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Strategies & Market Trends : Value Investing
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To: Bob Rudd who wrote (16119)1/9/2003 3:18:05 PM
From: Don Earl  Read Replies (1) of 78572
 
Bob,

I don't see much additional accounting burden on companies. They're already have to have the Federal tax numbers available in addition to their GAAP reporting. A footnote in the PRs and the quarterly reports is about all that would be required. Where it gets messy is going back over every trade to see when it was purchased and digging the information out of the filings to see how much cost basis to add.

What I think makes it interesting is it would put pressure on companies to report per share results on the second set of books. If XYZ trades for $60 and reports $4 a year in earnings, investors are going to want the extra $4 added to their cost basis. If XYZ is aggressively using loopholes in GAAP to come up with $4 but is only paying Federal tax on .50, it makes the discrepancy a lot more visible than the current system of entering a tax liability or "other" liability someplace on the balance sheet. After awhile even the least savvy investor will figure out that a PE of 120 is not so good, even with a GAAP PE of 15.

I think it would go a long way toward creating enough public awareness of the flaws in GAAP accounting to eventually eliminate the system in favor of tax accounting, but this backdoor approach of inventing cost basis dividends strikes me as being too unwieldy to become law.
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