Major Accounting Overhaul: Explained

[SuperFly03]

The first thing that must be dealt with is background information.

Financial Accounting Standards Board [FASB]

This body is considered an a-political body that sets the US accounting standards but in reality they report to the SEC which adds a political streak to it. The SEC generally lets them do what they want as the rules are set with the intent of protecting investors through transparent financial reporting. So, for all intents and purposes, the SEC just approves whatever the FASB puts out. It consists of full time board members representing a cross section of American business, not just accountants. The FASB goes through a rather thorough process when creating accounting standards. Issues are put on their agenda either because old standards are outdated, new business transactions have been created but aren’t addressed in the rules (think Enron type transactions and derivatives), or there is some political pressure from the SEC. The board members put on their thinking caps and draft a preliminary view document and publish it for public comment. Investors, CFO’s, Company Directors, Academics, Politicians, etc. comment on the document and the FASB goes through and considers all the comments as they proceed. The FASB then proceeds through a few intermediate stages before issuing an exposure draft which is basically “this is what we want the standard to be, now how does it affect you?” The FASB again elicits comments before creating the final standard. Once the final standard is issued is goes to the SEC which rubber stamps it (as explained before) and it becomes law. The statements are called Financial Accounting Standards (FAS).

International Accounting Standards Board [IASB]

In 1973 (the same year the FASB was created) the International Accounting Committee was formed (IAC) with the same general purpose as the FASB. However, they honestly didn’t do much until 2001 when the IASB was formed out of the IAC (akin to a subsidiary of a parent corp.). The IASB is composed like the FASB (cross section of board members). In 2002 the FASB and IASB kind of became butt buddies. They issued a document called the Norwalk Agreement on October 29, 2002 which set the ground rules for convergence. The two boards made a public declaration to work together on several joint projects (accounting rule areas like leases, derivatives, financial statements, etc) and develop the standards together so that reporting is consistent across US companies and non-US companies. The statements are called International Financial Reporting Standards (IFRS).

Originally Posted by ”FASB: Norwalk Agreement”

The FASB has undertaken the following six key initiatives to further the goal of convergence of U.S. GAAP with International Financial Reporting Standards (IFRS):

1. Joint projects being conducted with the IASB. Joint projects are those that standard setters have agreed to conduct simultaneously in a coordinated manner. Joint projects involve the sharing of staff resources, and every effort is made to keep joint projects on a similar time schedule at each Board. Currently, the FASB and IASB are conducting joint projects to address Revenue Recognition and Business Combinations.

Conceptual Framework Project Update
Business Combinations Project Update
Financial Statement Presentation
Revenue Recognition Project Update

2. The short-term convergence project. The short-term convergence project is an active agenda project that is being conducted jointly with the IASB, and it is expected to result in one or more standards that will achieve convergence in certain areas. The scope of the short-term convergence project is limited to those differences between U.S. GAAP and IFRS in which convergence around a high-quality solution appears achievable in the short-term.

Short-Term Convergence Project Update

3. Liaison IASB member on site at the FASB offices. One of the most visible features of the FASB’s daily operations that promotes convergence is the presence of a full time IASB member in residence at the FASB offices

4. FASB monitoring of IASB projects. IASB projects are monitored by the FASB based upon the FASB’s level of interest in the topic being addressed.
FASB Activities Related to IASB Projects

5. The convergence research project. The project seeks to identify all of the substantive differences between U.S. GAAP and IFRS and to catalog those differences according to the Board’s strategy for resolving them. Any topic in which a specific accounting treatment would be permissible under one basis of accounting but would not be permissible under the other basis of accounting is included in the project scope.

Convergence Research Project Update

6. Explicit consideration of convergence potential in all Board agenda decisions.
As a result of these and other initiatives, the FASB expects to make significant progress toward international convergence in the next few years. However, because of the volume of differences and the complex nature of some issues, the FASB anticipates that many differences between U.S. and international standards will persist well beyond 2005. (By 2005, all EU-listed public companies are being required by the European Union to prepare their consolidated financial statements using IASB Standards.)

What does this mean?

The IASB is generally more principlely rules based and the FASB is more bright lined rules based. Principle rules lean towards conceptual rules favoring economic substance over the form of the transaction while bright lines rules are extremely explicit in their application. The poster child of bright lined accounting rules is lease accounting, bear with me. According to the FASB leases are to be tested for capitalization. If they meet any 1 of the 4 tests then the lease must be capitalized otherwise it is classified as an operating lease. Capital leases are booked as an asset and the corresponding liability is booked as well (the present value of the lease payments) whereas an operating lease is run through as only an expense each period and no asset or liability is recorded. Structuring leases to fail all 4 tests is called off-balance sheet financing since the liability is removed from a company’s books causing their debt ratio to go down and their current ratio to go up which presents a healthier looking company to investors/banks.

