Sherburne was the Accounting Professor who explained that world to me in the last century. I think that he would be astounded to learn that the accounting profession has sanctioned a practice whereby management has the ability to not only assign its own value to a security but can also keep an increase or decrease in a security's value off the income statement and have such activity affect only the balance sheet.
Such a technique enabled Citibank to hide $2.3 billion in writedowns from appearing on its income statement; Merrill Lynch hid $3.1 billion. The companies in the S&P 500 have hid $80 billion in such losses on their balance sheets through this technique.
The game involves classifying a security as being available for sale, rather than being owned for the long haul or being actively traded. Activity surrounding such securities - those available for sale - do not have to be recorded on the income statement, it can go directly to the balance sheet as "other comprehensive income".
No wonder why the financial world is in trouble.
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