Put That Accounting Class on Hold

As someone who’s never taken an accounting course in my life, I have often thought about doing so. But I’ve always managed to find a way to put it off. There are probably a lot of people out there like me — people who never had a burning desire to learn accounting but who, given the increasing complexity of personal finances, taxes, investing, etc., feel like they could use some guidance.

Well, it looks as if I should probably procrastinate a bit longer. According to this Wall Street Journal article by David Reilly, a lot of the rules of accounting are about to change. This would obviously affect corporate accountants much more than average Steves, but I think I’ll let the dust settle anyway.

I have to admit that, as an author, my first reaction to seeing this article was a primal one: a new set of rules will be great news for the people hired to write the new accountings texts, and sad news for the authors of the outgoing texts.

Here, from Reilly’s article, is the gist:

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. …

The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting — from clerks to chief executives — to relearn how to compile and analyze information that shows what is happening in a business.


Ken Dyck

Forget about text books. Think of all the software systems that would need to be updated or rewritten. The kinds of radical changes that Reilly writes about are likely to be very expensive to implement. I'd be surprised if they went through without some serious opposition from the companies who would have to pay the bill.

pkimelma

The betting should start on how quickly unscrupulous companies learn how to game this new system of rules to mislead in their filings. I say one quarter is all it will take. Since they will be putting top notch accountants on it, the analysts and us normal investors will be even worse off.

jwinter74

No need to procrastinate on your accounting education. The proposed changes to financial statements appear to be largely confined to their presentation and not to the conceptual framework (FASB Concept Statements)on which they are based. Seperating the income statement into the same categories as a statement of cash flows (i.e. operating, financing & investing) brings the sources of revenue/gains & expenses/losses into sharper relief for banks, investors, etc. To group assets & liabilities in a similar manner should give us a clearer picture of how companies raise & utilize their capital. All of the standard balance sheet accounts appear to be intact so ratio & trend analysis will likely remain unchanged. Financial reporting knowledge gained today which is appropriately rooted in the Concept Statements will properly prepare the user/preparer/analyst of financial statements for any changes to come. It has been said that accounting is the language of business. You wouldn't have your child put off learning english because you heard a new edition of the MLA handbook was on its way, would you?

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egretman

One possible result: the elimination of what today is known as net income or net profit

Yes, I always thought that knowing how much a company actually makes is probably the most useless thing in life. I tried to tell that to my wife and I never understand why my banker wants to know if my company is making money.

Such petty concerns really.

....sniff......

dngshouse

jwinters comments are sort of relief. I am starting an accounting program in the coming weeks and was made aware of the article when it came out a couple weeks ago. At first i thought i would be screwed and would be learning a dead language. But if it is mostly due to presentation of numbers and not the inner workings and concepts, then i wont be completely wasting my time.

pkimelma

With regard to jwinter74's comments, accounting at its core has not changed in a long long time (how the company tracks its own books). The GAAP rules and reporting rules are supposed to help people outside the companies get an apples-to-apples comparison of how each is doing. The problem is that net revenue is easily manipulated quarter by quarter (playing with operating expenses, bad debt write-offs, and inter-country cash flows being the obvious ones). Everyone knows that if you have bad news, bury it for a while so you can (a) dump it all in one quarter, and (b) release it when less investors are paying any attention. The "dump it all at once" approach is of course because you will be punished for a big loss as well as a small one, so may as well have one big bad one vs. a set of small ones (you are punished worse for a set of losses).

pinus

If this attempt is meant to be serious (well, we read about proposed changes too much too often that actually never make it to be implemented), then economists might want to get involved as well - it is often not clear from financial statements what the numbers correspond to. Investment information, for instance.

kley678

What are some popular and technical books and articles on accounting?

jeffthecheff

Screw accounting!

Kent

How are accountants like the Ku Klux Klan and real agents?

Informational asymmetries.

jw

Find a community college and take accounting, SD. Financial first, then managerial. Then take a basic finance course. And a tax course.

Accounting is the end result put on paper of all the topics you and Levitt bring up.