The four tests are:

I. The lease transfers ownership of the property to the lessee by the end of the lease term
II. The lease contains a bargain purchase option
III. The lease term is equal to 75 percent or more of the estimated economic life of the leased property
IV. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property

As you can see the rules are extremely specific. The FASB gives exact percentages, while there is some judgment in the economic life of an asset and its fair value overall it is a bright rule. The fair value and economic life are much easier to determine than you think if you look at like class assets and discounted cash flows. Back to my point, companies routinely structure leases on equipment of all types to miss these rules since they are so explicit. Companies will pay 89.9% of the fair value which causes them to fail the 4th requirement and they will have a lease term about 70% of the life of an asset in order to fail the 3rd requirement. Such bright lines allows companies to get around the rules when they want to however principle based rules attempt to address that. Principle based rules address substance over form so in the case of a lease if it is structured to cost 89% of the value of an asset in principle you are buying the asset so you must capitalize it but under bright lines you would classify it as an operating lease. It can get very hairy but that is the underlying theory behind principle based rules.

Why do I mention this?

Simple, all accounting rules are headed towards principlely based. This will cause more judgment by auditors and more inconsistencies in reporting. Don’t throw your hands up and quit just yet. I explained the idea is to report the economic substance of transactions so while more judgment will be required you should also get a better picture of how a company is actually doing if the auditor does their job well. It will give the auditors more power to push back at companies as well.

Originally Posted by ”Securities and Exchange Commission: Proposed Rule: 33-8818”

Foreign private issuers that register securities with the SEC, and that report on a periodic basis thereafter under Section 13(a) or 15(d) of the Exchange Act, are currently required to present audited statements of income, financial position, changes in shareholders’ equity and cash flows for each of the past three financial years, prepared on a consistent basis of accounting. All foreign private issuers are currently required to reconcile to U.S. GAAP the financial statements that they file with the Commission if the financial statements are prepared using any basis of accounting other than U.S. GAAP. The Commission is proposing for comment revisions to Form 20–F and Regulation S–X under which it would accept financial statements of foreign private issuers that are prepared on the basis of the English language version of IFRS as published by the IASB without a reconciliation to U.S. GAAP. The revisions would allow a foreign private issuer to file financial statements prepared in accordance with IFRS as published by the IASB without reconciliation to U.S. GAAP. We are not proposing to change existing reconciliation requirements for foreign private issuers that file their financial statements under other sets of accounting standards, or that are not in full compliance with IFRS as published by the IASB.

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Currently every company that sells their securities on the public markets in the US must reconcile to US Generally Accepted Accounting Principles (GAAP). GAAP is what governs how people account for transactions and economic events in business. GAAP is set by the Financial Accounting Standards Board (the details about the board aren’t entirely relevant). The board members represent a cross section of business not just accountants. Foreign Private Issuers (FPI) are companies that are based outside the US but publicly list their stock, debt, etc. on the US capital market in some way (think Sony, Nintendo, Creative). As it stands now they file their financial statements (FS) in their home country using International Financial Reporting Standards (IFRS) and then must report their FS with a reconciliation to US GAAP. This reconciliation breaks out differences and allows US investors to compare FPIs against domestic companies on similar basises of accounting allowing for comparability.

The proposed SEC rule makes that reconciliation go away. Before you get up in arms, sit breathe and continue to read with an open mind. As it sits now companies must maintain upwards of 4-5 sets of books, yes 5 sets of books, these include: US GAAP (FASB), IFRS (as set by the IASB), IFRS (as modified by their home country potentially), Tax (Home Country), US Tax (which includes 2 basis). It is utterly ridiculous but keeping this many sets of books is necessary to comply with laws across the globe for companies. The aim of this rule is to ease the reporting requirements on FPIs and maintain a competitive US capital market. Over the past two decades the amount of capital as a percentage of the world’s capital has been decreasing (I believe I heard it is down from 40% to 35% but do not quote me on that) and it will continue to decrease relatively but increase in absolute dollar amounts as the economy becomes even more globally oriented.

