Thursday, June 21, 2007

Possible FASB Changes Upcoming for Net Income

From an article in the Wall Street Journal on-line...

Profit as We Know It Could Be Lost With New Accounting Statements -

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.

It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.

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.

What's this mean for accountants...

Well that falls in the wait and see category. What they are talking about could mean substantial changes in the way financial statements are presented. If the expected changes do go through, there is going to have to be a lot of re-education needed...

  • textbooks re-written
  • accounting systems modified
  • bookkeepers and accountants re-trained to compile data needed
  • executives and investors will need to learn to use the new data
The article states that this move is in part due to a change in who uses financial statements...originally created for bankers and lenders but now looking for better measures for investors. Will replacing net income with several different numbers reflecting profit from various activities be helpful or will this just create more confusion? I don't think we'll see quite the widespread changes noted in this article, but we will probably see additional financial indicators on the face of the financial statements sometime soon.

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