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Jan. 14 — The Financial Accounting Standards Board has reset its agenda for 2015, seeking better formulations of bedrock concepts as it also focuses extra efforts on simplifying accounting principles and practices.
At the same time, the U.S. board hopes this year to finish three challenging, high-priority joint projects, conducted with the International Accounting Standards Board, on leases and financial instruments. The parts of the multi-faceted instruments effort that FASB hopes to complete in 2015 would yield two new sets of standards.
In recent comments, including in a Jan. 5 Bloomberg BNA interview, FASB Chairman Russell Golden provided details on the board's simplification efforts and on what he calls “foundational” efforts, such as the rulemakers' conceptual framework and on a disclosure framework. In the latter, the board aims to make disclosures, across a range of topics, more effective.
“We have reprioritized our agenda, balancing foundational and simplification efforts with an ongoing cost-benefit assessment of our standards in progress,” Golden said in his Dec. 9, 2014 speech at a major conference of the American Institute of CPAs in Washington.
“It's a different mix than what we're used to, but it is critical to fixing past problems and ensuring less complexity now and in the future,” he added.
Over the last five to seven years, FASB had been working virtually full-bore on completing the major projects being carried out in tandem with IASB. The boards have had some significant success in that effort—most notably in the far-reaching, jointly-issued standards on revenue recognition. Those take effect in January 2017 for public companies and in 2018 for private companies, barring a possible deferral that rulemakers expect to consider over the next three or four months.
In the hour-long interview with Bloomberg BNA, Golden fleshed out a host of issues, from revenue recognition and leases to the U.S. board's new footing with IASB, and FASB's efforts to work with other standards setters around the world. He also described how FASB is trying to cut “clutter within our accounting standards,” a term he used in his Dec. 9, 2014 AICPA speech.
Highlights of the Jan. 5 interview include Golden stating that:
• FASB expects to consider in the first quarter, for potential added guidance to ease the shift to the new revenue rules, the topics of licenses, identifying separate performance obligations, and gross-versus-net presentation;
• also on revenue recognition, more research would be carried out on whether to delay the 2017 effective date of the new standards, with the board planning to possibly take up the deferral question at the end of the first quarter or early in the second quarter;
• he expects that FASB will issue, mid-year, long-brewing final standards on financial instruments—in separate statements on classification and measurement and on impairment, which includes prescribing how banks should report loan and other credit losses;
• the board hopes to issue sometime in 2015 a new leases standard, which has proved to be a difficult, and so far, divergent effort with IASB;
• as FASB and IASB have essentially ended their exclusive standards-setting partnership, the U.S. board has been reaching out to other standards setters for multilateral learning; and
• FASB will continue to work with IASB in framing any post-issuance implementation guidance on converged accounting principles, including revenue recognition and leases, but also possibly on business combinations, if the U.S. panel moves toward improvements in that area.
On the international accounting relations front, Golden spoke in the Jan. 5 interview about continuing to work with IASB—to finish the leases project and in current and future implementation guidance efforts on several topics. He also suggested FASB is forging stronger links to other national standards setters and regional bodies.
“We currently continue to work with IASB on the joint projects,” Golden said. “You'll continue to see joint meetings on leases. We'll also work with IASB as it relates to joint implementation” on converged projects. That includes revenue recognition and short-term work on business combinations aimed at more aligned standards, he said.
“I think it's also important that we continue to build relationships with other standards setters and that we engage in a dialogue with them about areas that they are working on,” Golden told Bloomberg BNA.
Those efforts include outreach to and meetings with standards setters in Canada, Japan, South Korea, and China. In that work, FASB is focusing particularly on jurisdictions where U.S. generally accepted accounting principles are the elected accounting rules of the road for foreign companies that might be based in Toronto or Tokyo, for example, and those that don't have to use their local accounting standards.
“I think both FASB and the other standards setters can learn from each other’ experiences, and I'm happy to say that over 2014 we built strong relationships with a number of other standards setters to continue in that dialogue,” Golden said.
Notable news in 2014 that likely will have repercussions for FASB in 2015, and possibly years after, is the naming by SEC Chairman Mary Jo White of a new chief accountant for the agency, James Schnurr.
After joining the commission staff in October, Schnurr, a former long-time partner at Deloitte & Touche LLP, discussed with Golden and others at FASB topics such as the future of international financial reporting standards, or IFRS, in the U.S. and how to help making companies' transition to the revenue recognition standards as smooth as possible. In a rare alignment of the stars of institutional accounting regulation, Schnurr, Golden, and FASB Vice Chairman James Kroeker all are former partners and were basically contemporaries at Deloitte.
In comments late last year, Schnurr gave his views on the general circumstances in which he believes a deferral of the revenue rules would be warranted, if FASB were to “revisit some of the wording” in the standard. He said Nov. 18 that would be “a reasonable reason” for the board to delay the effective date.
Earlier in November, Schnurr declared that “there's no way” the FASB-IASB Joint Transition Resource Group for Revenue Recognition (TRG) was able to handle “in a timely manner” the proliferating implementation issues that had surfaced in the group's first two meetings last year.
Finally, in the biggest news of 2014 produced by the new SEC chief accountant, he suggested in December that U.S. public companies might be allowed to do supplemental financial reporting under IFRS, to complement their U.S. GAAP filings. Staff accountants at the commission are studying that scenario.
Offering an initial reaction to Schnurr's suggested path, FASB's Golden was receptive. He told reporters Dec. 9, 2014 that he “was very impressed by Jim Schnurr's comments.”
The FASB chairman described the voluntary supplemental reporting as a “fourth alternative” regarding the possible future of IFRS in the U.S. The other paths are full adoption of the IASB-written rules—not seen as a likely course, a true option to use either IFRS or U.S. GAAP, and the so-called “condorsement” idea—coined by former SEC chief accountant Paul Beswick, Schnurr's predecessor.