In an effort to move to a single set of accounting principles (more on this later when I get to accounting standards not reporting standards), allowing FPIs to issue in IFRS as published by the IASB will alleviate some strain on FPIs and allow for capital to flow in and out of the US capital markets easier and with less strain.

The rule is out for comment. This means that the SEC is seriously thinking about making it a standard of reporting but is asking for public comment. Any single person may comment on a rule through the SEC’s website, there are no restrictions. The comment period ends within the next few weeks then the SEC will deliberate before making a final ruling.

There is also a concept release which is the stage before putting a rule out for comment.

Originally Posted by ”Securities and Exchange Commission: Eligibility Requirements”

The proposed amendments to allow a foreign private issuer to file financial statements without reconciliation to U.S. GAAP as currently required under Item 17 or 18 of Form 20–F, as appropriate, would apply only to a foreign private issuer that files its financial statements in full compliance with the English language version of IFRS as published by the IASB.70 The proposed amendments will apply to an eligible issuer regardless of whether it complies with IFRS as published by the IASB voluntarily or in accordance with any requirements of its home country regulator or an exchange on which its securities are listed. Under the proposals, in order to be eligible to omit the reconciliation, an issuer would be required, in a prominent footnote to its financial statements, to state unreservedly and explicitly that its financial statements are in compliance with IFRS as published by the IASB.71 In addition, in its report, the independent auditor must opine similarly on whether those financial statements comply with IFRS as published by the IASB.72

Basically it will apply to companies who comply with IFRS as published by the IASB verbatim and it doesn’t matter whether a company is using IFRS (as issued by the IASB) voluntarily or to comply with local laws. The company must have auditors attest to their compliance with IFRS and the company must blatantly state they are complying with IFRS not US GAAP.

Originally Posted by ”Securities and Exchange Commission: Eligibility Requirements”

The proposed amendments would not be available to an issuer that files financial statements that include deviations from IFRS as published by the IASB. A foreign private issuer that does not state unreservedly and explicitly that its financial statements are in compliance with IFRS as published by the IASB, or for which the auditor’s report contains any qualification relating to the application of IFRS as published by the IASB, would continue to be required to provide the U.S. GAAP reconciliation under current rules. Similarly, an issuer that files its financial statements using a set of generally accepted accounting principles of another jurisdiction also would continue to reconcile to U.S. GAAP as under current rules when preparing its financial statements for inclusion in a registration statement or annual report.73 The proposed amendments will not apply to issuers using a jurisdictional or other variation of IFRS. It would be acceptable for an issuer to state compliance with both IFRS as published by the IASB and a jurisdictional variation of IFRS, and an audit firm to opine that financial statements comply with IFRS as published by the IASB and a jurisdictional variation of IFRS, so long as the statement relating to the former was unreserved and explicit

It will not apply to companies who use a modified basis of IFRS. This is routine in some smaller eastern European countries (as well as some western ones). A country will take basic IFRS and modify them to their liking whether it be small adjustments or large. Any modified basis of IFRS disqualifies a company from omitting a reconciliation to US GAAP. If an auditor has a qualification related to IFRS (meaning the company doesn’t consistently apply IFRS to the letter) or if they don’t state they are complying with IFRS (as published by the IASB) they are disqualified.

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Originally Posted by ”Securities and Exchange Commission”

SEC Concept Release: 33-8831

SUMMARY: The Commission is publishing this Concept Release to obtain information about the extent and nature of the public’s interest in allowing U.S. issuers, including investment companies subject to the Investment Company Act of 1940, to prepare financial statements in accordance with International Financial Reporting Standards as published by the International Accounting Standards Board for purposes of complying with the rules and regulations of the Commission. U.S. issuers presently prepare their financial statements in accordance with generally accepted accounting principles as used in the United States, referred to as U.S. GAAP.

Concept releases are the equivalent of asking “So we thought this up but what do you think? Should we pursue this or is everyone and their mother opposed to it?” This rule is part of the boarder scheme of convergence between the FASB and the IASB in order to form a single set of high-quality accounting standards to present transparent financial statements to investors as discussed earlier. To be frank this idea has a lot of merit. Currently over 100 countries comply with IFRS but the US is the only country that uses US GAAP as written by the FASB. Recently Canada has stated that they will be moving to IFRS also. The brightest accounting minds will probably see this as a good idea (as I do) but I fear a political backlash from American pride and arrogance. When it comes to US policy we, as a country, tend to view our policies as better than everyone else (in general) which will make a move to use only IFRS difficult.

