What Will The FASB Be Up To Next?

With the revenue recognition standard about to be issued and Financial Instruments, Leases and Insurance contracts in various stages of deliberations, the FASB is starting to spend some time thinking about what should come next on its agenda.  While the FASB has its own list, here are a few of my suggestions (some of which are on the FASB’s list):

  1. Segment reporting – If nothing else, some of the concepts behind the current segment reporting standard need to be revisited. In a world where anyone in the company from the CEO to the first line manager can dive into any level of detail about financial transactions in seconds, the concept of “a” report the Chief Operating Decision Maker uses to decide where and how to allocate resources is so ‘90’s as to be laughable.
  2. Whatever per share – If Other Comprehensive Income and Cash Flow are so important then why won’t the FASB relent and finally allow/require companies to report OCI per share or Operating Cash Flow per share.  It’s not like investors can’t compute these numbers on their own today and maybe by thinking about it we can decide if the calculations of dilutive shares that we compute for net income per share should be the same or different for these other amounts per share.
  3. Intangible Assets – in a world where a many companies’ values are no longer linked to the assets recorded on the balance sheet we have to ask what are we missing.  The answer is Intangible assets.  If you truly want to help investors predict future cash flow, then we need to consider valuing the assets that are going to create that value.  While our current depreciation model for PP&E is not perfect, it is at least a somewhat reasonable approach to such assets.  Most PP&E does decline in value over time as it is used up and the parts of PP&E that don’t use up value like land and artwork are not depreciated.  I understand that well maintained office buildings and retail space does go up in value, but maybe the chief issue there is the way we require/allow the expensing of so much maintenance cost.  Either way, at least PP&E has some value on the balance sheet unlike most intangibles that are created by businesses each day.
  4. Share-based compensation – I will probably get a lot of hate mail on this one, but if we would all just finally admit that share-based compensation is just that – compensation – and record compensation expense to the current value of shares owed each period, the accounting would be a lot simpler and lot more accurate and comparable across companies.  And I won’t even mention how much simpler the footnote would be!

That’s enough from me.  What do you think the FASB should be working on to make financial reporting better, more transparent and easier to understand?


Failure and Capitalism

Last week I updated you on the AICPA 125th anniversary and Council meeting that took place in Washington DC.  One of the benefits of meeting in Washington is that you have the opportunity to hear from a variety of regulators and politicians.  Senator Ron Johnson from Wisconsin addressed most of Council during the traditional PAC breakfast.  He made the statement that “Capitalism doesn’t work if you don’t allow failure.”

The problem we are dealing with as a society is that, with apologies to NASA, in some areas failure is not an option.  9/11 taught us that a single failure can cost thousands of lives. In a world with biologic and nuclear weapons, a single failure can be catastrophic.  But just like we have the difference between internal control over financial reporting and internal control over operations, there is a difference between the impact of failure over security and the failure of a business.

Internal control over financial reporting is all about minimizing risk.  Internal control over operations is different.  In business, the whole point of operations is about taking risk to make money.  The point of internal control is to make sure that the risks taken are known and within acceptable tolerances.   So, like financial reporting, risks over security only have one direction – minimization.  But like operations, for risks in our capitalistic economy, failure must indeed be an option – but with the appropriate controls in place to make sure those failures are kept within appropriate tolerances.

The danger we face today is that we will take the failure is not an option attitude to our economy.  We have major problems to deal with in order to permit orderly failures, but the answer would seem to me to continue to allow capitalism to do what it does best – allow failures.  If the risk of a business is too great to allow failure (to big to fail) then I submit the solution is not more regulation to prevent failure, but instead enforcement of existing or heaven forbid, creation of new rules to split businesses that are too big to fail.

This sounds more radical than what Frank-Dodd proposed, but in the defense of capitalism, I have come to the conclusion that being radical is what is needed.  And being radical means bringing back to capitalism its most basic control – the risk of failure.

AICPA 125th Anniversary

The AICPA celebrated its 125th anniversary during its Council meeting in Washington DC May 16 – 18.  Usually council meetings have a number of business issues to deal with and while we did take care of important business issues such as approving the budget (be on the lookout for those dues statements), this meeting was more celebration than business.  Typically celebrations focus on the past and while we did spend some time highlighting where we have been, most of the time was spent looking at where we are going – as auditors, tax preparers, management accountants and everything else we as CPAs do and will do in the future.

 The future of auditing, like the whole professional, is critically linked to our ability to attract bright people with the right character in order to continue to provide continuing and new assurance and audit services.  But one of the issues hitting auditors hard today is keeping people involved in and excited about a career in audit.  I, like many of my B&I colleagues, came into the profession as an auditor, but decided to take my career in the profession to a different path.  Keeping people involved and excited about this core service of our profession is critical to the future of the CPA profession.  Audits are the root of the profession and without a strong root system, all the branches we have built off that will come down when the tree topples over.

 We heard from George Colony, CEO of Forrester research.  He presented a fascinating look on what is going on in the world where business and technology continue to blend.  Mr. Colony talked about four thunderstorms occurring in the intersection between the technology world and the business world today.  Those storms are

  1.  Death of the Web
  2. Post Social World
  3. The Changing Customer
  4. Mobile Engagement

 The final topic from the Council meeting I want to cover here is the panel discussion on the future of financial reporting.  The most interesting point was a stat from the chairman of the IIRC.  In 1975, financial reports indicated 83% of the value of an enterprise. In 2009 that value indication was down to 23%.  Clearly there is a disconnect between what investors need to know and what we produce.  For those of us in the public company world this should be a call to action to move to something more relevant.  One possibility is the integrated report.  The idea is to combine critical financial and non-financial information in a single integrated presentation that will provide users of the report what they need to make investment decisions.  The IIRC is in the middle of a pilot program with 75 companies worldwide to see how this would really work and then intends to use the results of the pilot to develop guidance on what should be in and how to produce an integrated report. If you want to know more about the IIRC effort, check out their website at www.theiirc.org

 There was so much more covered in the council meeting, but I can’t do it all justice in this blog.  Check out all of the articles from the Journal of Accountancy at www.journalofaccountancy.com to get a complete review of the happenings at the May 2012 Council meeting.