ThinkTWENTY20

By Eric E. Cohen, CPA

The American Accounting Association (AAA – the largest community of accountants in academia) has just finished its Annual Meeting. It was a grand – and I think successful – experiment in a post-pandemic environment, with both a week of in-person activities and a two-day virtual event as well. Key speeches from the in-person event were shared during the virtual event.

In both the face-to-face and virtual sessions, there were panels with updates from the IASB and FASB about reporting. Although I have a lot to write about soon, especially in the area of cryptocurrencies, it was a more mainstream comment that I am writing about today – whether assets and liabilities or income approaches are better for reporting. More on that in a minute.

It was interesting comparing and contrasting the two associated AAA events, face to face and virtual. 1200 or so hearty souls wended their way to San Diego for a week of 24C/75F sunny weather, making the trek between the Hyatt and Marriott conference hotels for the many sessions interspersed between them and the social events that took place. It was great to see old friends and make new acquaintances.

I felt the two approaches were very complementary. Networking in the virtual version is nearly impossible. But live transcripts and easy downloads, and even the Q&A function, make getting information from the virtual sessions themselves easier for many of us. I probably gained less weight during the virtual meetings as well.

All that is a prologue to the topic of this blog entry:

I do not have the transcript, but the essence is burned into my brain; in the IASB/FASB panel, the FASB speaker was talking about approaches to financial reporting and said that an “asset and liability” approach to financial reporting was better than an income approach, but it wasn’t delivered in the traditional context of taxation (e.g., ASC 740).

Don’t get me wrong: I was weaned on an asset & liability approach. If you tie down all the assets and all the liabilities, everything else falls into place in the big scheme of things; that’s the beauty of the accounting equation. In an age of data analytics, however, as well as great ERP export software and data standardization, and big data storage and fast data transfer, there has been a move to analyzing the business transactions and letting the balance sheet fall out. Not a new concept – I’ve touted George H. Sorter’s Events Theory from the 1960s here often, where the events are left to tell the story and the user can value, estimate and aggregate to their own specific needs. Much of the discussion of blockchain-based reporting, where the events drive the results in real-time, depends on the activity being more suitable than endlessly valuing the assets and liabilities.

The continuous monitoring system and audit of the future may be tied to automated tools that track balances, valuations and estimates. But the ASC 740 statement about asset and liabilities approaches can be traced back to SAS 96 in the 80s.

There has been a significant amount of investment into the more real-time, more efficient and far less costly transactional audit, based on evaluating the events in a system rather than tying down the assets. If there is general agreement that the asset and liabilities approach is still far superior, where does that go?