Huge Change in U.S. Accounting Rules

We are faced with a bombardment of information.

I recall hearing a brief news report several months ago that indicated part of the extension of tax cuts included accelerated depreciation for capital goods. The idea was to encourage companies to buy more equipment thus stimulating the economy. At the time, I assumed that the rate of allowable depreciation per year had been accelerated. Depreciation expense appears on the income statement and is the basis for valuation of assets on an accounting basis.

Evidently the tax deal went a step further than I thought. Capital expenses can be fully depreciated in 2011.

Of course this will be a significant boost to income out front (after the full write-off). However, as the following article mentions, the effect on 2012 will be extremely negative, perhaps even catastrophic.

Forsyth, Randall W., 2011. Booms away. Barron's, Mar. 5.

This is another reason to be cautious about the length of the bull market! Accounting gimmicks are effective in the short-term but often sacrifice the future.

In the past, many criticized American equity markets for being focused too much on the short term. This puts pressure on using accounting as a means of achieving short-term gains in equity prices.

I do not hear too many of these voices of criticism these days. Maybe it is time for more investors to think about the role of corporate accounting in relation to the medium and long-term, and the valuation of equities.