A New Vision for Accounting

Robert Herz and FASB are preparing a radical new format for financial statements.

Net Loss

From the outset, corporate financial officers have been ambivalent about FASB’s seven year-old project, which was originally launched to address concerns that net income was losing relevance amid a proliferation of pro forma numbers. Back in 2001, Financial Executives International “strongly opposed” it, while executives at Philip Morris, Exxon Mobil, Sears Roebuck, and Microsoft protested to FASB as well.

(Critics then and now point out that FASB will have little control over pro forma reporting no matter what it does. Indeed, nearly 60 percent of respondents to CFO’s survey said they would continue to report pro forma numbers after the new format is introduced.)

Given the project’s starting point, it’s not surprising that current drafts of the future income statement omit net income. Right now that’s by default, since income taxes are recorded in a separate section. But there is a big push among some board members to make a more fundamental change to eliminate net income by design, and promote business income (income from operations) as the preferred basis for investment metrics.

“If net income stays, it would be a sign that we failed,” says Don Young, a FASB board member. In his mind, the project is not merely about getting rid of net income, but rather about capturing all income-related information in a single line (including such volatile items as gains and losses on cash-flow hedges, available-for-sale securities, and foreign-exchange translations) rather than footnoting them in other comprehensive income (OCI) as they are now. “All changes in net assets and liabilities should be included,” says Young. “Why should the income statement be incomplete?” He predicts that the new subtotals, namely business income, will present “a much clearer picture of what’s going on.”

Board member Thomas Linsmeier agrees. “The rationale for segregating those items [in OCI] is not necessarily obvious, other than the fact that management doesn’t want to be held accountable for them in the current period,” he says.

Whether for self-serving or practical reasons, finance chiefs are rallying behind net income. Nearly 70 percent of those polled by CFO in December said it should stay. “I understand their theories that it’s not the be-all and end-all measure that it’s put up to be, but it is a measure everyone is familiar with, and sophisticated users can adjust from there,” says Kelly. Adds Rickard: “They’re treating [net income] as if it’s the scourge of the earth, which to me is silly. I think the logical conclusion is to make other things available, rather than hiding the one thing people find most useful.”

It’s not clear that investors and analysts are excited about the prospect of losing net income, either. “I like having one agreed-upon number that everyone can use for comparison, so I’d be reluctant to see that go,” says Janet Pegg, senior managing director and an accounting analyst at Bear Stearns. Debt investors are more neutral. “I don’t really care if it stays or goes,” says Greg Jonas, managing director for Moody’s Investors Service and a member of an advisory board to the FASB project. Moody’s analysts use net income in fewer than 5 percent of all the ratios they construct, Jonas says, so “we’re already looking at business from various perspectives.”

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