Assets, liabilities, revenues, expenses, accruals, depreciation. Fun stuff! (sarcasm)

Curt Sampson

egretman, I assume you're being sarcastic. Of course everybody wants to "[know] how much a company actually makes." That's the whole point of changing the standard presentations to be a bit more sophisticated: this a) makes it harder to manipulate the number, and b) forces those reading the data to learn a bit more about what they're looking it.

That you appear to think that the net profit line really is "how much a company actually made" is exactly why we need these sorts of changes.

And my first thought as well, after reading the WSJ article, was that it would be silly to delay studying accounting, since the general principles (and, it appears to me, the contents of annual and quarterly reports--outside of dropping an often-misleading figure or two) will change not at all.

watchingmachines

Despite the fact that it is boring, accounting is also very illuminating regarding the financial life of companies.

pvanderwaart

From a Freakonomics point of view, the accounting rules comprise a math model of the business. Of all the possible math models, it is the one that is blessed by the government for the calculation of taxes. That makes it important, but it doesn't make it correct.

The question of "how much money a company actually made" is one that has more than one answer. To assume that the number reported to the government is uniquely correct is to assume a multitude of accounting decisions (e.g. depreciation schedules) are uniquely correct.

liberalarts

Taking accounting is very useful for non economists. I am an econ Ph.D. and I learned a lot about how to categorize different types of financial information in my college accounting courses. I almost immediately forgot the exact FASB rules, but there is an underlying logic that doesn't change. By the way, posts 14. and 15. are right in that computing income is tricky and involves complicated judgements that accounting rules and tax rule regularize. This is why so called "flat taxes" are not as simple as their cheer leaders suggest. Before computing a flat tax on income, you have to compute your income, and that is where much of the complexity occurs.

klish

"From a Freakonomics point of view, the accounting rules comprise a math model of the business. Of all the possible math models, it is the one that is blessed by the government for the calculation of taxes."

Actually, the accounting rules differ greatly from the rules "blessed by the government for the calculation of taxes". Tax law is codified and is completely different from FASB or GAAP rules of accounting. A change in accounting standards for financial statement presentations would not result in a change in the way income must be reported for tax purposes unless bills were passed by treasury to change the tax code and regulations.

Currently, financial accounting standards try to dictate a more conservative picture of income while tax law (where the goal is revenue generation) attempts to require businesses to show higher, more agressive income numbers by accelerating income recognition and defering expense recognition. Both are useful computations but they can differ greatly.

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skip742

Hmmm...of course this would be a seachange, but following in the footsteps of Sarbanes-Oxley, I can't see how those who use these statements would stand for another major employment surge for the accounting profession. There's already a massive shortage. New accounting grads will be earning $200,000 per year if this goes thru.

But it won't. It smacks of the metric system. You cannot externally impose a brand new set of standards without an understanding of what is already in use. "Doing away with" income statements will not pass. In the end, they will compromise by putting more emphasis on the Statement of Cash Flows, which essentially means that nothing will change.

Trust me, the hundreds of thousands of executives who currently understand what their accountants are doing, and suddenly would have no clue...these people would NOT tolerate such drastic change, if for no other reason than that they don't want to be utterly dependent on the accountants to run the business.

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chancey

has anyone looked the "new financial statements" link on the wall street article link? (the little framed text in the middle.) i'm a bit puzzled: the new comprehensive income increased by $160,000 from revaluation of buildings, but the net equity is the same ($8,038,119) between the new and current balance sheet. where did this $160,000 go?

there are a lot more items presented on the new statements, but the current financial statements always have a long list of important disclosures or footnotes to explain those few items. perhaps investors don't pay much attention on disclosures? anyway, by putting on the face of the statements and compared with prior periods, there're less chance for manipulations.

money

Anyone know a good loan shark?

Ken Dyck

Forget about text books. Think of all the software systems that would need to be updated or rewritten. The kinds of radical changes that Reilly writes about are likely to be very expensive to implement. I'd be surprised if they went through without some serious opposition from the companies who would have to pay the bill.