Rating . The latter measures sales growth, profit margins and return on equity. The overall composite rating helps investors easily measure the quality of a stock’s fundamental and technical metrics.

In addition, the Google stock belongs to the IBD ranking. The ranking is the list organized by IBD of the main actions that are distinguished by technical and fundamental measures.

Google growth accelerates as coronavirus crisis eases in US

Bouncing off the coronavirus pandemic, Google’s profit and revenue growth accelerated during all three quarters.

Google earnings under generally accepted accounting principles, also known as GAAP, rose 166% to 26.29 per share in the first quarter. This included the gains on equity investments.

Gross revenue, which excludes traffic acquisition costs, jumped 34% to $ 55.31 billion.

On October 20, the Department of Justice filed an antitrust complaint against Google. The Justice Department accused Google of harming competition and consumers by monopolizing internet search and search advertising. A legal battle will likely drag on for years to come.

According to IBD MarketSmith’s analysis, GOOGL stock holds a relative strength rating of 76 out of 99. But its relative strength line is reaching new highs.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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PagerDuty’s income was better than expected. Why his stock is slipping. Thu, 03 Jun 2021 20:55:00 +0000

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Why Virgin Galactic Stock crashed on Tuesday Tue, 01 Jun 2021 16:17:59 +0000

What happened

Capitalize on its good stock market performance last week, pioneer of space tourism Galactic Virgo (NYSE: SPCE) announced on Friday – at the start of a three-day hiatus in stock trading – that it will raise $ 1 billion in new capital through the issuance of approximately 2.7 million new common shares.

On Tuesday, the first day investors reacted to the news, they immediately did so by selling Virgin Galactic stock, which is now down 6.3% at 11:40 a.m. EDT.

Image source: Getty Images.

So what

The announcement of Virgin Galactic’s capital increase took the form of an S-3 filing with the SEC on Friday night. According to the document, Virgin Galactic has not set a final price for the shares it will offer, nor has it made a precise decision on how many shares it will need to issue to raise the billion dollars of desired gross proceeds – a figure that she chose “only. for the purpose of calculating the registration fee” that she must pay to the SEC.

So while $ 1 billion divided by 2.7 million shares results in a price of $ 375 per share, it probably won’t work that way.

Now what

Rather, the main conclusion from Virgin Galactic’s S-3 filing should be:

  • First, the company wants to raise $ 1 billion.
  • Second, it could do so by selling “an indefinite number of additional shares” of ordinary shares.
  • But third, it could also collect the funds it needs by issuing “preferred stock, “Debt”, “custodian shares”, “warrants”, “purchase contracts” and / or “units” – or any combination thereof – in addition to the 2.7 million common shares.

Everything is on hold at this point, and Virgin Galactic is simply warning investors: it needs a lot of money, and he lays the foundation to raise it one way or another.

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Rich smith has no position in any of the listed securities. The Motley Fool owns shares and recommends Virgin Galactic Holdings Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Bluzelle 2.0 inaugurates a decentralized economy for creators Sun, 30 May 2021 11:48:37 +0000

reDespite the immense potential of blockchain to decentralize many activities, it is surprisingly supported by many centralized players who wield incredible power.

One area in which this reality is clearly evident is that of NFTs. Besides the challenges this new designer trend faces in terms of security holes and uneven infrastructure, most enthusiasts and users do not understand the troublesome nature of NFT storage.

Most NFTs are stored on centralized servers and cloud providers, such as Amazon Web Services (AMZN) or Google Cloud (GOOGL). This effectively means that one of the main benefits of decentralization is not an essential component of the NFT arena. This could potentially lead to a single point of failure: If the storage provider is breached or experiences a system malfunction, an NFT stored in this manner could be lost forever.

