Accounting Rules That Bug Me
It's always dangerous to complain about something. Complaining doesn't make it any better, and the solution (or in this case replacement) may be worse. Therefore I throw all caution to the wind. And I reserve the right to use pre codification references where it is easier for me.
Accounting for Leases
I've got restaurant clients with 10 - 25 year leases. They generally have rent holidays up front, perhaps tenant improvement allowances, and the rent escalates every year. FASB 13 essentially requires the rent to smooth out evenly over the course of the lease. You essentially calculate the total lease payments and divide it evenly over the lease term. This just doesn't reflect the economic reality of the situation!
Imagine they have a 10 year lease where they pay $12,000 a year, and it goes up $1,000 a year. Total rent expense: $165,000. Rent expense throughout the period is $16,500 a year. Then they sign a new 10 year lease with the same thing - rent keeps going up $1,000 a year. Annual rent expense is $26,500. Does this make sense? I don't think so at all.
FASB 13 has been widely criticized for a long time, and FASB is supposed to be working on a replacement. I shudder to think what the next one is going to be.
Other Comprehensive Income
This is just nonsense. The statement of other comprehensive income is a waste of effort to prepare and of the paper it is printed on. Does it mean anything to anyone?
Ever explain this to a client who decides to put money in marketable securities. Well if you are trading actively then it hits the income statement, but if they are "available for sale" then it doesn't, but you can still get the positive bounce from it. Drives me nuts.
I think it was the easy way out coming up with this concept.
Fair Value Disclosures
I'm reminded of a scene in the Marx Brothers classix "Duck Soup." Groucho is Rufus T. Firefly, the president of Freedonia. He's presiding a meeting of his ministers and one of them gives them a report on something (which I should remember because I just watched it again) and he says to the minister "This is so clear a 6 year old could understand it." He then turns to Zeppo and says "Find me a 6 year old. I can't make heads or tails out of this!"
That's what the fair value disclosure requirements are like to me.
This is another one that is a blast to explain to a client. None of them understand it at all. Which theoretically means you've got a internal control over financial reporting weakness because at least initially none of them are going to do it. Gets even better when goodwill is involved.
Redemptions of Ownership Interests - Corporations versus Partnerships/LLCs
A corporation acquires stock from a stockholder and the rules are really clear on what to do. But there are no rules out there for when a partnership or LLC acquires an interest from a partner. I have a client that has substantial goodwill on their books (most of which pre dates me being their auditor) from partnership redemptions and for that matter subsequent admissions. Why is this the case? The only difference is form of entity.
This posting is getting long. Some day Part II might appear.
Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies. Joel writes observations on different matters and especially on working with and using LinkedIn. He thinks he has a sense of humor.