FASB Urged to Revamp Personal Financial Statement Rules Amid Trump Case Controversy
August 28, 2024
The Financial Accounting Standards Board (FASB), the primary standard-setter for financial accounting in the U.S., is being pressed to overhaul its guidelines on personal financial statements, following a high-profile legal case involving former President Donald Trump that highlighted ambiguities in the current rules.
In a letter to the FASB, a leading accounting academic has proposed four key changes to ASC 274, which requires financial statements to be based on “estimated current value.” The rules have come under scrutiny after the New York State civil case against Trump and the Trump Organization, which raised key issues regarding its interpretation and application.
The Trump case, decided in February 2024 and currently under appeal, has raised concerns about the reliability of financial statements. Experts testified that the flexibility in Generally Accepted Accounting Principles (GAAP) allowed for significantly different value estimates for the same asset, potentially making the financial statements worthless.
“Ex-President Trump testified during his trial that, due to how flexible GAAP was, he considered his personal financial statements ‘worthless,’” said Dr. Daniel Tinkelman, a Professor of Accounting at Brooklyn College of the City University of New York, in an August 2024 letter to the FASB pressing for rule changes. “Expert witnesses for his defense argued that GAAP was so flexible that value estimates for the same asset could differ by orders of magnitude, and still be acceptable under GAAP,” he wrote. “I respectfully suggest that the FASB consider whether the accounting in this area needs to be revised and clarified. GAAP statements, in my opinion, should be useful, not ‘worthless.’”
Seeking Changes to Boost Transparency and Consistency
Tinkelman emphasized the need for clearer and more consistent standards to prevent similar issues in the future. To achieve this, he proposed the following four changes to current accounting rules to boost transparency and consistency in financial reporting:
Prohibit the use of the term “net worth” unless the reported figure accurately reflects the definition, which involves subtracting estimated taxes due upon sale of assets and payment of liabilities;
Replace “estimated current value” with “fair value”, as defined in the Accounting Standards Codification (ASC);
Confirm that the overall ASC 274 requirement to report assets and liabilities at estimated current value (or fair value) takes precedence over the implementation guidance on valuation methods; and
Require disclosure of changes in accounting methods, even if comparative statements are not presented.
The Ambiguities of ASC 274
The letter comes at a time when the FASB is planning to issue an agenda consultation document to solicit public comment about which new projects to add to its technical agenda. This timing is significant, as the FASB’s consideration of new projects is guided by specific criteria, including whether the issues are pervasive, have a clear solution without imposing excessive costs on companies, and can be implemented without significant unintended consequences to other rules.
In this context, it’s also notable that ASC 274, Personal Financial Statements, has an interesting history. It was originally adopted from the American Institute of Certified Public Accountants’ (AICPA) Statement of Position (SOP) 82-1. When the FASB incorporated various pre-existing guidance into its codification, ASC 274 became an integral part of the framework.
ASC 274 governs personal financial statements, requiring assets to be presented at their estimated current values and liabilities at their estimated current amounts. This section was central to the New York State civil case against President Trump and the Trump Organization, according to Tinkelman’s letter.
The discrepancies in the Trump case surrounding asset valuations, disclosure methods, and tax provisions underscore the need for potential revisions to ASC 274 to ensure reliable financial statements, the letter explains.
Specifically, the case disputed the definition of “estimated current value,” which ASC 274 defines as the amount a willing buyer and seller would agree upon. The Trump Organization’s financial statements were accused of inflating asset values, such as valuing Mar-a-Lago as if it could be sold as a private residence, ignoring legal restrictions.
Another issue was the disclosure of valuation methods. ASC 274 requires transparent disclosure of these methods, but the Trump Organization’s financial statements were alleged to use subjective and misleading methods, such as “as if” valuations.
Additionally, ASC 274 requires provision for estimated income taxes on asset value differences. The Trump Organization’s financial statements allegedly omitted these provisions, departing from GAAP.
The definition of “net worth” under ASC 274 was also contested. The Trump Organization’s financial statements reported net worth figures without accounting for estimated taxes, allegedly leading to inflated figures that did not comply with ASC 274.
[Thomson Reuters]
