5 ms·

This sounds like a bug - a business is not clearly safer or less safe a credit risk doing the movement described. Perhaps a business opportunity there.

by gburt 11y ago

mathattack 11y ago
There are lots of accounting bugs like this. The challenge is Accounting isn't as cut and dry as people think. For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are. Another example - If you buy a financial product to hedge a risk vs to speculate, the accounting treatment is different. (In the latter you need to mark it to market more frequently) One more... If you're a bank, and you make a loan which you intend to hold until maturity, the accounting treatment (mark to market) is different than if you intend to sell the loan. Accounting is more than just consistent rules followed by the green eyeshades. :-) There are two immediate existing business opportunities: 1) Accounting companies (E&Y, Deloitte, etc) help execs understand all these rules. Their advisory (what can you do?) work is more profitable per partner than their audit (what did you do?) work. 2) Investment funds do detailed analysis of accounting statements to make "Apples to Apples" comparisons of companies, then analyze their equity and debt valuations to see if they are properly priced. Sometimes this goes by the name of "Relative value" or "Long/short".
- nobody_nowhere 11y ago
  Appreciate your informative commentary.
- toyg 11y ago
  Standing ovation. People think accounting is just sums -- it's not. It's the interpretation of sums. Balance sheets and P&L statements don't follow some law of nature; they are careful crafts that try to convey specific concepts about how a company views itself and how it thinks other people should view it. Like all things written by humans, these documents can lie, misdirect, and bend the truth to an agenda. It takes skills to craft them and to decipher them. Accounting is "just sums" in the same way being a playwright is "just writing". It's a shame that formal education seems to fail at communicating this to the general public; Western society is based on capital but few people understand where and how this capital actually is.
  - anigbrowl 11y ago
    The failure you speak of is by design, I think. Discovering that there aren't hard and fast standards for how to declare everything and that balance sheets can be made to lie is rather shocking to most people.
    - mathattack 11y ago
      It is by design but there is no way to come up with a truly 100% objective system. There are real reasons to have judgment involved. (Hard and fast rules in any subject always create strange exceptions)
    - vessenes 11y ago
      Hard and fast standards would just re-incentivize gaming the system on the operations side. Accounting is very, very difficult. The best answers often include subjective decision making. Consider; your project managers claim to be done with 80% of a project. You've billed and been paid for 50%. One lone ranger claims the project is only 30% done. At completion, the project will require a an expensive piece of hardware from you to launch. You have three of these pieces of hardware in stock; the first two you bought cost $50k. The last one cost $150k. The market value is $100k, and the customer will pay $100k at launch. There is no one answer as to how to book this. You have three choices for the inventory booking (FIFO, LIFO, AVCO) -- the first one will at launch book you a net profit of $50k, the second a loss of $50k, and the last one a profit $17k or so. And, you may decide to book the expense of the hardware now, depending on the contract, so it might look like an expense until you actually launch. If you are accrual basis, you have at least two ways to book your current revenue; 80% or 30%. Depending on your internal personnel costs, that may yield a profit or a loss. Of course, if some of the project time has been spent on things that could yield benefit to the company later, you may move some of it over to an R&D budget,... The decisions go on. They are neither trivial nor are they unlinked from reality -- answering the questions like 'did we make money on this project?' and 'how much should we sell the hardware for?' are basic questions that yield 'it depends' type answers. So, yes, people lie on balance sheets, all the time. But, truth is often hard to achieve for even a very solid financial officer and good management team.
- forgetsusername 11y ago
  >For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are. It isn't supposed to be ambiguous, though it sometimes is (and that's a problem). At least in Canada, we have relatively straight-forward rules to follow for allowable capital depreciation rates, as seen here: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/clsss-eng.html http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/c...
  - mathattack 11y ago
    It becomes an issue if the assets themselves depreciate faster or slower than the rules suggest.
  - mathattack 11y ago
    It becomes an issue if the assets themselves depreciate faster or slower than the rules suggest.
- alexchantavy 11y ago
  Bit of a tangent, but this makes me think about how personal credit scores are calculated. I find infuriating the exact formula isn't public knowledge.
jpfr 11y ago
But it may be way more profitable. Because profitability is not the amount of dollars earned, but the ratio of earned dollars per invested dollar. Also, it makes sense for most healthy companies to borrow money and pay out a stock dividend at the same time. You need to pay interest on the borrowed money. But that interest can be deduced from the taxes you'd have to pay otherwise. The trick is to find the correct ratio. The earnings to invest ratio goes up and everyone is happy.
jonknee 11y ago
Sort of, but another way to look at it is Zynga is not a real estate company and shouldn't be valued based on its real estate. Decoupling the real estate and the Real Business lets investors properly value both (when bankers say this they mean the two parts will be worth more than they are now as one).
- staticautomatic 11y ago
  Such thinking would tacitly suggest that no company which is not in the real estate business should own real estate.
  - mathattack 11y ago
    In a sense it's a question of vertical versus horizontal integration. (Figuratively and literally) Do you want to concentrate just on what you're good at, or the whole stack? There's not a right and wrong answer, but it's best not to have too much value tied up in something that you're not focusing on.
  - jonknee 11y ago
    That's a common thought on Wall Street. Activist investors frequently push companies to separate from real estate holdings (and frequently succeed). This particular deal makes a lot of sense, the type of investor who wants real estate is not usually the same type that is interested in a struggling tech company.
thaumasiotes 11y ago
> a business is not clearly safer or less safe a credit risk doing the movement described Yes they are? The reason you're thinking of the building as completely safe wrt to credit risk is that, if the company finds it can't pay the loan on the building, it can sell it and hope to pay the loan that way. But that might not work! In the second scenario, that's already been done, which eliminates the risk of being unable to sell the building for an amount that will cover the loan.

