A New Vision for Accounting

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

Assuming the change happens, the full impact of the new format remains difficult to gauge. Viewed from one perspective, the new GAAP could be incredibly disruptive. It would require huge changes, from revising accounting textbooks and curriculums to changing IT systems to constructing new earnings metrics (and selling investors on them).

Take a different viewpoint, though, and the change is marginal. Companies would mostly be reporting data they already collect. Analysts already manipulate data in the ways that make sense to them; the new format would just save them a few steps. Meanwhile, XBRL, which could be mandated before the new format takes hold, could make the project irrelevant, some say, since in theory it would allow anyone to assemble his own customized financials based on standard data tags.

To be sure, CFOs will need to follow the project and comment when appropriate. In the long run, though, neither FASB nor companies, analysts nor investors, are likely to be the final arbiters of how onerous or easy the new approach is. The ease of conversion in many cases “will depend on how much I can estimate,” says Kelly, “and that will come down to, ‘What do the auditors think?’”

Alix Stuart is a senior writer at CFO.

What about Private Companies?

The new GAAP format may be just the inspiration private companies need to push for their own separate version of accounting standards. “It would appear from this project that the purpose of financial reporting is the valuation of publicly traded equities,” says John Hepp of Grant Thornton, on the grounds that the structure is designed to clarify the persistence of earnings into the future, rather than the historical facts of the past period. “If that’s the case, it may not make sense to apply it to companies that aren’t publicly traded.”

While the Private Company Financial Reporting Committee (PCFRC), which is part of the Financial Accounting Standards Board, has not formally decided to lobby for a “little” GAAP, as companies in Canada have done, it is considering it more intently these days. “From what I’ve seen in the preliminary formats, [the new financial statements are] probably overly complex for the needs of most private companies,” says Judy O’Dell, head of the PCFRC. Bankers and other lenders on the committee “are very concerned” about what the lack of net income and traditional subtotals on balance sheets would mean for the ratios they traditionally use in making lending decisions, she says.

Any effort on behalf of a separate GAAP is likely to meet with resistance from FASB chairman Robert Herz, however. He says he wants to stick with one GAAP because “users don’t want to have to learn two languages,” and because many private companies ultimately go public. However, Herz concedes that the new GAAP format “may have to be simplified” for private companies. — A.S.

What finance chiefs think of FASB's financial-statement project, January 2008

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