To address this obvious flaw in existing NFT storage architectures, Bluzelle has expanded its offerings beyond its traditional database services to include a decentralized storage mechanism. By replicating NFT files on validator nodes, Bluzelle can ensure that NFT creatives benefit from all the attributes of decentralization while avoiding the pitfalls of centralized storage. (To learn more about other cryptocurrency stocks, check out the TipRanks Comparison of cryptocurrency stocks tool)

Bluzelle 2.0 rolls out the red carpet at the NFTs

While NFTs are currently more art-driven, Bluzelle sees immense potential in the creator economy. From an organizational perspective, NFTs will play an important role in securing intellectual property, making it essential to decentralize the creation process and, more importantly, file management and storage.

Bluzelle 2.0, the latest iteration of the service, transforms the initial data layer solution for dApp developers into a decentralized storage provider. The deployment of this new version accompanies the significant developments that have taken place since the start of the year. Bluzelle has introduced several modules designed to add value to the network, covering staking activities, cross-chain bridges, mainnet databases and blockchain oracles, thus contributing to greater interoperability.

Version 2.0 will be compatible with Ethereum and Binance Smart Chain (BSC), Polygon and Fantom. However, the accompanying NFT infrastructure presents the significant strength of the network in the storage arena. Decentralization of storage will guarantee 100% availability and access to NFTs hosted on the network while making them tamper-proof and more secure.

The next network upgrades expected over the next few months will also be attractive to DeFi developers who need high network transaction throughput, a greater degree of cross-chain communication, oracles to mine and push data and decentralized data storage.

For the creators’ economy, Bluzelle’s leap represents a major step towards real decentralization, helping to realize blockchain’s vision of ending reliance on custodians, annuity seekers and centralized institutions that exercise extensive control over many industries.

Disclosure: The editors of TipRanks did not hold any positions in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information in this document is for informational purposes only. Nothing in this article should be construed as a solicitation to buy or sell any securities.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Salesforce Exceeds Market Expectations With Its Results – Explica .co Sun, 30 May 2021 08:37:54 +0000

U.S. companies continue their upward spiral in earnings and joins with April 30 revenue of $ 5.960 million. 23% more than a year ago according to Eric Savitz on MarketWatch.

The higher figure was ahead of the company’s forecast range of 5.875 million to 5.885 million and the street consensus at 5.890 million.

Non-GAAP earnings were 1.21 per share, including an investment gain of 24 cents per share, ahead of the Street consensus of 88 cents. Excluding investment income, non-GAAP earnings were 97 cents per share. According to generally accepted accounting principles, the company made 50 cents per share, including profits.

For the fiscal second quarter, it forecasts revenue of $ 6.22 billion to $ 6.230 million, with non-GAAP earnings of 91 to 92 cents per share; The previous street consensus called for 6.15 billion and 85 cents per share.

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For fiscal year January 2022, the company projects revenue of $ 25.9 billion to $ 26 billion, with non-GAAP profit of $ 3.79 to $ 3.81 per share, ahead on the previous Wall Street consensus of $ 25.8 billion and $ 3.33. The company said the full year includes around $ 500 million in contributions from Slack Technologies. The company expects its acquisition of Slack to end near the “end” of the second fiscal quarter.

“We had the best first quarter in our company’s history,” CEO Marc Benioff said in a statement. “We are on track to reach $ 50 billion in revenue in fiscal 2026.”

The firm closed Thursday’s session in the red at $ 225.83 per share.

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Focus on profits Tuesday: will they exceed expectations for the ninth consecutive time? Sat, 29 May 2021 17:00:00 +0000

Zoom Video Communications (NASDAQ: ZM) is expected to release its results for its first fiscal quarter of 2022 (which is for the period ended April 30) after market close on Tuesday, June 1.

Investors are likely to approach the video conferencing specialist’s report with cautious optimism. On the one hand, in the last quarter, the company crushed Wall Street consensus estimates for revenue and profit, which it has been doing consistently since even before the start of the COVID-19 pandemic.

On the other hand, many investors are naturally worried about Zoom’s ability to continue to generate strong growth in an environment where the pandemic is diminishing in the United States and certain other countries, thanks to programs of successful vaccination.

Like many so-called “coronavirus stocks,” Zoom’s stock has declined since its peak in the fall, which is when a lot of good news broke on the vaccine front. Despite the significant pullback, the stock remains a big winner over the one-year period up to May 28: it rose about 103%, compared to the 41% return of the S&P 500. (A stock chart follows below. below.)

