Accounting Is All About Numbers…NOT

I’ve heard the story so many times I’ve lost count.  It goes something like this. “I was good at math so someone recommended I consider accounting as my career.”  Or, “I decided to major in accounting because there is always a (right) answer to every problem.”  Well, I am here to tell you we’ve all been sold a bill of goods on this one that makes the jokes about buying a piece of the Brooklyn Bridge seem like child’s play.

Let me give you a couple of examples from our accounting standards on other post-retirement benefits and share-based compensation.  These two standards are difficult enough to begin with.  The “math” is some of the most complex that we deal with as accountants.  In fact it is so complex that we hire actuaries to do the math for us, but at least once you decide on the right input – the “assumptions” – there is a right answer that comes out the back end.  But therein lies the problem, what are those pesky assumptions.

Let’s look at stock based compensation.  The standard says you should use the fair value of the right granted on the grant date as the as the amount you expense over the vesting period of the award.  That sounds simple enough, but then go read up on the grant date.  It says it is the date the company and the employee reach a mutual understanding about the award.  Once again that sounds simple, but wait, maybe not.  Let’s say the Board of directors approves an allotment of 1,000 shares restricted stock based on a stock price of $25 when they approve the award because they are intended to give $25,000 in compensation to the highest rated employee in the group. So the board has approved it and we are now set and can start amortizing the cost over the vesting period, right?  Wrong!  The board hasn’t actually granted the award to a specific employee, but one to be decided at a later date.  It’s hard to have a mutual understanding if the employee doesn’t know they are getting the award.  Let’s say it takes a month for HR to figure out which employee is getting 1,000 shares because they have to wait for the performance reviews to be completed, and during that time the stock rises to $30 a share.  Now, once the employee is told they are getting the shares we finally have a mutual understanding about the award, but to the board’s surprise, that mutual understanding is for $30,000 of compensation, not $25,000 which is what they intended.  Of course it gets even worse if the Board approves the award for the top employee to be decided over the next year, then we won’t know what the value of the award is for over a year.  So much for straight answers

Now let’s talk about post-retirement benefits.  In this day and age, companies are often changing or eliminating post-retirement benefits because they simply can’t afford to provide them anymore.  Usually, the process officially starts with a plan amendment. Once again these are often approved by or at least presented to the Board for review. Under “normal” accounting thought, once the plan was legally amended you would think a company would be required to account for the change, but not so fast in the post-retirement benefit world.  Once again the need to “communicate” the change to the plan participants is required by the standard before any change is accounted for.  In the FASB’s own example, they show a plan amendment adopted in ‘X1 that is communicated to the plan participants in’X2 that is effective in ‘X3.  Even though the legal adoption is completed in ‘X1 you don’t account for it until the plan participants are told about the change in ‘X2.  And of course, there are lots of questions about what it means to communicate such changes and the words, not the numbers, are what really matter in determining if the communication has actually been made.

So accounting may ultimately be about the numbers, but its words that help you decide what the numbers are supposed to be.  Maybe it’s time we all took a refresher course on writing.

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