While FASB contends that accounting based on fair value measurement of assets and liabilities comes closer to reflecting a company’s economic reality, some observers fret that changing the reporting system to reflect such an emphasis will obscure the role of management. These critics note that investors have a more forward-looking perspective than economists do, and focus on what managers bring to the table.
“Changes in assets and liabilities may accurately reflect how much a company earned in a given period,” comments Charles Mulford, an accounting professor at the Georgia Technological Institute. “But we want to know how much of that is likely to recur in future periods in order to determine what we’re willing to pay for that.” That recurrence of value is “what managers contribute,” Mulford points out, adding: “My biggest concern is that we will lose sight of that.”
FASB is not blind to this concern, as evident in yet another project, on financial performance measurement. The project aims at creating a new way of presenting bottom-line results that distinguishes earnings from operations, investing, and financing, and from ongoing activities and one-time events. Still, a new type of income statement along those lines may only serve to highlight how little managers add. And despite pressure from groups like Financial Executives International, FASB has said it won’t wait for work on this project to be completed before proceeding with rules that embrace fair value.
What’s more, the document that outlines FASB’s preliminary views on the conceptual framework notes that “stewardship” of assets and liabilities, as the board refers to management’s role, should not be the objective of a company’s financial reporting, but rather should be “subsumed” in it — a position that may not sit well with finance executives. According to our survey of finance executives , more than a quarter of finance executives at public companies believe the main purpose of accounting is to assess the performance of company management.
The ramifications of all this for CFOs are potentially quite significant. A remake of the very basis of accounting could require a wholesale change in approach to growing earnings, and involve difficult judgment calls based on valuation methodologies that are open to challenge. Baldly put, the current accounting set-up, based more as it is on income-statement effects than on changes in the balance sheet, may be easier to manipulate for purposes of burnishing a company’s financial results.
As a document the board recently issued to outline its “preliminary views” of the conceptual framework put it: “Management’s stewardship responsibilities include protecting the entity’s economic resources, to the extent possible, from unfavorable economic effects of factors in the economy such as inflation or deflation and technological and social changes.” That goes well beyond the relatively simple task of managing investors’ expectations for a company’s earnings or even massaging the earnings themselves to meet announced targets.