The members of the Financial Accounting Standards Advisory Council gave some mixed feedback on proposed new accounting rules that would require companies to break out expenses for employee compensation, depreciation, intangible asset amortization and costs incurred related to inventory and manufacturing activities in their financial statements.
Financial Accounting Standards Board members discussed the challenges and benefits of the plan with accountants, financial preparers and financial executives that are part of the advisory body to the U.S. standard setter last week. The FASB is also collecting feedback via its formal public comment period which goes through Oct. 30.
FASB Chair Richard Jones kicked off a Thursday FASAC meeting lending his support to the proposal, noting that the rules as drafted were among the highest priorities of investors that the board has heard from. At the meeting he urged people to “step back for a second” and avoid getting lost in the details, noting that the new rules would help solve the problem of opaque income statements that are difficult for investors to interpret.
“If somebody hands you a financial statement it’s fairly easy to look at the balance sheet and then go find the footnotes and see the details of what makes up that balance sheet caption but take a look at an income statement line item and try to understand what the key components of that category are and what you’ll find is a hodge podge of disclosures sprinkled throughout the footnote giving pieces…that’s what this is trying to address,” Jones said, referring to the proposed new rules.
Shripad Joshi, senior director-accounting officer at S&P Global Ratings and FASAC member, spoke out in support of the changes, noting that the new standard would help investors and analysts connect the dots between the income statement and cash flows.
“Today depreciation and amortization is buried in cost of goods sold and you can’t figure out what the gross margin for companies is,” he said, calling the new disclosure standard very useful and suggesting that it would be helpful if both public and private companies were also required to follow the new rules. Under the current plan only public companies would be required to follow the proposed standard that is now under review.
But some FASAC members that work for companies that will have to comply with the proposed new standards said it won’t be an easy adjustment. Jeff Karbowski, chief accounting officer for Los Gatos, California based media streaming company Netflix, said the proposal is currently not an “operable” one, noting that it would take considerable work to determine how companies would disaggregate assets that currently flow through cost of sales.
Netflix doesn’t have inventory but creates a pool of assets made up of many different components such as production costs, people costs, depreciation, licenses, outside contractors then amortizes them over an extended period and they then flow them through the P&L, he told the council. Under the new standards companies would have to form an asset and then disaggregate them on the backend, he added. “I don’t know what that effort would entail but I would estimate it to be relatively significant,” Karbowski said.