This sounds like a bug - a business is not clearly safer or less safe a credit risk doing the movement described. Perhaps a business opportunity there.

by gburt 11y ago

This sounds like a bug - a business is not clearly safer or less safe a credit risk doing the movement described. Perhaps a business opportunity there.

mathattack 11y ago

There are lots of accounting bugs like this. The challenge is Accounting isn't as cut and dry as people think. For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are. Another example - If you buy a financial product to hedge a risk vs to speculate, the accounting treatment is different. (In the latter you need to mark it to market more frequently) One more... If you're a bank, and you make a loan which you intend to hold until maturity, the accounting treatment (mark to market) is different than if you intend to sell the loan. Accounting is more than just consistent rules followed by the green eyeshades. :-) There are two immediate existing business opportunities: 1) Accounting companies (E&Y, Deloitte, etc) help execs understand all these rules. Their advisory (what can you do?) work is more profitable per partner than their audit (what did you do?) work. 2) Investment funds do detailed analysis of accounting statements to make "Apples to Apples" comparisons of companies, then analyze their equity and debt valuations to see if they are properly priced. Sometimes this goes by the name of "Relative value" or "Long/short".

nobody_nowhere 11y ago
Appreciate your informative commentary.
toyg 11y ago
Standing ovation. People think accounting is just sums -- it's not. It's the interpretation of sums. Balance sheets and P&L statements don't follow some law of nature; they are careful crafts that try to convey specific concepts about how a company views itself and how it thinks other people should view it. Like all things written by humans, these documents can lie, misdirect, and bend the truth to an agenda. It takes skills to craft them and to decipher them. Accounting is "just sums" in the same way being a playwright is "just writing". It's a shame that formal education seems to fail at communicating this to the general public; Western society is based on capital but few people understand where and how this capital actually is.
- anigbrowl 11y ago
  The failure you speak of is by design, I think. Discovering that there aren't hard and fast standards for how to declare everything and that balance sheets can be made to lie is rather shocking to most people.
  - mathattack 11y ago
    It is by design but there is no way to come up with a truly 100% objective system. There are real reasons to have judgment involved. (Hard and fast rules in any subject always create strange exceptions)
  - vessenes 11y ago
    Hard and fast standards would just re-incentivize gaming the system on the operations side. Accounting is very, very difficult. The best answers often include subjective decision making. Consider; your project managers claim to be done with 80% of a project. You've billed and been paid for 50%. One lone ranger claims the project is only 30% done. At completion, the project will require a an expensive piece of hardware from you to launch. You have three of these pieces of hardware in stock; the first two you bought cost $50k. The last one cost $150k. The market value is $100k, and the customer will pay $100k at launch. There is no one answer as to how to book this. You have three choices for the inventory booking (FIFO, LIFO, AVCO) -- the first one will at launch book you a net profit of $50k, the second a loss of $50k, and the last one a profit $17k or so. And, you may decide to book the expense of the hardware now, depending on the contract, so it might