Replies to post #3783 on China Growth Stocks

[Brennus]

CCGY had positive earnings last quarter.

I know most are just discovering the FASB disservice to investors that is EITF 07-5. So let me pass on the details as I know them...it requires a company to mark instruments that can be construed as indexed to the company's equity. As I read the rule, if the instrument is in a currency other than the operating company's operating currency then it must be recorded as a liability...and changes in that liability must be recorded on the company's statements of income from quarter to quarter.

What does that mean in layman's terms? Warrants are indexed to a company's equity...everybody sort of understands that intuitively. Every single china microcap ever has operating currency of renminbi/yuan and warrants priced in US dollars. There is no readily available market for the warrants (they are Level 3), so they are marked every quarter according to a Black-Scholes model.

Here's the bottom line, most of the time if the model says the warrants go up, the liability on the balance sheet increases. The amount of the change in the liability gets recorded as an expense on the income statement. It's a complete farce and a total fiction...again, a monstrous disservice perpetrated on investors by FASB.

So, what does that mean for CCGY? Well, guess what, CCGY share price went up during 2q. So the warrant liability went up. So there appears on the income statement a bogus non-cash charge that makes the 'as is' bottom line number useless in evaluating the operation of the underlying business.

What you have to do is add the 'Change in fair value of warrant liabilities' line item back into the 'Net Income' line item. In this case, net income goes to +330,830 or 1.1 cents per fully diluted share. Good considering the circumstances!

As an object lesson, it's important to understand this procedure. A lot of China Stox had large positive earnings because the change in their warrant liability was negative. A lot of China Stox had large negative earnings revisions because the change in their warrant liability was positive. Ironically, that makes earnings of China Stox that are doing WELL look BAD and earnings of China Stox that are STRUGGLING look GOOD.

Thanks for looking out for us, FASB!