What today's balance sheet tilt means.

• Author: Groves, Ray
• Position: Analysis of the effects of the Financial Accounting Standards Board's Statements 87 and 96

What today's balance-sheet tilt means

When we discuss the FASB and the future for that organization, we are also talking about the future for users of financial statements, financial executives, and public accountants. If there is a theme to this future, I see it summed up in two words: complexity and volatility.

Why do I think there is going to be more complexity and more volatility? A major reason is the shift that has been in process for some time and promises to accelerate--the shift in emphasis from the income statement to the balance sheet.

The FASB spent a good bit of its first decade developing a conceptual framework, and when that document was finally completed, there was a fair amount of compromise in it. To some degree, it backed off from the very strong balance-sheet emphasis that initiated the project. It still does, however, lean significantly toward the balance sheet. This balance-sheet tilt shows up in recent FASB statements such as 87 on pensions and 96 on income taxes.

We are moving toward an era in which the income statement reflects not only the operating results, but also changes in balance-sheet accounts. And the later may, of course, have very little relationship to the operations of a business for a particular period.

This shift in emphasis is not only from the income statement to the balance sheet; it's also from off the balance sheet onto the balance sheet. Thus, automotive and other large manufacturing companies that have financial subsidiaries must now fully consolidate those subsidiaries in the balance sheet. Equity accounting for those subsidiaries is no longer permitted.

Statement 94 required consolidation for the first time in this year's annual reports, but that does not mark the end of this issue. One of the FASB's major projects addresses consolidations and the issue of what is the reporting entity.

We may see future consolidation of entities that today are not consolidated because they are not controlled through stock ownership. The equity accounting method itself is being reevaluated to see if it should have a role in the way companies account for significant investments.

The FASB is also looking at control, and whether a change in control should prompt a new basis of accounting. Now, control other than through stock ownership is a very subjective term. Sometimes it has a legal meaning, sometimes a financial meaning, and certainly it could introduce volatility into financial reporting if control becomes a requirement for consolidation.

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