Photo Credit - MLive.com
What is GAAP for those who do not know, "GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. If a financial statement is not prepared using GAAP principles, be very wary!," (Investopedia, 2013).
As a graduate student on the verge later this year of receiving my Masters of Business Administration, when I read this Op/Ed and/or Press Release by Mr. Barrow, one part immediately stood out was the issuing of bonds, or in this case municipal bonds. When a entity, and in this case the entity is a City, issues bonds the financial instruments are not denoted as debts on a balance sheet but are long-term liabilities. Yet surprisingly for the State of Michigan's Republican dominated Government "magical accounting standards" bonds issuance denotes present debts regardless to the fact Detroit's bonds have not been called.
Just for clarification again, a municipal bond is a investment security issued by a locality to generate revenue. Organizations who invest in the bond should know, if they have a half-way decent financial advisor, that although a bond generally carries less risk than purchasing stock, a risk-loss factor inherently exist with any investment. More information about a Bond Risk Value can be found here.
"All investments offer a balance between risk and potential return. The risk is the chance that you will lose some or all the money you invest. The return is the money you stand to make on the investment.
"The balance between risk and return varies by the type of investment, the entity that issues it, the state of the economy and the cycle of the securities markets. As a general rule, to earn the higher returns, you have to take greater risk. Conversely, the least risky investments also have the lowest returns.
The bond market is no exception to this rule. Bonds in general are considered less risky than stocks for several reasons:
*Bonds carry the promise of their issuer to return the face value of the security to the holder at maturity; stocks have no such promise from their issuer.
*Most bonds pay investors a fixed rate of interest income that is also backed by a promise from the issuer. Stocks sometimes pay dividends, but their issuer has no obligation to make these payments to shareholders, (The Securities Industry and Financial Markets Association, 2010)."
Either way, please keep these thoughts in mind as you read the below post by Tom Barrow. Information on Mr. Barrow's expertise in Accounting subjects can be found here.
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