Originally Posted by ”Securities and Exchange Commission: SEC Concept Release: 33-8831”

Further, in 1997, the Commission noted that for issuers wishing to raise capital in more than one country, preparing more than one set of financial statements to comply with differing jurisdictional accounting requirements increased compliance costs and created inefficiencies. In the study prepared pursuant to a mandate from Congress, the Commission encouraged the efforts of the International Accounting Standards Committee (‘‘IASC’’), the international accounting standard setting body at the time, to develop a core set of accounting standards that could serve as a framework for financial reporting in cross-border offerings, and indicated the Commission’s intent to remain active in the development of those standards. These standards are now known as International Financial Reporting Standards (‘‘IFRS’’).

Almost 100 countries now either require or allow the use of IFRS for the preparation of financial statements by listed companies, and other countries are moving to do the same. This recent movement to IFRS outside the United States has resulted in an increase, from a relative few in 2005 to approximately 110 in 2006, of filings with the Commission of foreign private issuers that represent in the footnotes to their financial statements that their financial statements comply with IFRS as published by the IASB.10 The Commission expects to see this number continue to increase in the future, particularly pursuant to Canada’s announced move to IFRS, as there currently are approximately 500 foreign private issuers from Canada.11 This movement to IFRS also has begun to affect U.S. issuers, in particular those with a significant global footprint.12 For instance, certain U.S. issuers may compete for capital globally in industry sectors in which a critical mass of non-U.S. companies report under IFRS. Also, U.S. issuers with subsidiaries located in jurisdictions that have moved to IFRS may prepare those subsidiaries’ financial statements in IFRS for purposes of local regulatory or statutory filings.

Originally Posted by ”Securities and Exchange Commission: SEC Concept Release: 33-8831”

The Possible Use of IFRS by U.S. Issuers

The Commission’s recent proposal to accept from foreign private issuers financial statements prepared in accordance with the English language version of IFRS as published by the IASB without an U.S. GAAP reconciliation raises the question of whether the Commission also should accept financial statements prepared in accordance with IFRS as published by the IASB from U.S. issuers. The Commission has identified at least two market forces that may provide incentives for some market participants to request in the future that the Commission accept financial statements prepared in accordance with IFRS as published by the IASB from U.S. issuers. First, as a growing number of jurisdictions move to IFRS, more non-U.S. companies will report their financial results in accordance with IFRS. If a critical mass of non-U.S. companies in a certain industry sector or market reports in accordance with IFRS, then there may be pressure for U.S. issuers in that industry sector or market to likewise report in accordance with IFRS to enable investors to compare U.S. issuers’ financial results more efficiently with those of their competitors. Second, as more jurisdictions accept financial statements prepared in accordance with IFRS for local regulatory or statutory filing purposes, U.S issuers’ subsidiaries based in these jurisdictions may be preparing and filing their local financial statements using IFRS as their basis of accounting. If U.S. issuers have a large number of subsidiaries reporting in this manner, then these U.S. issuers—most likely large, multinational corporations—may incur lower costs in preparing their consolidated financial statements using IFRS rather than U.S. GAAP. If an issuer can and does reallocate any financial statement preparation cost savings to higher earnings opportunities and does not suffer a relatively greater increase in the cost of its capital as a result of using IFRS, investors will benefit in terms of a better rate of return.
The Commission anticipates that not all U.S. issuers will have incentives to use IFRS. For example, U.S. issuers without significant customers or operations outside the United States—which may tend to be smaller public companies—may not have the market incentives to prepare IFRS financial statements for the foreseeable future.
Additionally, the Commission recognizes that there may be significant consequences to allowing U.S. issuers to prepare their financial statements in accordance with IFRS as published by the IASB. If the Commission were to accept financial statements prepared in accordance with IFRS as published by the IASB from U.S. issuers, then investors and market participants would have to be able to understand and work with both IFRS and U.S. GAAP when comparing among U.S. issuers because not all U.S. issuers are likely to elect to prepare IFRS financial statements. On a more practical level, a U.S. issuer may have contracts such as loan agreements that include covenants based upon U.S.
GAAP financial measures or leases for which rental payments are a function of revenue as determined under U.S. GAAP. Similarly, U.S. issuers may use their financial statements as the basis for filings with other regulators and authorities (e.g., local and federal tax authorities, supervisory regulators) that may require U.S. GAAP financial information.

