How often do companies get to defy the rules of GAAP? The answer is almost never. Accountants defend it like they would the Holy Grail, if they could find it. GAAP is, to a large extent, an abstract set of rules meant to be applied by CPAs as medical potions are by MDs. But, it is rare that the code is suspended altogether.
Some place along the way to the bank rescue an accountant in The Treasury Department took Mr. Paulson aside and told him that putting $125 billion into bank equity would do severe damage to earnings at the firms. In addition to the preferred shares the government was getting the banks would also issue warrants, a way for taxpayers to particlpate if the bank stocks did very well.
Under GAAP warrants have always been treated as a liability, something owed to be paid later. A real debt. According to The Wall Street Journal, The Securities and Exchange Commission and the Financial Accounting Standards Board are expected to issue guidance telling the banks participating in the program that they can consider the warrants "permanent equity". That is a sweet deal which is beyond the imagination of most CFOs. It is a mulligan, a reset of the pinball machine, a get-out-of-jail-free card.
Unfortunately, the actions is a deep perversion of one of the core principals of accounting. Warrants are not commons shares. They are a future obligaiton which exists based on an election of the warrant holder.
Warrants are issued, at one time or another, by some significant portion of the public companies in the US. It is unlikely that the new rule will changed for them the same way it will be for the nine financial firms the governemnt is aiding with infustions of capital.
Sometime overnight rowdies sneaked into the stadium and moved the goal posts and no one bothered to put them back.
Douglas A. McIntyre