“Traditionally, the more active the commission, the more active the private sector in developing accounting methodology and disclosure approaches. The dynamism of accounting in the 1980s, therefore, is likely to depend on the joint action of the private sector accounting institutions and of their creative irritant, the SEC.”
During and shortly after World War II, the SEC and the Committee on Accounting Procedure (CAP) had a few skirmishes, starting with a minor difference over income tax allocations and the presentation on the income statement of the tax effects of gains or losses included in equity (“surplus”).(22) That presaged a more significant tussle over the use of equity accounts for nonrecurring or unusual gains and losses.
In December 1947, Accounting Research Bulletin (ARB) No. 32 endorsed the “current operating” concept, whereby certain material non-recurring items could bypass the income statement and be charged or credited directly to equity (“surplus”).(23) The ink was hardly dry before SEC Chief Accountant Earle King expressed disagreement in a letter to the American Institute of Accountants that accompanied the publication of ARB No. 32 in the January 1948 Journal of Accountancy.
King asserted the Commission’s preference for the “all inclusive” method, whereby all items, other than capital transactions, are included in the determination of net income. He stated that the SEC staff would take exception to presentations that appeared misleading, “even though they reflect the application of [ARB] No. 32.” King bluntly reminded the CAP which partner had the ultimate authority.(24)
The SEC would issue a stop order to prevent a registrant from following one method in its SEC filings and another in its report to shareholders, and by 1980 the “basic information” in annual reports to the SEC and to shareholders would have to be the same. In December 1966, the Accounting Principles Board (APB) adopted the all-inclusive method with extraordinary items shown separately but before net income.
In addition to occasional spats, the SEC was always there to be the “creative irritant” to prompt the private sector to address issues or react more quickly, such as Accounting Series Release (ASR) No. 95 in December 1962 on profits from real estate transactions, and ASR No. 102 in December 1965 regarding the consistent balance sheet classification of deferred income taxes and the related assets. Both ASRs gave rise to provisions in subsequent pronouncements by the APB and FASB.(25)
When it came to creative irritation, John C. “Sandy” Burton was perhaps the most active of the SEC Chief Accountants, issuing 70 ASRs in four years. While the FASB dealt with measurement and recognition issues, Burton believed that the SEC should lead on differential disclosures.
(22) December 1944 ARB No. 23, Accounting for Income Taxes; November 16, 1945 ASR No.53, In the Matter of “Charges in Lieu of Taxes” – Statement of the Commission’s Opinion Regarding “Charges in Lieu of Income Taxes” and “Provisions for Income Taxes” in the Profit and Loss Statement.
(23) December 1947 ARB No. 32, Income and Earned Surplus.
(24) The current operating and all inclusive concepts were often referred to as “dirty surplus” and “clean surplus,” respectively.
(25) October 1982 SFAS No. 66, Accounting for Sales of Real Estate; December 1967 APB Opinion No. 11, Accounting for Income Taxes.
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