Peeling away financial reporting issues one layer at a time

Introducing ‘Shareholder-Oriented Financial Accounting’

Last December, I announced that I have started to write a book that would propose a very different basis for financial accounting by public companies.  I’m calling it ‘Shareholder-Oriented Financial Accounting’ (S-OFA), and this is the opening paragraph I have in mind:

Public company financial statements are sacks of mush. U.S. GAAP and IFRS are based on a common and logically-flawed conceptual framework.   Their rules are different in some respects, but they share the characteristics of being arbitrary, internally inconsistent and needlessly complex. They are also rife with ostentatious terminology and labelling that misrepresents their relevance to investors and economic policy makers.    

The purpose of this book is twofold: (1) to support the above condemnation with detailed analyses; (2) and more important, to specify a detailed foundation for producing financial statements that is much less costly, much less complicated, more relevant, more understandable and more reliable.

With respect to the first of those purposes, the methods of analysis I will employ are predominantly “normative,” as opposed to “empirical.” The advent of computing power and large databases have made possible many empirical investigations of accounting numbers over the last 40 years.  Thousands of empirical studies on the relationship between reported earnings (or components of reported earnings) and share prices have been published, and often aggregated.  Taken together, they broadly indicate some degree of relevance of U.S. GAAP and IFRS to investors, generally by reporting various “statistically significant” relationships.  Notwithstanding, some would discount much of this evidence, either due to questionable assumptions on the part of the researchers, inherent limitations of the statistical methods, or that the levels of the statistics reported are themselves underwhelming.  Some would also say, that the statistical relationships have been weakening over time – in spite of (or perhaps due to) the “improvements” to U.S. GAAP that the FASB has made over the years.

I have already written hundreds of thousands of words in blog posts challenging U.S. GAAP on normative grounds, and have suggested in various degrees of specificity solutions to each of the problematic areas I have identified.    The book will be an extension of my blog in that I will be refining my analyses and adding organization, detail and examples.

The organization of the book will reflect its twofold purpose.  Each chapter will begin with a critique of extant financial accounting concepts or standards as promulgated by the FASB or IASB.  In the first section, this will be followed by Statements of Guiding Principles.  The ensuing sections will provide Statements of Application (of the guiding principles) for specific topics. Examples will be provided throughout to explain by illustration the Statements of Application.  Below is my draft table of contents:

Introduction and Guiding Principles

  • Where financial accounting currently is, and where it needs to go
  • Envisioning a future role for auditors and the SEC

Recognition and Measurement of Assets and Liabilities

  • Non-financial assets
  • Financial assets and liabilities
  • Executory contracts


  • Offsetting asset and liabilities
  • Reporting changes in shareholders’ equity
  • Reporting changes in cash
  • Intercorporate investments
  • Disclosures
  • Comparative financial statements and maintaining a constant unit of measure

To give you a flavor of the Statements of Application, this is a list of items that you won’t see in S-OFA — because they won’t be needed:

  • Asset impairment or inventory cost flow assumptions
  • Allowances for losses on loans and receivables
  • Other comprehensive income
  • Deferred taxes
  • Goodwill and non-controlling interest
  • Special foreign currency translation or hedge accounting rules
  • Multiple measurement objectives for assets and liabilities
  • The equity method of accounting for investments
  • Revenue recognition
  • Complex rules for distinguishing between liabilities and equities
  • Contingent gains/losses
  • Indirect method of the statement of cash flows
  • Industry-specific standards

That ought to reduce my job by a few thousand pages, at least.  But, I will also offer some significant additions that are consistent with the idea of shareholder-oriented financial reporting:

  • A single measurement objective for assets and liabilities, and a single unit of measure
  • Note disclosures consisting of detailed reconciliations of beginning and ending balance sheet amounts, and other tabular information.  Except for a required MD&A, narratives will be kept to a minimum.
  • Expenses will be presented by source and by function.
  • Proportionate consolidation will be the predominant form of accounting for significant intercorporate equity investments.
  • Comparative information and flows of assets/liabilities will be adjusted for changes in general price levels through the most recent balance sheet date.

I hope that investors will come to recognize that the financial statements produced in accordance with S-OFA will provide them with better information than U.S. GAAP or IFRS, without noise from items reported as “assets” or “liabilities” that are not, by any reasonable economic view, actually assets or liabilities.

I also hope that capital markets regulators will recognize that S-OFA’s guiding principles do a better job of providing the direction that financial accounting must take if it is to serve the public interest — instead of the interests of issuers manipulating reported earnings and obfuscating financial health.


  1. Reply Jan Svenda February 8, 2017

    Hey Tom,

    I am a long-time follower of Accounting Onion and enjoy your writing and agree that GAAP is just a mess. My ‘favourite’ standard is probably FAS ASC 310-30 – accretable yield – which is as convoluted as a standard can get I believe.

    If you ever need an extra pair of eyes for any of your chapters, I would be more than happy to help out (even if it is just the simplest proofreading).


    Jan Svenda

    Disclosure: I do not have a CPA, but I work as an independent analyst (mainly publishing on Seeking Alpha) and love accounting.

    • Reply Tom Selling February 8, 2017

      Hi, Jan:
      Thanks for reading over the years, and for the offer of help. Looking forward to staying in touch.

  2. Reply Sergey Kvasnyuk February 9, 2017

    Hello Tom,

    I am a CPA, formerly an auditor and currently helping smaller public issuers adopt the new revenue recognition standard. Your criticisms of it have been on point; it is contorted and very costly to adopt.

    I agree that GAAP is due for a rethink far more major than what FASB envisions for the simplification initiative. I would love to help on your project in some way.

    Best of luck!
    – Sergey

    • Reply Tom Selling February 9, 2017

      Hi, Sergey:

      Thanks for the encouragement. I am sure that we will be in future contact about this, one way or another.


  3. Reply Jathin February 10, 2017

    Hi Tom,

    I’m a follower of your blog as well, and a huge fan. If you need anyone to review your book I’d be happy to help.



  4. Reply Zac February 11, 2017

    In the Big 4 for 30 years, would love to help on this with time and contributions.

  5. Reply Tom Selling February 11, 2017

    I have received many messages online and offline from volunteers to help with S-OFA. Thanks very much to all, and be assured that I plan to take you all up on your offer in one way or another.

    Does anyone live in Phoenix (or perhaps Dallas)? If so, then meeting in person could really help to move things forward.


  6. Reply WH February 24, 2017


    Another fan of your work here, who’s very interested to contribute in this. Happy to help in any way I can!


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