According to an article in the July 2014 edition of Accounting Today: “POOP: It’s time to bring GAAP into the 21st Century”, by Paul B.W. Miller and Paul Bahnson, GAAP, or Generally Accepted Accounting Principles, are the only exception to the fact that “progress, even disruptive progress, is the only constant, and woe to those who deny it”. In the opinion of Miller and Bahnson (M&B), GAAP is a sad example of something unable to grow and improve with the forces of change. M&B put forth some pertinent examples where GAAP, or the powers that create GAAP, appear unable to embrace change. For example:
- Depreciation, which has been Cost Based Depreciation “going back to the 1830’s … how come we’re still using it as “cost based depreciation” 180 years later”? The APB (Accounting Principles Board) and the FASB (Financial Accounting Standards Board) have considered changes to Depreciation; however, have been reluctant to change.
First, let’s go through some alphabet soup. The APB, the successor of the Committee on Accounting Procedure (CAP) was established by the AICPA (American Institute of Certified Public Accountants) in 1959 to issue pronouncements on accounting principles, known as ARB’s or Accounting Research Bulletins. The SEC (Securities Exchange Committee) has relied heavily on the APB and its ARB’s for guidance in member firms issuing financial data, “to the extent that the private sector demonstrates the ability to fulfill the ability in the public interest”. (Wikipedia) Over time, it became apparent that the APB could possibly use some streamlining and a little more varied input, with the SEC feeling that a “smaller full-time body, directly in control of its research, holds more promise of success”. (Wikipedia) This process brought about the APB’s morphing into the FASB in 1973. The FASB is overseen by the Financial Accounting Foundation (FAF), the Board of Trustees of which is selected by a myraid of groups, including the AICPA, the American Acocunting Association, the Institute of Management Accountants, etc. The Board of Trustees of the FAF select the seven members of the FASB, each appointed to a five year term, with a possible additional five year term. All pronouncements of the CAP and the APB remain in place (as you will see later), unless superseded by those from the FASB. Now back to Depreciation:
- M&B stated in their Accounting Today article that Cost Based Depreciation was “reconsidered in 1965 in Opinion 6”, but the Board “ended up only endorsing it as it was practiced”, with one board member, Dr. Sidney Davidson’s dissent being exemplary of the dilemma: “property, plant and equipment should not be written up to reflect current costs, but only because current measurement techniques are inadequate for such restatement. When adequate measurement methods are developed, both the reporting of operations in the Income Statement and the valuation of plant in the Balance Sheet would be improved through the use of current rather than acquisition costs. In the meantime, strong efforts should be made to develop the techniques for the measurement of current costs”. Made sense, but that was 50 years ago! Why hasn’t the industry worked and settled on an appropriate method of measuring current costs? In this regard, M&B feel, and I completely concur, that “GAAP Depreciation is pure POOP”, destroying “financial statements usefulness for supporting decisions”.
Another example M&B used to express GAAP as POOP:
- Business Combinations: “Until a few years ago when the FASB disallowed what we used to call “pfooling (M&B’s term) of interests”, combination accounting has been virtually unchanged for more than six decades, dating back to 1959 when ARB 51 was issued. When the FASB finally acted on ARB 51 (over huge protests), all it did was to cast in concrete the purchase method, another Pitifully Old and Obsolete Practice”. The obvious route to improved usefulness would be to combine market value measures of both parties Assets and Liabilities”. The argument, as with Depreciation, is finding adequate techniques for measuring costs; however, reliable and appropriate methods must have been arrived at for the acquirer to gauge the acquired’s values to make the decision to acquire, so “if reliable market values can be produced for the acquired company’s assets and liabilities, they can also be found for the acquirer’s assets and liabilities”. In my opinion, this is simply a case of “what’s good for the goose is good for the gander”, but it appears the gander doesn’t want to put forth the time and effort to reevaluate itself, as it did to evaluate the company it acquired.
A third example M&B put forth of GAAP as POOP was:
- Quarterly Reporting: “The habit of providing statements once every three months has been in place since the early 1930’s, when the New York Stock Exchange compelled its member firms to do so”, which was made “a required practice 30 years later when the SEC required registrants to file unaudited 10-Q Reports”. Flash forward 50 years, where investment trades are placed and executed in milliseconds, M&B proclaims that “…managers and accountants claims that they can’t provide information more frequently as BULL, or Bold and Unbelievably Lame Lies”! As a result, according to M&B, “we have the bizarre situation where the securities market most sought-after information consists of analysts best guesses of what companies will report. When earnings releases occur, the markets react to them according to their relationship to the predictions, not their actual information content”, which of course is preposterous.
According to M&B, other examples of GAAP which remain in accounting as POOP today would be:
- “Treasury Stock: ARB 1, 1939, actually dating back to 1933 (81 years);
- Stock Dividends and Splits: ARB 11, 1941 (73 years);
- Inventory and Cost of Goods Sold: ARB 29, 1947 (67 years);
- Current and Non-Current classification of Assets & Liabilities: ARB 30, 1947 (67 years);
- Equity Method: ARB 18, 1971 (43 years);
- Receivables and Payables: ARB 21, 1971 (43 years);
- Income Statement Structure: ARB 9, 1966 (48 years) and ARB 30, 1974 (41 years, slightly modified by SFAS (Statement of Financial Accounting Standards) 154, which took accounting changes off Income Statements); also ASU (Accounting Standard Update) 2011-05, which put Comprehensive Income on the Income Statement, but we note that not reporting unrealized income as income dates back to SFAS 12, issued in 1975 (39 years)”.
Conclusion: In an age of “phenominal progress in all kinds of information systems”, where is the truth in accountants and financial managers inability to generate more current and appropriate methods of evaluating and producing more timely valuation procedures? Frankly, that’s a question that I and Miller and Bahnson do not have an answer to.