Straight up… this is the first step towards a world government. I am calling it now, today. We will see a move towards world government after we get a single worldwide basis of accounting. Business moves faster than government, always has and always will. Companies have gone global nearly overnight and the government is struggling to keep up. Recently we have seen the rise of the EU out of Western Europe. Once a global base is set with accounting (generically business overall) we will see musings of a worldwide government. The UN is a joke as of now and will be replaced. I am not trying to bring politics into a financial thread but this is where I see it trying to head over the next 30-50 years.

Tax information and new Financial Statements to come after dinner. Stay Tuned.

[SuperFly03]

Financial Reporting gets an overhaul:

As a part of convergence the FASB and IASB are taking a step back and asking a very deep question about Financial Statements (FS)… “Why do we report it this way?”

Depending on how a company is financed there can be penalties just for financing a company through debt instead of equity. If you finance a company through debt you have to pay interest which reduces your net income but if you are financed through equity you have to pay dividends (or not, just depends on the industry/company) which do not affect net income. So, all else equal, a company financed through debt will have a lower net income than a company financed through equity.

Earlier this year the FASB issued a exposure draft document on how FS may be constructed in the future. There was a WSJ article that does a better explanation than I can do in the time I have.

Originally Posted by ”WSJ”

Profit as We Know It Could Be Lost
With New Accounting Statements
By DAVID REILLY
May 12, 2007

Pretty soon the bottom line may not be, well, the bottom line.

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.

ACCOUNTING OVERHAUL


Get a glimpse of what new financial statements could look like, according to an early draft recently provided by the Financial Accounting Standards Board to one of its advisory groups.

The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.

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.
This is likely to come as a shock, even if many investors and executives acknowledge that net income has flaws. "If there was no bottom line, I'd want to have a sense of what other indicators I ought to be looking at to get a sense of the comprehensive health of the company," says Katrina Presti, a part-time independent health-care contractor and stay-at-home mom who is part of a 12-woman investment club in Pueblo, Colo. "Net income might be a false indicator, but what would I look at if it goes away?"

The effort to redo financial statements reflects changes in who uses them and for what purposes. Financial statements were originally crafted with bankers and lenders in mind. Their biggest question: Is the business solvent and what's left if it fails? Stock investors care more about a business's current and future profits, so the net-income line takes on added significance for them.

Indeed, that single profit number, particularly when it is divided by the number of shares outstanding, provides the most popular measure of a company's valuation: the price-to-earnings ratio. A company that trades at $10 a share, and which has net profit of $1 a share, has a P/E of 10.

But giving that much power to one number has long been a recipe for fraud and stock-market excesses. Many major accounting scandals earlier this decade centered on manipulation of net income. The stock-market bubble of the 1990s was largely based on investors' assumption that net profit for stocks would grow rapidly for years to come. And the game of beating a quarterly earnings number became a distraction or worse for companies' managers and investors. Obviously it isn't known whether the new format would cut down on attempts to game the numbers, but companies would have to give a more detailed breakdown of what is going on.

The goal of the accounting-rule makers is to better reflect how businesses are actually run and divert attention from the one number. "I know the world likes single bottom-line numbers and all of that, but complicated businesses are hard to translate into just one number," says Robert Herz, chairman of the Financial Accounting Standards Board, the U.S. rule-making body that is one of several groups working on the changes.
At the same time, public companies today are more global than local, and as likely to be involved in services or lines of business that involve intellectual property such as software rather than the plants and equipment that defined the manufacturing age. "The income statement today looks a lot like it did when I started out in this profession," says William Parrett, the retiring CEO of accounting firm Deloitte Touche Tohmatsu, who started as a junior accountant in 1967. "But the kind of information that goes into it is completely different."

Along the way, figures such as net income have become muddied. That is in part because more and more of the items used to calculate net profit are based on management estimates, such as the value of items that don't trade in active markets and the direction of interest rates. Also, over the years rule makers agreed to corporate demands to account for some things, such as day-to-day changes in the value of pension plans or financial instruments used to protect against changes in interest rates, in ways that keep them from causing swings in net income.

Rule makers hope reformatting financial statements will address some of these issues, while giving investors more information about what is happening in different parts of a business to better assess its value. The project is being managed jointly by the FASB in the U.S. and the London-based International Accounting Standards Board, and involves accounting bodies in Japan, other parts of Asia and individual European nations.
The entire process of adopting the revised approach could take a few years to play out, so much could yet change. Plus, once rule makers adopt the changes, they would have to be ratified by regulatory authorities, such as the Securities and Exchange Commission in the U.S. and the European Commission in Europe, before public companies would be required to follow them.

