Opinion ID: 376668
Heading Depth: 4
Heading Rank: 4

Heading: Consolidated Statement of Changes in Financial Position.

Text: 42 Finally, appellant charges that the inclusion of AFDC in the net income figure in the Consolidated Statement of Changes in Financial Position buttressed the misimpression that AFDC was interchangeable with cash and constituted a violation of applicable accounting principles. Again, these objections do not withstand analysis. 43 The net income entry bears a footnote which states that AFDC is included in the computation, and further refers the reader to the definition of the accounting device previously set forth in the income statement. The reader was apprised that the net income figure contained certain cost elements within it by the fact that the same footnote was appended to an expense entry denominated as Plant and Equipment Expenditures. 44 Appellant contends that the AFDC portion of the net income figure should have been broken out and deducted from this total. Such an approach, however, would have required, in order that AFDC be effectively capitalized, that an identical entry be made on the debit side of the balance sheet and subtracted from current expenditures. This offsetting entry would have been improper since AFDC, comprised in part of an equity component, could not be deemed an ordinary expense, and could not legitimately have been characterized as a sum spent on plant and equipment. To avoid that distortion, prevailing accounting wisdom directed that AFDC be treated precisely in the manner it was in the Consolidated Statement of Changes in Financial Position, as undifferentiated items of both income and expense, each balancing the other. 45 Moreover, it is undisputed that the inclusion of AFDC as an element of income did not distort the bottom line of the statement; the ultimate net profit figure was not affected, and indeed the Consolidated Statement of Changes in Financial Position showed a decrease in working capital. It may be argued, of course, that notwithstanding this bottom line accuracy, the portrayal of AFDC as a component of net income was misleading because it artificially inflated the apparent cash flow into the company, a signal consideration in the eyes of some potential investors. It postulates the existence of investors who are at once savvy enough to appreciate concepts such as cash flow and yet unable to comprehend the definition of AFDC fairly and accurately set forth earlier in the prospectus. In determining the adequacy of disclosure, we are required to view the prospectus from the standpoint of the reasonable, not schizophrenic, investor. 46 Little need be said of appellant's contention that in adding the AFDC total to the Company's net income, Detroit Edison violated Opinion No. 19 of the Accounting Principles Board. That directive required the deduction of expense items applicable to current operations from overall revenues in determining the amount of cash or working capital generated internally by an enterprise during a reporting period. Since AFDC is not a current expense, but an expense which will be attributed to a later period, it does not seem that Opinion No. 19 condemned the inclusion of AFDC under the net income heading. Moreover, whatever its currency among accounting scholars, Opinion No. 19 had not been expressly incorporated into the Uniform System of Accounts. To the extent that the recommendations set forth therein were embraced by the FPC through its issuance of Accounting Release No. 10, it must be noted that that decree by its own terms was applicable only to annual reports to be submitted to the FPC on its own Form 1 and not to registration statements or prospectuses. 10 Neither the SEC nor the FPC, each of which reviewed the prospectus, objected to AFDC's inclusion amongst net income in the Consolidated Statement of Financial Changes. 47