Image source: Zoom Video Communications.

Zoom Video’s key figures

Here are Zoom’s results for a year ago and Wall Street estimates to use as a benchmark.

Metric Results for the first quarter of fiscal 2021 Wall Street consensus estimate for the first quarter of fiscal 2022 Growth projected over one year
Returned $ 328.2 million $ 905.7 million 176%
Adjusted earnings per share (EPS) $ 0.20 $ 0.99 395%

Data sources: Zoom Video Communications and Yahoo! Finance. YOY = year after year.

Zoom’s management guided for revenues of between $ 900 million and $ 905 million, representing a 175% year-over-year growth midway through. He also expects Adjusted EPS to be between $ 0.95 and $ 0.97, which is 380% year-over-year growth at the midpoint.

The upcoming report marks Zoom’s last relatively easy year-over-year comparison. It covers the period from February to April, so the period of a year ago only includes about a month and a half which was spurred by the pandemic, which has closed many workplaces, schools and places. of recreation and entertainment in the United States and around the world. mid-March 2020.

As a reminder, in the last quarter, Zoom’s revenues climbed 369% year over year to $ 882.5 million, exceeding the $ 811.8 million expected by Wall Street. Generally Accepted Accounting Principles (GAAP) based EPS fell from $ 0.05 to $ 0.87, while adjusted EPS soared 713% to $ 1.22. This result was magnified by the analyst consensus estimate of $ 0.79.

Zoom has easily exceeded earnings expectations on the streets in each of the eight quarters released since its initial public offering (IPO) in April 2019. It seems more likely than not that its next report will keep its streak alive. consecutive beats.

ZM Chart

Data by YCharts.

Zoom on guidance

The stock market is looking to the future, so Zoom’s forecast for its second fiscal quarter will be very important. Indeed, any move in the stock after the earnings release will likely depend more on the company’s second-quarter guidance than its first-quarter results, compared to Wall Street estimates.

For the second quarter of the fiscal year, analysts model for the company to post adjusted EPS of $ 0.94 on revenue of $ 931.6 million, year-over-year growth of 2% and 40%, respectively.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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Federal Reserve’s inflated (and risky) balance sheet – analysis – Eurasia Review Sat, 29 May 2021 02:17:47 +0000


By Bill Bergman *

The Fed has embarked on a massive expansionist quest in recent years. In 2020, the Reserve Bank’s total assets grew from $ 4.2 trillion to $ 7.4 trillion amid the pandemic and related government foreclosure and fiscal “stimulus” policies. This was about three times the extraordinary growth in the consolidated balance sheet of reserve banks during the 2008-2009 financial crisis. And in the latest weekly “H.4.1” release, total assets reached $ 7.8 trillion – up about $ 100 billion a month so far this year.

In banking, rapid growth is not difficult to achieve if you are willing to take risks. In fact, rapid growth should always be questioned as a possible sign of undue risk-taking. What about federal reserve banks? How many risks do they take and at what cost?

To answer these questions, we must first identify the accounting principles on which the Fed’s balance sheet is based.

In the United States, there are “generally accepted accounting principles” (GAAP) – but there are different traits for different people. Private sector companies follow accounting standards set by the FASB – the Financial Accounting Standards Board. State and local governments follow a different set of “generally accepted” rules that are set by the GASB – the Governmental Accounting Standards Board. The US federal government follows another set of “generally accepted” principles established by the FASAB – the Federal Accounting Standards Advisory Board.

Let us leave aside for now the question of whether “generally accepted accounting principles” can even exist in a world where there are more than three sets of them, including international accounting standards. Who sets the accounting standards for the Federal Reserve?

There are two main parts of the “Federal Reserve”. The Federal Reserve Board of Governors is an independent regulatory commission, a government agency, and it follows federal government standards set by the FASAB. But Federal Reserve Banks are another story: they follow accounting standards set by the Federal Reserve Board of Governors! These standards are not GAAP.