As a first step, rule makers expect later this year to publish a document outlining their preliminary views on what new form financial statements might take. But already they have given hints of what's in store. In March, the FASB provided draft, new financial statements at the end of a 32-page handout for members of an advisory group. (See an example.)

Although likely to change, this preview showed an income statement that has separate segments for the company's operating business, its financing activities, investing activities and tax payments. Each area has an income subtotal for that particular segment.
There is also a "total comprehensive income" category that is wider ranging than net profit as it is known today, and so wouldn't be directly comparable. That is because this total would likely include gains and losses now kept in other parts of the financial statements. These include some currency fluctuations and changes in the value of financial instruments used to hedge against other items.

Comprehensive income could also eventually include short-term changes in the value of corporate pension plans, which currently are smoothed out over a number of years. As a result, comprehensive income could be a lot more difficult to predict and could be volatile from quarter to quarter or year to year.

As for the balance sheet, the new version would group assets and liabilities together according to similar categories of operating, investing and financing activities, although it does provide a section for shareholders equity. Currently, a balance sheet is broken down between assets and liabilities, rather than by operating categories.

Such drastic change isn't likely to happen without a fight. Efforts to bring now-excluded figures into the income statement could prompt battles with companies that fear their profit will be subject to big swings. Companies may also balk at the expense involved.
"The cost of this change could be monumental," says Gary John Previts, an accounting professor at Case Western Reserve University in Cleveland. "All the textbooks are going to have to change, every contract and every bank arrangement will have to change." Investors in Europe and Asia, meanwhile, have opposed the idea of dropping net profit as it appears today, David Tweedie, the IASB's chairman, said in an interview earlier this year.

Analysts in the London office of UBS AG recently published a report arguing this very point -- that even if net income is a "simplistic measure," that doesn't mean it isn't a valid "starting point in valuation" and that "its widespread use is justification enough for its retention."

Such opposition doesn't surprise many accounting experts. Net income is "the basis for bonuses and judgments about what a company's stock is worth," says Stephen A. Zeff, an accounting professor at Rice University. "I just don't know what the markets would do if companies stopped reporting a bottom line somewhere." In the U.S., professional investors and analysts have taken a more nuanced view, perhaps because the manipulation of numbers was more pronounced in U.S. markets.

That said, net profit has been around for some time. The income statement in use today, along with the balance sheet, generally dates to the 1940s when the SEC laid out regulations on financial disclosure. But many companies have included net profit in one form or another since the 1800s.

In its fourth annual report, General Electric Co. provided investors with a consolidated balance sheet and consolidated profit-and-loss account for the year ended Jan. 31, 1896. The company, whose board at the time included Thomas Edison, generated "profit of the year" -- what today would be called net income or net profit -- of $1,388,967.46.
For the moment, net profit will probably exist in some form, although its days are likely numbered. "We've decided in the interim to keep a net-income subtotal, but that's all up for discussion," the FASB's Mr. Herz says.

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Tax:

I am not a tax guy… I can scrape by doing my own taxes but that is about it. The only reason I am evening mentioning tax is because of how big it is. All tax preference items like standard deduction, hope tax credit, life time learning credit, capital gains preference rate, etc. expire in 2009/2010. They expire, they don’t revert to a previous state they just go away. Also just prior to these deductions/credits expiring more and more Americans will be hit with the Alternative Minimum Tax (AMT). The AMT was instituted in the mid 80’s to close loop holes for rich people paying $0 in taxes on incomes around $200k. They would use credits/deductions so well they could get down to 0 tax liability. The AMT system disallows many normal deductions/exemptions and includes in income tax-free income and asses a tentative minimum tax. An individual must pay the greater of the tentative minimum tax or their regular tax liability.

It isn’t much of a problem now as only a few million people are hit by it but the AMT system isn’t indexed for inflation. So, as wages increase in step with inflation the amount of people hit by the AMT increases 10 fold. Currently 3.5M people are hit with the AMT tax but by 2010 35M people will be hit by it.

So when you are voting this coming year pay very careful attention to the candidates stance on taxes. Bush will likely try and deal with some of this but with the Democrats in control it will be difficult to pass anything. An extreme tax reform is coming and it will affect everyone filing a tax return so either make sure your tax preparer is keeping up and is knowledgeable or you need to get ready to relearn what you know about taxes when you prepare your own return.

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