COMMENTARY: Robert T. Sprouse on Financial Reporting.

Abstract This article comments on the financial reporting aspect of accounting. The discussion of the U.S. Financial Accounting Standards Board's (FASB) basis for conclusions addresses the issues related to comparability, economic consequences, and the relationship of costs and benefits. In its December, 1986 Exposure Draft, the Board had proposed that the standard become effective for fiscal years ending after December 15, 1987--in effect, for financial statements for the calendar year 1987. The final Statement, however, delayed that effective date for one year to allow companies additional time to renegotiate loan covenants or other provisions of loan agreements and to familiarize investors, creditors, and other users with the effects of consolidation on financial statement ratios. Tenneco Inc.'s reorganization provides a good example of an enterprise adjusting to the requirements of a new financial reporting standard. Tenneco's management may have preferred that such an adjustment were not necessary. Its reorganization obviously was made at a cost--both cash and non-cash. Nevertheless, if, as the FASB concluded, the new standard contributes to comparability among financial statements, it necessarily also contributes to the credibility of financial statements. In our economic system, the interest of Tenneco Inc, as well as the public interest, is thereby well served.