GAAP's Gap Part II: Accounting for Equity Transactions (Open Letter Re: FASB Preliminary Views 1550-100)

7 Pages Posted: 11 Dec 2007

Date Written: December 10, 2007


The Financial Accounting Standards Board (FASB) has long recognized shortcomings in fundamental accounting principles that are exacerbated by the proliferation of increasingly complex financial instruments. The FASB has been engaged since 1986 in a project to align financial reporting with economic substance and improve consistency.

The FASB recently issued its Preliminary Views. Key points are:

- After a 22 year effort, the result should be good. It is not.

- A carve out is provided to allow separate consideration at a future date for the treatment of compensation options. Until then, option compensation accounting (SFAS 123R), though flawed, is exempted. Hot potato!

The FASB Preliminary Views lists two fundamental premises of accounting that contribute to engineered earnings and inconsistent reporting: 1) The definition of equity, and 2) The exclusion of equity items from the income statement. The FASB's proposed solution is to redefine equity and deals with only the first premise while ignoring the second. If adopted, the result will be a tedious, case by case dispute on whether an instrument qualifies to be treated as equity, and a crop of new securities will surely arise to skirt the revised rules. Meanwhile, a simple, comprehensive opportunity (the claims approach, part of a 1990 FASB Discussion Memorandum) to modernize accounting by marking equity to market within the income statement has been scrapped.

Keywords: Financial Instruments with Characteristics of Equity, 1550-100, liability and equity project, basic ownership, ownership-settlement, reassessed expected outcomes, accounting, equity, mark to market, FASB, SFAS 123r, pacioli, Dutch East India, voc, hidden asset, equity value added

JEL Classification: G10, G24, G30, G32, G34, G35, G38, M41, M44, K22

Suggested Citation

Gumport, Michael A., GAAP's Gap Part II: Accounting for Equity Transactions (Open Letter Re: FASB Preliminary Views 1550-100) (December 10, 2007). Available at SSRN: or

Michael A. Gumport (Contact Author)

MG Holdings/SIP ( email )

Summit, NJ 07901
United States

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