Assets/Liabilities accounting rules !!
I am neither certatin about US accounting rules nor an accountant expert.
But I do have some basic knowledge about "globaly accepted accounting rules".
One of the key-core generaly accepted accounting rule is that the books should report worst case scenarions:
- Debts and liabilities: should appear in its worst case view, it means that the books should show in liabilities the full exposure to debts as well as potential exposures that may become real..
- Assets: should appear in its worst case view.
A) It normally means that the book value of a tangible asset is the original investement in the asset minus the cumulative depreciation over years. In the example of RState it normally undervalue the assets because RState bought long ago in the long run usually increases value. Equipment, IT, etc, shows up as purchase value minus depreciation. Again - in the case of RState - tipically the value increase significantlly over many years. ( not the case for investments done in the last few years).
B) In the case of untangible assets that has clear dinamic but fair market value such as stake in public companies, bonds, etc..the rule forces to show in the books the last known fair market value in the investment... ( this is what killed the balansheets of companies holdign junk-mortage related assets ).
C) In the case of untangible assets such as stake in companies that have not public valuation - tipically non-public companies - the accounting rules woulsd force to show the original investment ( in normal conditions lower than current market value in case of these stakes being sold). The real value of such assets shows up in books only once the asset has been sold. The exeption may be considered by auditors in case there are clear objective signs that the original investment has been depreciated. In this case the value in the books would reflect this depreciation ( again worst case scenario rule).
D) There are other elements such as intelectual property (patents or acummulated R&D), legal rights, brand value, customer base, signed future contracts, etc... that usually are reflected as Good Will asset. Here there are some depreciation rules to be applied.
As I said before I am not an expert but besides the cash, and possibly some good will related to WM brand, most WMI assets are in groups A (remaining real state) and C (stake in non public subsidiaries).
It means that formal accounting books - and now I mean the last 8k filing - should reflect the worst cases and not necesarily market value.
Example: a stake in a PE fund that invested 5 years ago in tech companies, would show the original value invested, not considering the value - normally higher ) of the companies in which that fund invested. Remember that if these investments have been obviously depreciated because the PE did a lousy job the auditors would force to show the depreciation.
Other example: the purchase of a building 15 or 20 years ago would appear valued as the original investment. Likely today is worth much more, but the companies are not allowed - oftenly not even interested in order hide profit and save taxes - to reflect that increased value until the building is sold.
Other example: the original investment in WM Bank should appear valued as zero, whatever big it was originally ... there are obvious reasons to erase it from WMI balance sheet...
Why is this relevant? .. because 8k doc. must always show the worst - according to accounting rules, specially if presented to the court - possible valuation of assets.
For me this mean that now we do have a bottom valuation in this 8k doc. If WMI manages to sell some of these non public subsidiaries at higher price than this worst case valuation reflected in the 8k - and only once they do it - then this new higher value will inmediatly show up as additional asset value ( assets ) and as retained profit ( liability/equity) in the balance sheet and as profit in the P/L... therefore producing inmediate value to shareholders.
Any possible buyer would evaluate and know pretty well the difference between book value shown in the 8k and possible real value.
I think I am not making here any conceptual mistake, but I would appreciate a reply from someone familiar with US accounting ...
AI
