Appendix 4

Summary of Unnecessary FASB Statements

In this appendix we briefly list some of the FASB statements that are believed, by the author, to be unnecessary under AFTF. A brief reason is given in each case. 

FASB Statement No. 130, Reporting Comprehensive Income

This statement seems to require comprehensive income reporting which includes pension adjustments and unrealized gains or losses on available-for-sale securities. If the pension adjustments recognize some future reality in cash flows those adjustments will be captured under AFTF. AFTF does not use a cost basis for securities. It would require something stronger than "available-for-sale" for recognition. AFTF would require a decision and a commitment to sell. AFTF is comprehensive in recognizing value and recognizes all factors and all "income" (discounted expected net income). 


FASB Statement No. 130, Accounting for Stock Based Compensation

This statement requires that a current fair value be used to value stock based compensation liabilities. It is believed that the discounted expected net cash flows of AFTF are a fair value, in this and other contexts. AFTF is responsive so that values will be current and take into account period changes. 


FASB Statement No. 122, Accounting for Mortgage Servicing Rights

Requires a separate fair value recognition of such assets. Under AFTF, an asset is defined as expected positive cash flows. The value of such rights is based on expected net cash flows. 


FASB Statement No. 121, Accounting for the Impairment of Long-lived Assets

Requires periodic review and testing of assets against expected cash flows to ascertain an impaired asset loss. Under AFTF the asset value is a current (discounted) expected cash flow. The use of a discount rate is conservative. 


FASB Statement No. 120, Accounting and Reporting for Mutual Life Insurance Enterprises

Requires mutual companies to satisfy FASB statements 60, 97, and 113. These statements will be obsolete under AFTF. 


FASB Statement No. 119, Disclosure about Financial Instruments and Fair Value of Financial Instruments

Requires fair value reporting for trading derivatives. This would be a normal function of AFTF. FASB 119 also requires disclosure for hedging derivatives. AFTF would attach a quantitative value to such hedges as part of the valuation of the transactions hedged against. Expected values would perform the option pricing.

 

FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities

This statement distinguishes between securities held-to-maturity, trading or available-for-sale securities. These distinctions would not be needed since the expected value would always reflect the expected uses. Fair value would be used in all cases.

 

FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan

Requires the use of the present value of expected cash flows for impaired loans. This is essentially the AFTF approach except that AFTF uses the historic cost of capital rather than the loan interest as a discount rate.

 

FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts

This statement seems designed to correct misinterpretations of the real effect of reinsurance contract. Expected cash flows would distinguish real from nominal transactions.

 

FASB Statement No. 114, Employers’ Accounting for Post-employment Benefits

If benefits are earned, vested, probable and estimable then a liability should be established. Under these conditions an AFTF liability could and would be established. AFTF would go further by anticipating expected earned or vested benefits.

 

FASB Statement No. 109, Accounting for Income Taxes

requires that assets or liabilities be established for taxes refundable or due or associated with current year accounting. These items would be automatically captured by prospective accounting, with an appropriate adjustment for the timing of cash flows.

 

FASB Statement No. 106, Employers’ Accounting for Post-retirement Benefits Other Than Pensions

requires that costs of post-retirement (health) benefits be recognized as earned. AFTF would not wait for benefits to be earned to recognize their costs (expected negative cash flows), no more than AFTF waits to recognize income items (expected positive cash flows). Note that distant cash flows have little effect on present values.

 

FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the sale of Investments

This statement deals with:

  1. The deferral of expenses which is not an issue under AFTF,
  2. The recognition of profit which is firmly settled with AFTF,
  3. The recognition of realized investment gains and losses; these are cash flows recognized when they occur under AFTF.

Hence, this statement is not needed in the AFTF framework.

 

FASB Statement No. 95, Statement of Cash Flows

AFTF is based on direct cash flows and would have detailed cash flow displays, and more. No reconciliation to an income statement is needed.

 

FASB Statement No. 93, Recognition of Depreciation by Not-for-Profit Organizations

Depreciation is not a necessary concept within AFTF.

 

FASB Statement No. 89, Financial Reporting and Changing Prices

This statement makes voluntary the constant purchasing power adjustment required in FASB Statement 33. Such purchasing power adjustments are automatic with AFTF

 

FASB Statement No. 86, Accounting for the Costs of Computer Software to be Sold. Leased, or Otherwise Marketed

This statement mandates current R&D expense recognition unless technological feasibility is established. Under AFTF expenses are always recognized as they occur as cash flows. Future income is recognized as expected values, which become greater when technological feasibility is established. See A Perspective on Capitalized Expenses in Chapter 1.

 

FASB Statement No. 80, Accounting for Futures Contracts

This statement mandates current period recognition of gains or losses in market or fair value of future contracts. AFTF expected values are fair values and will usually agree with market prices.

