Professor Elam

The board will determine whether to add the issues raised to its standard-setting or research agendas over the next year and beyond, Chairman Rich Jones said in an interview. 

The body expects to finalize new rules on accounting for software costs, environmental credits and government grants in 2025, Jones said. The FASB’s standards, which can take years to come to fruition, can saddle companies with a greater compliance burden but also give more technical clarity, while providing investors with new corporate details. 

Notably, the FASB could dive into two hot-button accounting topics: companies’ use of financial key performance indicators, or KPIs, and their accounting for intangible assets such as drug development, cryptocurrency or brands. 

“You’re seeing us really explore what, depending on the direction those projects take, could be a very significant shift in financial reporting,” Jones said. 

Profit measures

Earnings before interest, taxes, depreciation and amortization, or Ebitda, and free cash flow, which is the money a company has left over after paying operating and capital expenses, are not defined under U.S. accounting rules. Measures such as net income, revenue, earnings per share and diluted earnings per share are defined. 

The FASB is getting input on whether investors and others would benefit from moving a measure like Ebitda into financial statements and creating a standard definition companies could use, even if they made non-GAAP adjustments to it. If companies were to deviate from that definition outside of their financials, the Securities and Exchange Commission or other regulators might require them to disclose their rationale, Jones said.

“Do I think there’s something we could do there? My own view is absolutely,” Jones said. “I’m eager to see what we learn from our stakeholders.”

Several KPIs companies mention outside of the financial statements are considered non-GAAP, meaning they go beyond U.S. generally accepted accounting principles. The project, if added to the standard-setting agenda, would mark the FASB’s first major effort to tackle non-GAAP accounting.

Defining which types of companies should have a particular KPI in their financials would be an important part of the analysis, Jones said. “You might argue that Ebitda is a better measure for a manufacturer but not a very good measure for a financial institution,” Jones said.

Companies rely increasingly on these measures, sometimes to present an overly optimistic picture of profitability. Some companies’ earnings news releases regularly feature adjusted Ebitda and adjusted free cash flow, which are non-GAAP staples. 

Executives usually say focusing on core operating earnings is the most accurate way to depict financial performance to investors, but their approach may vary. “Sometimes, clients are surprised by how much freedom they have in terms of what they can do with their KPIs,” said Kern Roberts, head of Chatham Financial’s global accounting advisory team.

Most investors use their own adjusted version of companies’ KPIs. The FASB should require companies to consistently disclose the inputs to KPIs such as the amortization amount used in a company’s Ebitda calculation, said David Gonzales, senior accounting analyst at Moody’s Ratings and member of a FASB advisory group.  

“It would cut down a lot of our time trying to understand and find these things in financial statements,” Gonzales said. 

The untouchables

Another major project is to improve how companies account for and disclose intangible assets, or any asset they can’t touch. The FASB is getting feedback on either pursuing one broad accounting model for all intangibles or grouping assets from different industries together into similar buckets like the development of software and medicine. Existing guidance on intangibles covers specific areas such as software, R&D and certain industries. 

“My own personal view is I think there’s an awful lot put into the intangibles bucket that’s different,” Jones said. 

The project would also evaluate ways to make it easier for investors to compare earnings for companies that grow through acquisitions with those that grow organically. “Today…you can get three very different answers,” Jones said at a December conference, referring to accounting for intangibles based on how they were acquired. 

Companies will likely have mixed views on the prospect of adding more of these assets to their balance sheet, potentially making it one of the FASB’s more controversial projects, said Scott Ehrlich, managing director at Mind the GAAP, an accounting training and consulting firm.