In the past I’ve sometimes referred to Tom Selling’s Accounting Onion blog (here for instance)…

It’s been a while though, since the blog hadn’t been updated since June 2018, and I assumed it had gone the way of all other accounting blogs (as far as I’m aware, I’m the global recordholder for consistent longevity – this is the 617th post – but please hold your applause in case I’m wrong). Recently I idly checked again, and found that Selling had returned, establishing a portal for soliciting comments on drafts of his book project, of An Honest Financial Accounting: The Myth, and Making it a Reality. To help the cause, I’ll post a few brief extracts here.

It starts off by positing the following three step view of accounting:

• Step 1:  State what the entity started with;
• Step 2: State what the entity ended up with;  
• Step 3:  State in reasonably sufficient detail the flows that took place during the period, i.e., why the amounts reported in Steps 1 and 2 are different.

Selling writes:

• Unfortunately – for two no-good reasons – US GAAP doesn’t match such a straightforward characterization of accounting: it often puts Step 3 before Step 2; and, often while doing so, it ends up presenting fiction as fact…
• The FASB actually did, in its early days, let the world know that Step 3 should follow 1 and 2.   It wrote that assets and liabilities should be viewed as primary elements in accounting; and accordingly that presenting deferred costs per se as assets would be a fiction….“net income” for a business enterprise is impossible to cleanly define — despite many attempts to do so —except by its derivation from changes in assets and liabilities.
• But…When it came to writing actual “standards,” the principle that honest reporting of assets and liabilities should be given primacy over measuring net income was disregarded whenever it was inconvenient.  Which was very often.
• Here are just a few of the significant examples from US GAAP that demonstrate how pervasive the problem of putting Step 3 before 1 and 2 has become:

• “Goodwill” is rarely goodwill…
• “Translation” of the assets in foreign operations is random number generation…
• “Asset impairment” has little or nothing to do with current changes to the value of an asset…
• Revenue is recognized when a “performance obligation” is satisfied, which may not necessarily correspond to the receipt of an asset or satisfaction of a liability…
• A loan or receivable is measured by how future defaults are expected to affect income, as opposed to measuring the loan at its economic value…
• If US GAAP were an honest accounting, none of the above would be permitted.  National and global financial crises could have been averted, and CEO pay could be more commensurate with performance.

Selling dislikes the notion of “general purpose financial reporting,” writing that “accounting is appropriately limited to reporting information about a clearly-defined subset of economic assets and obligations.  It can provide valuable information for a broad spectrum of uses, but it is most directly related to the vital task of performance evaluation: of the economic entity itself and by extension, its managers.” His book aims to show…

• …among other things, that a simple honesty constraint imposed on financial accounting rules would produce a vast improvement over extant US GAAP.  For there are a great many examples of US GAAP that fall short of an honesty standard in a great many ways.  Notwithstanding, not all of US GAAP violates an honesty constraint.  There are also many examples where a choice could be made between two or more honest accounting treatments.  For those, (the) book is intended to be an example of a good-faith attempt to weight those relative costs and benefits from behind a veil of ignorance.

Most of the detailed material (such as the expansions on the bulleted list above) has yet to be posted (one can read though the draft chapter entitled A Thumbnail History of Financial Accounting’s Descent into Madness, in which Selling spreads the culpability for the descent widely). It will be interesting to see how closely the proposals track those made by Alex Milburn in his 2012 paper Toward a Measurement Framework for Financial Reporting by Profit-Oriented Entities, which argued for a jettisoning of a mixed measurement system such that “assets that are inputs to a cash-generating process should be measured at current prices in the markets in which the inputs would be acquired by the entity (or, when such prices are not practicable of faithful representation, on the basis of the most relevant substitute that is practicable of faithful representation) (and) changes in current market values or in substitute measurement bases that reflect current input values would be reported immediately in the statement of income.”

Anyway, we’ll take another look at Selling’s project in the future. In the meantime, I’ve again demonstrated a secret of my own blog’s longevity – that of regularly using the space to point readers to more intellectually stimulating material available elsewhere…

The opinions expressed are solely those of the author