A New Vision for Accounting

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."

While the threat of net income disappearing permanently is "a real one," according to Kelly, there are several mitigating factors. Young, who is one of the stronger proponents of the move, finishes his term this year, and other board members seem considerably more sympathetic to keeping the status quo. "If people continue to demand a net income metric, we'll provide information to calculate it," says Herz. The head of the IASB, David Tweedie, has also gone on record as saying he thinks net income should stay.

The official board pronouncement is that companies would still be allowed to segregate OCI items in the short term, but that they must appear on the main income statement. Over the long term, the board plans a separate project to evaluate each OCI item and reconsider its placement.

Going Direct
Another major shift in the new model would be to require companies to use the direct method for the cash-flow statement, explaining cash changes from the bottom up to arrive at net income, rather than starting with net income and making adjustments. (Currently, most companies use the latter, indirect method.) That statement would be linked with a new form, the so-called reconciliation schedule, that would track changes in income to cash flows or fair-value changes.

The difficulty in constructing a direct cash-flow statement largely depends on the company. As controller for multinational McCormick, Kelly says he found the exercise "virtually impossible," with thousands of transactions involving currency translations and so-called intercompany eliminations (what one division charges another for a product) gumming up the works. "If I were to get a cash-flow statement from each of my divisions around the world and try to add it up, it would never add up to my general cash-flow number," he says.

Rickard, on the other hand, switched CVS/Caremark to the direct cash-flow method three years ago as part of an experiment, and found it so easy he never bothered to switch back. That's in part because all of the company's operations are stateside, and because Rickard had no intercompany eliminations.

Survey respondents were similarly split. About 40 percent said constructing a direct cash-flow statement would require major adjustments, while it would take minor adjustments for nearly 30 percent. Given such disparity, finance executives can expect something of a reprieve. The IASB, for one, doesn't think the direct method should be required, and FASB members say they are looking closely at a hybrid direct/indirect method now used in Australia and New Zealand as a compromise.

"Radical Yet Insightful"
The concept of the reconciliation schedule, on the other hand, is gaining much wider support. Young thinks it is one of the most critical components of the new format, and more important than mandating the direct cash-flow statement. Wall Street is pushing for it as well.

"As we see more fair value coming through the financial statements, those statements need to do a better job of showing where the changes are coming from; this would help a lot," says Pegg of Bear Stearns. Jonas of Moody's considers the reconciliation schedule "the most radical yet most insightful" part of the project so far. "Many fundamental analysts are trying to understand the business's ability to generate recurring, persistent cash flows," he says, and the schedule helps them do that.

Surprisingly, some finance executives endorse it, too. "It's the kind of schedule you do to make sure you haven't made a mistake anyway, and to me, there's no difference if we publish it," says Rickard. More than 50 percent of survey respondents said they thought the reconciliation schedule would help explain revenue changes to investors; only 28 percent said it would not.

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