look like an expense until you actually launch. If you are accrual basis, you have at least two ways to book your current revenue; 80% or 30%. Depending on your internal personnel costs, that may yield a profit or a loss. Of course, if some of the project time has been spent on things that could yield benefit to the company later, you may move some of it over to an R&D budget,... The decisions go on. They are neither trivial nor are they unlinked from reality -- answering the questions like 'did we make money on this project?' and 'how much should we sell the hardware for?' are basic questions that yield 'it depends' type answers. So, yes, people lie on balance sheets, all the time. But, truth is often hard to achieve for even a very solid financial officer and good management team.
forgetsusername 11y ago
>For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are. It isn't supposed to be ambiguous, though it sometimes is (and that's a problem). At least in Canada, we have relatively straight-forward rules to follow for allowable capital depreciation rates, as seen here: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/clsss-eng.html http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/c...
- mathattack 11y ago
  It becomes an issue if the assets themselves depreciate faster or slower than the rules suggest.
- mathattack 11y ago
  It becomes an issue if the assets themselves depreciate faster or slower than the rules suggest.
alexchantavy 11y ago
Bit of a tangent, but this makes me think about how personal credit scores are calculated. I find infuriating the exact formula isn't public knowledge.

jpfr 11y ago

But it may be way more profitable. Because profitability is not the amount of dollars earned, but the ratio of earned dollars per invested dollar. Also, it makes sense for most healthy companies to borrow money and pay out a stock dividend at the same time. You need to pay interest on the borrowed money. But that interest can be deduced from the taxes you'd have to pay otherwise. The trick is to find the correct ratio. The earnings to invest ratio goes up and everyone is happy.

jonknee 11y ago

Sort of, but another way to look at it is Zynga is not a real estate company and shouldn't be valued based on its real estate. Decoupling the real estate and the Real Business lets investors properly value both (when bankers say this they mean the two parts will be worth more than they are now as one).

staticautomatic 11y ago
Such thinking would tacitly suggest that no company which is not in the real estate business should own real estate.
- mathattack 11y ago
  In a sense it's a question of vertical versus horizontal integration. (Figuratively and literally) Do you want to concentrate just on what you're good at, or the whole stack? There's not a right and wrong answer, but it's best not to have too much value tied up in something that you're not focusing on.
- jonknee 11y ago
  That's a common thought on Wall Street. Activist investors frequently push companies to separate from real estate holdings (and frequently succeed). This particular deal makes a lot of sense, the type of investor who wants real estate is not usually the same type that is interested in a struggling tech company.

thaumasiotes 11y ago

> a business is not clearly safer or less safe a credit risk doing the movement described Yes they are? The reason you're thinking of the building as completely safe wrt to credit risk is that, if the company finds it can't pay the loan on the building, it can sell it and hope to pay the loan that way. But that might not work! In the second scenario, that's already been done, which eliminates the risk of being unable to sell the building for an amount that will cover the loan.