According to Pluris Valuation Advisors, which specializes in valuing illiquid securities, 119 of 242 companies have disclosed exposure to auction-rate securities and taken an impairment charge with the SEC as of mid-May. Why haven't more companies holding auction-rate securities marked down their value?
Pluris expected more companies would take an auction-rate hit but perhaps the difference in analyzing these securities has not made reality apparent yet; or, it is just plain denial. Since the auction-rate market froze in February, a lot of companies with these illiquid investments took a proactive stance and wrote them down, but obviously, half of them aren't doing that.
In 2005, the major accounting firms decided to reclassify auction-rate securities from cash equivalents to short-term investments, which are generally due in one year or less. So now, each company (and its auditor) must decide how to handle the accounting for their frozen auction-rate investments. Auction-rate securities each have different underlying collateral and pay different penalty rates when auctions fail. These factors could lead auditors to give companies varying advice on how to account for the failed securities.
For example, companies with auction-rate paper backed by collateralized debt obligations have little hope of recovering their money and are more likely to take a charge. Companies that have decided against an impairment charge may think it's possible to restructure the debt within a year so it's appropriate to continue to hold the securities as a short-term investment on their balance sheets. Another scenario is that companies are holding auction-rate securities in which the credit quality of the underlying securities has not been affected, so they may expect to get the full value of their investment back at some point in the future, near or far.
No comments:
Post a Comment