Unit of account / bifurcate / aggregate / link presentation / combine
I am working on a research paper on the unit of account. Well, no it’s really about bifurcation of compound financial instruments. But wait, it’s really about aggregation. I guess one could say it’s about linking the presentation of things too. My head is whirling. Exactly. The point of the paper is not about the terminology, but I’m finding myself thinking a lot about this terminology.
So I’m wondering your opinions on these not-well-defined terms we use in financial reporting.
I consider the unit of account to be the high-level concept. Under it are bifurcation (splitting apart some ONE thing that has multiple parts). Also under it is the issue of aggregation which “goes the other way.” Bringing together different items. Bifurcation and aggregation don’t quite seem to be on the same dimension, though. That is to say, to aggregate doesn’t mean to “not bifurcate.” And finally, linked presentation, well i’m not sure but if you ask me right now, today, i would say that this is just how it looks on a financial statement, but that’s not precise at all. Isn’t that the same as the unit of account issue? Yes, you can see why my head is whirling.
Thoughts?
Thanks, Lisa. I’ve been thinking about all of that, too, and so are the staff and board at the FASB. I think it would help if we had some concrete examples to work with. Can you be more specific with respect to your analysis of financial instruments? What do you have in mind? For example, when I think of accounting for post-employment benefits, I run into the following questions (among others). Is the unit of account the post-retirement obligation and the plan assets, or is it the net of the two? Should we link the presentation of the asset and liability? Can we effectively bifurcate the pension expense into service cost, interest cost, amortized gains and losses, etc.? When thinking about the discount rate can we separate (bifurcate) the effects of different types of risk? Maybe we could all agree on terminolgy in the context of answering the specific questions you have in mind with respect to compound financial instruments. I’m just thinking that the issues with terminology might be clearer if we had some concrete policy questions to consider. Thanks for bringing this up!
Shane, I guess i’m not sure what you mean by “concrete policy issues.”
In the study I am doing, we are looking at how it matters. So while we cannot solve the unit of account issue in our paper, we can provide evidence that it does affect decision making.. and we provide a theoretical framework for how it does so. Just because people react in a certain way does not mean that the FASB should do the accounting that way, of course. Our study just provides evidence on how it matters.
Our study is very simple. We look at callable bonds and puttable bonds. We look at both when examining the income statement side of bifurcation. WE look only at puttable bonds for the balance sheet.
WE find that it matters much more (bifurcation that is) on the income statement than on the balance sheet.
Lisa, I completely agree with the confusing picture these terms paint. It’s useful to see them all collected in one place. And Phil’s response adds another to your list: net versus gross presentation.
My thought is that these are problematic because we have yet to have made collective decisions about which ways of measurement, recognition, presentation, etc. are those that are most useful to financial statement users, and as such, we find that on an issue-by-issue basis, we are more or less comfortable with answers to the “unit-of-account” or “bifurcation” questions that aren’t necessarily consistent.
Research such as that you describe seems to me to be exactly what is needed — evidence regarding what kinds of answers to these questions have effects on users’ judgments.