Organizations and Markets

New Accounting Rules?

17 May 2007 at 10:23 am Peter G. Klein 2 comments

| Peter Klein |

Conventional accounting practices have their critics and problems, but reports of their death have been greatly exaggerated. Perhaps you caught the front-page item in last Saturday’s WSJ, “Profit as We Know It Could Be Lost With New Accouting Standards.” The lead-in features this remarkable statement:

In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid. . . .

Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.

This revision “could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century.”

At first I thought this was a conspiracy by accounting professors to sell a new generation of textbooks. But I asked around and discovered, to my relief, that it is much ado about nothing. Financial professionals have long been aware that net income isn’t the only, or even the best, measure of overall corporate performance; they have offered a host of alternatives (even before Stern-Stewart began pushing EVA). My University of Georgia colleague Denny Beresford, a former Chairman of FASB, tells me that FASB has been working on this project for over a decade and that we should not expect major changes any time soon. “It must have been a very slow news day at the Journal.”

Entry filed under: - Klein -, Institutions.