Peeling away financial reporting issues one layer at a time

On Golden’s Con: Selling False Hope for Fundamental Changes to Financial Reporting

“FASB is preparing to consider foundational changes that could significantly alter financial reporting in the future as well as standards improvements that will reduce complexity, board Chairman Russell Golden said … in a speech at the 13th annual Financial Reporting Conference in New York City …”

The above was reported by the Journal of Accountancy.  Since the FASB will not be posting the text of Mr. Golden’s speech on the web, I’ll  have to rely on the JofA’s summary.  It lists five issues that Mr. Golden states “will be studied and debated by FASB in the coming years under active projects.”

For each of these issues, I’ll begin with a brief snippet from  JofA, and follow that with my reactions, which unfortunately, are largely negative.  I’m going to try my best to offset my negativity with constructive comments.


“FASB will debate an overarching measurement philosophy as part of its conceptual framework project because, Golden said, a conceptual philosophy of measurement does not exist in current standards.”

“Overarching measurement philosophy”?  “Conceptual philosophy”?  I don’t know what these terms mean.

Sadly, the burst of attention from Enron and Sarbanes-Oxley on the role of principles in accounting standards has faded to a distant memory. If the FASB has succeeded completely at anything over the past 12 years, it has been to banish the utterance of “principles” in its public communications; i.e., to avoid making any sort of commitment to do what is generally accepted as the right thing.  In the place of accounting principles, the Board is promoting the development of “accounting concepts” in as many flavors as possible; for solemn invocation when it suits some political purpose.

There is no better example of this than the Board’s last stab at measurement “concepts” prior to Mr. Golden’s recent speech:

The measurement chapter [of the conceptual framework] should list and describe possible measurements … without prescribing specific measurements for particular assets and liabilities …”

“…[T]he best way to satisfy the objective of financial reporting through measurement is to consider the effect of a particular measurement selection on all of the financial statements, instead of emphasizing the statement of financial position over the statement of comprehensive income or vice versa.”

To be fair, Mr. Golden may now have something very different in mind than the above, which was posted in July 2010.  Yet, I can’t see how he will be able to deviate to any significant extent without offending one “constituency” or another.   If it’s history is any guide, the Board will want to retain the flexibility to specify  any form of so-called “measurement” it wants, any time it wants.

But, as significant as that problem is, other problems run deeper.  The reason I put “measurement” in quotes in the previous paragraph is because when Mr. Golden uses that word, he surely cannot mean real measurement.

Real measurement is the act of quantifying an attribute of something.  In the physical world, it’s an elementary concept.  In accounting, we could, for example, measure the historic cost of acquiring an asset, or the current cost of replacing it, or its sales value, or its value in use.  The lease accounting project, is most current of many many examples I can provide where what is touted as “measurement” is not real measurement.  The boards have correctly, in my view,  concluded that lease contracts convey a right of use (ROU) to the lessee that it should recognize as an asset; but what the board proposes as “measurement” of that ROU is a contrived number that is not even distantly related to real measurement. Nowhere does the Board provide a clue about the attribute of the ROU the Board believes is being measured — because they can’t.

How the Board will be able to discuss their “measurement philosophy” without invoking actual principles of measurement or without even a concept of measurement that can cover leases, loans, foreign currency translation, etc. is beyond me.  Yet, there is an even more fundamental problem: the eerie silence the Board has maintained regarding the intended use of the conceptual framework — of which those forthcoming ruminants on measurement must surely form one of the most critical parts.  Let’s consider two possibilities for a new conceptual framework’s status: (1) the status quo; and (2) elevating the conceptual framework above the other myriad sources of “nonauthoritative GAAP” that issuers may “consider.”

If the Board has only the status quo in mind, then who really cares about this project at all?  Whatever the Board comes up with will, as I have stated, not constrain the Board’s flexibility to make any rule it wants any time it wants. And, issuers can choose to ignore it with impunity by relying on the tried and true safety-in-numbers gambit of “industry practice.”

But, what if the Board wants to elevate the conceptual framework above all other nonauthoritative sources?  Now, that would really be something special, and it would be the absolute right thing to do.  But, it ain’t gonna happen.  To paraphrase U.S. Senator Elizabeth Warren, the system is rigged by the plutocrats, and I don’t hear them chafing at the status quo.

If there is a third possibility that is reasonably distinct from these two, then I don’t know what it could be.  Hence, I really don’t know why Mr. Golden is so jazzed up to revive the conceptual framework project.  Cynical me thinks that it makes for high-sounding speechification, and that little else of significance can come from it.

* * * * * *

Now for the constructive part.

The FASB should stop beating around the bush and plainly acknowledge that investors want financial statements that measure wealth; and that reported net income derives from reporting changes in wealth.    We could argue ’til the cows come home about how “wealth” should be measured, and I am not suggesting (although I would prefer it) that the Board must pick one basis of measurement for all assets.

However, my most fervent wish is for the Board to abandon historic cost, and the excess baggage of “impairment testing” that comes with it.

If they would only do that, I promise to shut up.

* * * * * *

Whoops!  At the top of this post I stated that I would be covering five issues raised by Mr. Golden, and I’ve only covered one so far.  I’ll get to the other four in my next post.

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