These two failures are caused by realization and allocation. Realization and allocation are central concepts of current GAAP, but they are the very reason why GAAP does such a poor job of reporting the real-world effects of economic events. The cause of the first failure is that GAAP confines the events financial report issuers are permitted to report mainly to only those that change the quantities of assets and liabilities, such as purchases, sales, receipts and payments. This is the realization convention, whereby only so-called realized changes in assets and liabilities are to be reported. In the ensuing 22 years, though, FASB has not made such a reexamination, and there is no sign it will do so in the foreseeable future.
Issuers usually disguise their desire and power to prevent more volatility in income reporting.
William Ihlanfeldt, a retired issuer, provided an undisguised example in the narrow area of pension reporting, field tests for which were sponsored by the Financial Executives Research Foundation. They did listen, but it was not without considerable prodding. A company selects each formula at the beginning of the period of allocation, supposedly to represent the effects of prospective underlying economic events. Financial report issuers cannot possibly have that foreknowledge about events that may occur after they select the formulas. And events do not occur as regularly as the use of the formulas implies.