One way the Fed’s principles for reserve banks differ from GAAP questions is to understand the significant risks facing reserve banks and, therefore, the US Treasury.

Reserve bank assets include trillions of dollars in bonds, most of which are government bonds or government guaranteed. Like any bond portfolio, these investments are subject to interest rate risk. When interest rates rise, bond prices fall (and vice versa).

According to the Board of Governors’ accounting standards for reserve banks, “unrealized” losses in the value of bond investments are not immediately reflected in the financial statements. It is only when losses are “realized” (for example, when bonds are sold) that the loss is reflected in the financial statements.

Today, short- and long-term government bond interest rates are near their historic lows, which is important in part because the Fed has massively increased its purchases of government bonds. But low interest rates cannot be taken for granted, especially if we get significantly higher inflation expectations – which seem to have started to germinate in recent weeks.

If we get significantly higher interest rates for this reason, the impact on the Reserve Bank’s balance sheet of losses on securities assets would occur if the losses were to become “realized” – a realistic prospect if the Reserve Bank Federal government reversed course and began to sell securities as a means of conducting monetary policy in a context of higher inflation expectations.

This impact, and this risk, is higher for entities with significant financial leverage. And reserve banks are among the most indebted banks on the planet. On the 2020 balance sheet, which reported $ 7.4 trillion in assets, reserve banks reported “only” $ 40 billion in total capital – a capital-to-asset ratio of half a percent.

For a given percentage change in asset value, highly leveraged entities will see a larger percentage drop in capital value. In this case, reserve banks would start reporting negative capital after losses amounting to only half a percent of their total assets.

In other words, if they were required to recognize losses. According to the current standards set by the Board of Governors, they will not start doing so until the losses are realized on sales on the open market. And even then, the reserve banks won’t show a negative amount of capital because the Fed sets its own accounting standards, at least for the reserve banks, and changes them as it sees fit.

In 2011, after the first upward spike in reserve banks’ balance sheets with the financial crisis, the Federal Reserve Board of Governors changed the accounting standards for Federal Reserve banks. These changes have limited the possibility that the capital account of reserve banks will ever turn negative. And more recently, some have argued that the Fed’s control over its own accounting principles could allow even more creative ways to cushion the blow of possible investment losses.

But a free lunch for the Fed isn’t necessarily a free lunch for the rest of us.

The problem (and risk) facing the Treasury (and the rest of us) is compounded by the Fed’s new, legally dubious practice of paying interest on the reserves that banks maintain with reserve banks. If short-term interest rates were to rise amid heightened concern over inflation, under current policy the Fed would pay higher interest on huge reserve balances worth several trillions of dollars. dollars currently in reserve banks.

Presenting its own balance sheet, a balance sheet with roughly $ 6 trillion in assets versus nearly $ 33 trillion in (underestimated) liabilities, the federal government gives us the following heartwarming words:

However, the government has other important resources that go beyond the assets presented in these balance sheets. These resources include the management of real estate and businesses in addition to the sovereign powers of the government in matters of taxation and setting monetary policy.

In other words, we should be reassured that our government will be able to deprive us of our money or inflate the dollar to pay off its debts.

Perhaps we shouldn’t be comforted by these claims, especially because they come in a document that theoretically puts the responsibility of government on the real ruler of the United States – the people.

The Federal Reserve has consistently returned its profits to the Treasury for decades. And the government seems to see the Fed and monetary policy as its trump card. But it is not necessarily an asset for the people.

When justifying the Fed setting its own accounting standards, Fed executives consistently claim that the value of central bank independence justifies this state of affairs. But how independent is the Fed really under current law and policy?

In 2010, the Government Accountability Office’s (GAO) opinion on the US government’s financial statements began to include a caveat about the risks of the Fed’s swelling balance sheet for the Treasury. GAO Opinion Letters ceased to include these notes in 2015. Now that the Fed’s balance sheet is booming again, these issues deserve closer examination.

* About the Author: Bill Bergman is the Research Director for Truth in Accounting, a nonprofit public finance watchdog, and a finance instructor at Loyola University in Chicago.

Source: This article was published by the MISES Institute

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