Small Things Matter

On more than one occasion I have taken the FASB to task in this blog, so when they do something right it is only fair that I express some praise. The FASB has recently issued three exposure drafts that actually simplify accounting rules, disclosures and procedures. I talk briefly about each below.

Simplify Inventory Lower of Cost or Market (LCM) test – the FASB is proposing to change the “market” component to a single net realizable value calculation. They are proposing to get rid of floors and ceilings in the calculation which added complexity with no real benefit. Less calculations is good, eliminating calculations that do not materially change financial results 99.9999% of the time is even better.

Accounting for Cloud Computing costs – there have been rules for years on how sellers of cloud computing services should account for such services. The question is does the service include a separate deliverable of a software license or is the software license so integrated into the service they are considered a single unit of account for revenue recognition purposes. The FASB has essentially said those same rules apply to purchasers of cloud computing services. Some companies already followed this model by analogizing to the seller accounting, but other companies did not follow that accounting resulting in the dreaded “diversity of practice.” By adopting the standard the FASB will eliminate a difference that does not need to exist without adding a ton of work for most preparers of financial statements.

Eliminate Extraordinary Items – I could be cynical and say the FASB is finally facing up to reality. When was the last time you saw a company with an extraordinary item. The reality is the regulators got so picky on what was unusual AND infrequent that nothing seems to meet the definition. Actually I think the regulatory elimination of extraordinary items is why you have seen a proliferation of non-GAAP “adjusted” earnings and “adjusted” EPS numbers. Investors want to understand what is non-recurring and recurring in nature. Extraordinary items were supposed to handle that in the financial statements, but the regulators’ actions eliminated that option for preparers so we went outside GAAP to supply the information investors want. With the elimination of extraordinary items maybe we can then move onto a discussion of splitting the income statement up into something truly useful for investors. A place to start would be to look at non-GAAP disclosures in this area.

So the FASBs new targeted approach to improving GAAP looks to be a winner so far. These three exposure drafts appear to be truly useful improvements to GAAP and I for one want to recognize the FASB’s effort to make things better. Thanks FASB!

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