The New Accounting – Say Goodbye to the Old Bottom Line


Last weekend, the Wall Street Journal had a fascinating article about possible accounting changes that may take shape relatively soon. I'm surprised I've heard nothing about it up to this point.

In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.

It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.

Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.

This has major implications for the stock market, accounting students, auditors, and corporate accounting departments. The one group that may benefit from this is value investors, who already modify financial statements by removing certain items, adding others, and digging into the footnotes. If you already take the modern form of financial statements and do your own analysis, this change shouldn't make much difference to you.