Here is a reason why we need better transparency in company books. According to a story in the Washington Post, Fannie Mae is writing off almost half of its capital base. Why, because that capital was in the form of deferred tax assets, i.e. credits against taxes on future profits. Fannie has decided that it is unlikely to make a profit in the near future, so the tax credits are essentially worthless. That is a write off of $20 billion of a $47 billion capital base. According to the Post story:
In the months leading up to the companies' takeover, the firms and their federal regulator cited the capital positions in an effort to allay fears about their financial security. But during a summer probe of the companies' books, government officials grew concerned about whether the financial cushions were sufficient. In particular, the deferred tax assets drew scrutiny.
Government-appointed Fannie Mae chief executive Herbert M. Allison Jr. and Freddie Mac chief executive David M. Moffett are reviewing a range of accounting policies at the company. At Fannie Mae, Allison decided the company had to be more forthright in how it reports information about the liquidity of certain assets.
Let's hope that this is the start of a trend toward better disclosure of assets -- including intangible assets.
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