to the Editor
Insights on Evolution of GAAP, International Developments
2005 - I enjoyed Stephen A. Zeff’s two-part “The
Evolution of GAAP” (January and February 2005). I
found his insights into the background of the standards
very interesting. On two matters, however, my perspective
is a little different.
first concerns the so-called elimination of pooling-of-interests
accounting. This is a good example of two old adages: “Watch
what we do, not what we say,” and “To achieve
your goals, change the definitions.”
main criticisms of pooling accounting were that companies
did not have to account on the balance sheet for the fair
value of common stock issued in an acquisition, and, thus,
future earnings were overstated because there were no systematic
charges to income to reflect the utilization of the acquired
assets. Although FASB’s solution fixed the first problem,
in practical terms and as a general rule it made the second
problem worse because now all acquisitions are treated as
poolings on the income statement. The Accounting Principles
Board eliminated this abuse in 1970; it is unfortunate that
the FASB reinstated it.
apparently more restrictive impairment test does not solve
the problem; it merely ensures that any write-offs will
be taken only after the asset has declined in value, not
while the actual declines occur. In addition, there is no
requirement for companies to disclose how much previously
reported income was overstated when the one-time charge
is taken, and I have yet to see anyone volunteer this information.
took comfort in the fact that quite a few companies took
large write-offs following the approval of SFAS 142. I do
not share his comfort. First, SFAS 142 permitted write-offs
taken in the initial application of SFAS 142 to be shown
as a change in accounting. Thus, companies were able to
avoid charging the results of bad acquisitions to “regular”
income. Second, the two approaches are not mutually exclusive;
the standard could have called for mandatory amortization
and a tougher impairment test.
a different issue, Zeff points out that SFAS 109 on income
taxes is one of the best examples of how the asset-and-liability
view led to a more defensible standard. While this is true,
it also points out the compromises necessary to issue any
standard. First, the standard not only permits recognizing
NOL carryforwards as an asset but it also lowered the threshold
requirements in the previous standard. Second, and more
important, the standard prohibits discounting. It is, of
course, completely inconsistent for the FASB to say that
a standard is based on an asset-and-liability view and then
to prohibit considering the time value of money.
in the February issue, regarding the article “Accounting
and Reporting for Financial Instruments: International Developments,”
I would like to clarify a potentially misleading statement.
The authors state that IAS 32, issued in 1995, requires
reporting mandatorily redeemable preferred stock as a liability
and that this was similar to the U.S. guidance. In fact,
the International Accounting Standards Committee (IASC)
took the lead in requiring this accounting; no other standards-setting
body, including FASB, had established such a requirement
in 1995. FASB did establish a similar requirement a number
of years later. In the interest of full disclosure, I was
the chairman of the steering committee that drafted IAS
32, and I want to commend my former colleagues for taking
the leading position on this issue.
J. Murray, CPA (Retired)
Note: The writer is a former member of the FASB
Emerging Issues Task Force (EITF) and Advisory Task Force
on the Consolidation Project, the International Accounting
Standards Committee (IASC), and the AICPA Accounting Standards
Executive Committee (AcSEC).
authors of ‘International Developments’ respond:
is correct about the timing of the guidance on mandatorily
redeemable preferred stock. In our article we were attempting
to point out that IAS 32’s guidance on accounting
for mandatorily redeemable preferred stock is similar to
that of SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Debt and Equity,”
not that IAS 32 was guided by the U.S. standard.
K. Venuti, PhD, CPA
Richard C. Jones, PhD, CPA
Zarb School of Business, Hofstra University
Fixing Social Security
all the discussion about privatizing Social Security, I
have a thought about sustaining its existence. I am certain
that CPAs in New York State who prepare tax returns have
noted that many returns include Social Security benefits
that are taxable. This is because current retirees, unlike
those who retired in the 1930s, ’40s, and ’50s,
are beneficiaries of company pension plans, 401(k)s, IRAs,
and dividend and interest income.
suggestion is for the IRS to cull out those returns and
the federal income tax being paid on their Social Security
benefits. That amount should be taken out of the general
revenues and transferred to the Social Security Trust Fund.
I am certain that it would make a sizable dent in the shortfall
that the Bush administration is predicting. I don’t
know how receptive the government would be to this idea,
but it’s better than privatizing Social Security.
Bass, CPA (Retired)
Floral Park, N.Y.