Accounting & Tax

Unfair Value

Former FASB chairman Dennis Beresford says new accounting rules could distort, rather than clarify.
CFO.com StaffMay 21, 2001

In the current issue of Barron’s, former Financial Accounting Standards Board chief Dennis Beresford weighs in on the effects of new accounting policies on earnings.

Beresford, now an accounting professor at the University of Georgia’s Terry College of Business, believes the new rules will do the opposite of what FASB and the Securities and Exchange Commission are setting out to achieve.

“[S]ome recent FASB actions seem to force companies to do exactly what the board and the commission have been working so hard to eliminate,” he writes. “In some cases, companies would have to record excessive expenses for accounting purposes that in a future fiscal reporting period would be reversed to produce instant earnings.”

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He points to “little-noticed” FASB Concepts Statement No. 7, issued in February 2000. Concepts Statements, as the name suggests, express FASB’s stand on broad topics. The provide the basis of FASB reasoning in deliberations of specific topics later.

Concepts Statement 7 says that the time value of money is an important economic fact and accounting should consider it. Some of today’s Generally Accepted Accounting Principles acknowledge the time value of money, but others do not.

Perhaps because of its apparent simplicity there was little attention paid Concepts Statement 7 when the FASB published it. But, says Beresford, “beyond this economic reality lies an overlooked detail [:] the Board’s decision to require companies to record liabilities at “fair value.”

The fair-value clause could require companies to record earnings in ways that are just as misleading as the practices FASB and the SEC are trying to eliminate. For example, writes Beresford, “if the FASB should take on a project to clarify the accounting for warranty costs, its policy in Concepts Statement 7 presumably would cause it to specify that the timing of expenditures should be considered and a lower, time- value adjusted amount recorded at the date of sale. Then, an expense would be recorded in subsequent periods to increase the warranty liability to the amount expected to be paid. Recording some of the cost of the warranty in a later year does recognize the time value of money, but it might confuse corporate executives and investors.

“In Concepts Statement 7, the FASB has laid out a plan to revolutionize the reporting of many liabilities on corporate balance sheets,” writes Beresford. But “the result would be that income statements would be quite different than corporations and investors have been used to, and the new net income amounts reported wouldn’t represent better information for investors.”