The Wall Street Journal Interactive Edition -- June 27, 1996

U.S. Accounting Board Seeks New Form of Earnings Report


The Financial Accounting Standards Board proposed another earnings report for companies. Some analysts said it would provide useful new information, but others feared it would confuse investors and lead to manipulation. The FASB, the chief rule-making body for U.S. accountants, called a proposed new earnings figure "comprehensive income." The FASB said it would include current net income plus other items such as foreign-currency translation adjustments, certain pension-liability adjustments and unrealized gains and losses on securities that are available for sale. Most of these items are currently displayed in the equity statement on the balance sheet, the FASB added. According to the FASB, some stock-market analysts had complained that too many adjustments had been made to equity and that investors who focus on earnings may overlook them. Some analysts feared that the new earnings figure would add to an already crowded field of profit-and-loss figures. Companies now report earnings before taxes, earnings from continuing operations, fully diluted earnings a share (which assume the exercise or conversion of all convertible securities, options and the like) and earnings before restructuring -- and sometimes other earnings measures as well. But the new comprehensive income statement would be displayed as prominently as the traditional net-income figure. A number of analysts and accountants said the new bottom line created by the proposal would be misconstrued by Wall Street and manipulated by companies to hide big charges against income. Robert Willens, an accounting specialist with Lehman Brothers, said that the new earnings figure may boost the price-earnings ratio of key stock-market indexes during periods when the dollar is appreciating and interest rates are rising. A rising dollar reduces the dollar value of repatriated foreign earnings, Mr. Willens explained. Rising interest rates require companies holding debt securities for sale to reduce their reported profits by the unrealized loss in the securities, Mr. Willens added. Robert Herz, a partner with accountants Coopers & Lybrand, said that some accountants are concerned that the comprehensive-income statement may just become "another dumping ground" for certain charges like losses from hedging. These charges wouldn't reduce the current net-income figures, pleasing most companies. The traditional net-income figures would continue to be issued under the FASB proposal, Mr. Herz noted. Many big companies also oppose the proposal. "It would create a confusion for the general public over what are the real earnings and how many measures should be appropriate," asserts P. Norman Roy, president of the 14,000-member Financial Executives Institute, which includes the top financial executives of the biggest U.S. companies. But the Association for Investment Management and Research, whose membership includes the majority of financial analysts, supports the proposal. It contends the change would improve disclosure of certain items on the balance sheet that may remain hidden from unsophisticated investors. The FASB requested comments on the proposal by Oct. 11 and slated public hearings for Nov. 15-19.

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