 

FASB Statement No. 77, Reporting by Transferors of Receivables with Recourse

This statement seems to require immediate recognition of the realities of the transfer. AFTF expected cash flows capture gradations of reality and immediately measures the effect of the transfer decision.

 

FASB Statement No. 76, Extinguishment of Debt

This statement uses terms such as "probable" and "remote possibility" to judge complete extinguishment. AFTF would give due weight to possibilities via expected cash flows.

 

FASB Statement No. 74, Accounting for Special Termination Benefits Paid to Employees

This statement specifies use of the present value of expected future payments, the AFTF methodology.

 

FASB Statement No. 73, Reporting a Change in Accounting for Railroad Track Structures

This statement is a good example of an issue that did not require a formal FASB statement. Perhaps a "private letter ruling" format would be appropriate for specialized issues.

 

FASB Statement No. 72, Accounting for Certain Acquisition of Banking or Thrift Institutions

This statement deals with goodwill, which is obviated under AFTF.

 

FASB Statement No. 71, Accounting for The effects of Certain Types of Regulation

This statement deals with capitalized costs, which are obviated under AFTF.

 

FASB Statement No. 69, Disclosures about Oil and Gas Producing Activities

This statement requires disclosures, for example of, " a standardized measure of discounted net cash flows relating to proved oil and gas reserve quantities." Expected cash flows would meaningfully capture these and other values in financial statements, not only as disclosures.

 

FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises

This statement, GAAP insurance accounting, is a curious combination of immediate and delayed recognition. Some revenue is immediately recognized at policy issue (See A Perspective on Capitalized Expenditure in Chapter 1). The policy reserve recognizes future expected contract liabilities and some of the expected gross premiums (the net premium). A purpose of GAAP insurance accounting is to correct for the obvious deficiencies of statutory accounting as a shareholder reporting tool. GAAP is largely unsuccessful. AFTF satisfies the essential purposes of GAAP accounting far better that GAAP does.

 

FASB Statement No. 58, Capitalization of Interest Cost …

This statement deals with capitalized costs, which are obviated under AFTF.

 

FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films

This statement appears to specify immediate recognition or delayed recognition depending on the situation. With AFTF cash flows are recognized only when they occur (they are measured as a current present value).

 

FASB Statement No. 50, Financial Reporting in the Record and Music Industry

This statement specifies complete and immediate recognition of "reasonably assured" fees. Expected values would be more refined. This statement also deals with capitalized costs.

 

FASB Statement No. 48, Revenue Recognition when Right of Return Exists

This statement uses terms such as "estimated returns" and "expected costs". AFTF is more explicit.

 

FASB Statement No. 47, Disclosure of Long-Term Obligations

AFTF would quantify and report these.

 

FASB Statement No. 45, Accounting for Franchise Fee Revenue

This statement delays recognition until fee services are rendered. AFTF would recognize the cash flows when paid, including the cost of future services.

 

FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers

AFTF directly measure all intangibles that affect future cash flows. If they do not affect cash flows they don’t exist as AFTF assets and should not exist as assets under any accounting system.

 

FASB Statement No. 43, Accounting for Compensated Absences

Accrued vacations are probable and their cost is immediately recognized. Sick pay is somewhat improbable and is not recognized. AFTF would apply more precise probabilities.

 

FASB Statement No. 38, Accounting for Pre-Acquisition Contingencies of Purchased Enterprises

Specifies uses of reasonably estimated amounts, not unlike AFTF.

 

FASB Statement No. 37, Balance Sheet Classification of Deferred Income Taxes

AFTF would eliminate this issue, I think.

 

FASB Statements No. 35 and 36, Pension Accounting

I believe that an entirely new approach is possible with AFTF, but I have not given it much thought.

 

FASB Statement No. 16, Prior Period Adjustments

AFTF is prospective. Current period adjustments would be clearly disclosed.

 

FASB Statement No. 7, Accounting and Reporting by Development Stage Enterprises

AFTF is prospective and can capture the future. The dual validation, however, breaks down. AFTF would not be especially reliable, but neither are startups.

 

FASB Statement No. 5, Accounting for Contingencies

This statement is one of the philosophical bases for AFTF, at least for liabilities. It prohibits "reserves for general contingencies" and thereby makes accounting more explicit and more accurate. Gain contingencies are recognized when realized, which is the AFTF approach, except that they are immediately measured. Values are immediately recognized.

 

FASB Statement No. 2, Accounting for Research and Development Costs

This statement requires such current costs to be expensed in the current period, as does AFTF. AFTF would also anticipate future R&D costs and resulting benefits.

 

 Conclusions 

Many of the FASB statements are designed to require that the dominant or expected reality be recognized in accounting reports. Recognition of the expected cash flows recognizes both the probable and the improbable in a balanced manner and is a more general and more refined principle than is provided by FASB statements. FASB statements will still be required, but the incessant detail and revisions may be replaced by the principle, standards of practice, the ethics and good judgment of the accounting profession. 

  

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