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What is wrong with US GAAP

By Keith Kauffman posted 10-17-2018 03:16 PM

  
The elephant in the room is financial statements prepared under US GAAP no longer provides any value. The primary reasons are US GAAP is overly complex, burdensome to implement, costly to maintain and does not represent the economics of a business or organization. Thus, users no longer want or use the financial statements prepared under US GAAP. There is more information on my website www.antigaap.com.

The following are a summary of my primary reasons:

Overly Complex - One only needs to look at the two most recent major accounting standards as examples; revenue recogition and leases. Understanding the requirements around "performance obligations" for revenue recognition and determining if imbedded leases exist under the new lease standard require a PhD in accounting and law degree to assess. In addition, both standards will be adding significant disclosures to an already lengthy set of financial statements. There are other examples such as credit losses, deferred taxes, derivatives, goodwill, and business combinations. How does the continued increase in the complexity of accounting standards assist users/readers of financial statements to make better decisions?

Burdensome to implement - Both in dollars and personnel time for the company besides the additional auditing time and cost. For example, the new lease standard requires companies to assess every lease in the organization including imbedded leases. The mere task of collecting the data requires significant personnel time and most likely new software to track and maintain the leases. One of the primary implementation issues especially for privately held companies is not having the expertise in-house which requires them to hire outside professionals or additional personnel. In addition, just for the completeness standard alone, the auditors will have to perform additional procedures to ensure all the material leases (how is this determined will be interesting) have been acquired and properly documented. This is even before actually assessing the leases and recording amounts into the books and records. Thus, the mere gathering of leases and ensuring the Issuer has the "world" of those leases will add significant cost and burden to a company. In the October 2018 Journal of Accountancy, Lease accounting rules get additional tweaks, it states "FASB continued its efforts to improve its new lease accounting standard, issuing minor amendments, 16 targeted changes, and a proposal designed to reduce costs and make implementation easier for lessors". I think this makes my point.

Costly to Maintain - As many accounting standards require revisiting fair values, estimates, impairments, etc. at least annually if not more often depending on external reporting requirements and/or the accounting standard. Many companies have to hire outside professionals (as mentioned above) to meet these requirements and, of course, these costs are in addition to the annual audit fee. Thus, the true cost of an annual audit can be much more than just the audit fee.

Economics of business or organization - One of the main reasons US GAAP is failing is adherence to US accounting standards as interpreted by an audit firm is absolute. It is more important to follow an audit firm's interpretation of the accounting standard than it is to reflect the true economic substance of a transaction. To say it another way. Financial statements under US GAAP are better than reality. Using public companies as an example, there is a signifciant amount of non-GAAP fianncial information provided with the US GAAP financials. It is also my understanding that non-GAAP information has continued to increase over the years. This information is provided for the benefit of investors and analysts (Users). If the financial statements prepared under US GAAP truly represent the economic transactions of the business, why is all this non-GAAP information needed? Why does the non-GAAP information continue to increase? I have to assume the investors/users are requesting this information in order to assist in their decision making about the company because the US GAAP financial statements are not sufficient enough or provide the information needed. The SEC is concerned with misleading non-GAAP information and I understand is attempting to reduce and/or remove this information. My comment to the SEC is since the financial statements prepared under US GAAP do not provide any value or the needed information, remove the US GAAP financial statements and replace them with something the investors or analysts actually use.

The common response to why US GAAP continues to be used is it is there to protect the users (investors, financial institutions, government agencies, etc.) and provide as much information as possible for a user to make a decision. If this is the case, there seems to be a serious disconnect between what the user wants and what US GAAP is providing. Its time to close that gap (no pun intended) and provide information a user wants.
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