Trucking executives seldom have to concern themselves directly with the doings of the Financial Accounting Standards Board (FASB). Every so often, however, the board proposes a change in accounting principles or measurement that has major implications for the CEO as well as the company and its finances.
A recent example is FASB Statement No. 150 (FAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (www.fasb.org/action/aa090303.shtml). FASB is a private, nonprofit organization, not a government agency, but its standards are used by lenders and others as the benchmark for accurate presentation of a company's financial records.
Many closely held trucking companies require that when one of the owners dies, the remaining owners must buy back his or her shares, typically at the fair market value as determined at time of redemption. If the company has done well, that value would exceed the book value, the value at which the shares have been carried on the company's financial statements.
FAS 150 would require the redemption value of these “mandatorily redeemable shares” to be classified as liabilities. Until now, there has been no such requirement and, accordingly, most balance sheets do not record the shares as liabilities.
The proposed change presents a number of potential problems to carriers (and other closely held businesses). The resulting reduction in net worth can be huge. As a result, many carriers would no longer appear to be good financial risks to lenders, lessors, surety bond underwriters, or customers that require certain capitalization standards from vendors.
Some firms buy life insurance policies that will provide enough cash in the event of an owner's death to buy back the shares. However, accounting principles do not allow the company to count the full face value of the policy as an asset that would offset the liability. (Because a policy can be canceled by the policyholder or by the insurer if the premium isn't paid, only the current termination value can be counted as an asset.) Thus, even companies that appear prepared to redeem the shares may still have problems under FAS 150.
The board had previously decided to put this statement into effect for fiscal years ending after December 15, 2003. But on August 27 of this year, it decided that for mandatorily redeemable financial instruments of a nonpublic entity, Statement 150 should be effective for existing or new contracts for fiscal periods beginning after December 15, 2004, instead of December 15, 2003.
Further, the board invited public comment on two FASB Staff Positions interpreting aspects of FAS 150. The posted deadline for comments on the interpretative staff position papers was September 27.
However, the board's web site emphasizes that decisions are tentative and open to change until the board formally votes. In the past, issues that have triggered credible comments that suggest the likelihood of severe, unintended consequences often have been deferred for long periods, heavily modified, or dropped altogether.
The bottom line: If your company has buy/sell agreements to repurchase the stock owned by key executives, you need to get with your accountant and financial advisers to understand the implications of FAS 150. If you decide you have reason to worry, express your views to the FASB. The life you save may be your company's.