The last would be built on FASB and IASB continuing to carve out converged rules together—a challenging prospect, as seen over the last two years—while the U.S. board would play a pivotal role in endorsement of the resultant IFRS by U.S. authorities. Condorsement, similar to the full adoption of IFRS, seems to have faded as a probable—and especially near-term—eventuality with regard to the future of the international standards in the U.S.
In late May 2014, IASB and FASB issued what rulemakers and at least one regulator called a convergence success story: the all-in-one, converged standard on revenue recognition. That set of rules deals with what many in financial accounting call one of the most important, if not the most important, line in the financial statements. Regulators hope that in the U.S., the new, one-stop-accounting standard on revenue will prevent the kinds of problems in financial reporting that in the recent past were a leading cause of restatements and SEC enforcement actions.
However, the boards, along with regulators and auditors, face the challenge of seeing the aligned rules stay aligned—in other words, trying to insure that the like-worded, like-minded standards are applied consistently.
Golden said in the Jan. 5 interview that the two TRG meetings, to date, have been a success. From the discussions, “both boards have been able to understand” some of the implementation challenges facing companies and their auditors.
“There have been other discussions at the TRG where I think we have been able to educate our stakeholders about what was the board's intentions to help resolve potential diversity before companies implement the standards,” Golden told Bloomberg BNA.
“At this point there still are a number of issues to be raised to the TRG,” he said. “And we've made those publicly available.”
The FASB chairman noted that he had authorized the board's staff to conduct research on “three potential, formal standard-setting implementation activities.” Those pertain to intellectual property, or licenses; gross-versus-net presentation; and “determining separate performance obligations,” he said.
“Those topics will be addressed by the board as potential agenda topics in the first quarter,” Golden said.
In addition, Golden noted that he had cleared the staff's work on “how the timing of implementation is going” both for large and small public companies and for private companies. “As you know,” he added, “we've received a fair number of requests to defer the effective date.”
“The point of this research is to understand where companies are in their implementation, to determine if they need additional time or not,” Golden said. He said he hopes to bring that issue to the board “in the late first quarter, early second quarter” of this year.
The input on implementation received so far has been “mixed,” the FASB chief said. A focus of the preparation for the shift to the rules has been the volume and type of information required for retrospective application of the new standard.
“Some companies believe they will be ready and don't want a deferral,” he said. “They believe a deferral could potentially increase their cost.”
“Other companies, however, do believe a deferral is warranted because they need additional time to deal with some of the implementation questions that I talked about earlier,” Golden continued. He cited that as one reason why he wanted the FASB staff “to research all of this at the same time.”
The U.S. board would like to understand, for example, whether a company that would like to do retrospective accounting is “avoiding potential retrospective accounting because of the timing.”
In the interview, Golden also noted that throughout the work conducted on the prospects for the revenue reporting rules' implementation, FASB would like to discuss the research and other activities with IASB.
The U.S. board would do that “to understand if implementation improvements in the U.S. could also be beneficial to the rest of the world,” he said. The London-based board is “involved in all of our research and, consistently throughout the project, we'll share information with them,” said Golden.
Later in the interview, the FASB chairman said that, based on discussions with other accounting standards setters, the U.S. has more implementation questions about revenue reporting under the new rules—“even though it's the same standard applied in the U.S., that would be applied by others as well.”
“And that doesn't surprise me,” he said. He spoke of FASB and IASB, in their joint rulemaking on revenue, “coming from two different places.” The international board had two or three standards pertaining to revenue, while U.S. GAAP had many, many more pieces of industry-specific guidance, Golden suggested.
“So other parts of the world were going from an approach where they had less detailed information” to a situation in which they had more information, he said. The U.S. “was going from a situation where it had more detailed standards to one where there is more consistency across business models.”
“I think that's why there's more questions in the U.S. than there is elsewhere,” Golden said.
Golden's assessment of the current direction and level of success of the recent work of FASB and IASB on leases seems to encapsulate the U.S. board's scaled-down expectations for joint projects of the boards that have turned out to be fairly tough slogs. The quest for virtually identical wording in standards has been replaced over the last two years with an overall goal of minimizing differences.
Unlike in the revenue recognition effort, which yielded many similarly worded provisions, the project on leases has led to fairly significant divergence—especially in income statement presentation. In comments in December, the SEC chief accountant lamented the boards' lack of accord on policies for reporting lease-related expense.
The quest for virtually identical wording in standards has been replaced over the last two years with an overall goal of minimizing differences.
However, the boards are closer together on the balance sheet treatment of leases, as FASB chairman suggested in the Jan. 5 interview and as noted in a December speech by IASB's vice chairman.
Golden offered reasons for the U.S. panel's collection of lease accounting decisions pertaining to the performance statement. Those tentative decisions—and FASB hasn't shown signs of shifting course—largely leave in place existing U.S. GAAP treatments for lease expense allocation and differ from the IASB's single approach for lessee accounting. The London-based board's model calls for all leases leading to amortization of a right-of-use asset that would be recorded separately from interest on the lease liability.
In mid-December, FASB and IASB agreed on a key issue of scope of the planned standard—on essentially what is a lease. Golden noted Jan. 5 “we were able to converge on scope,” and specifically on the definition of a lease, he said.
“I think the definition of a lease is very important to minimize differences that relate to the balance sheet,” the FASB chairman said. “We have agreed on the appropriate measurement and to record these as assets and liabilities.”
However, Golden also noted that the boards differ on whether to have what they call “small-ticket” leases subject to the new lease accounting model—most important, to have such leases lead to lessees recording liabilities on the balance sheet.
IASB doesn't plan to include small-ticket items in the scope of its planned standard. “FASB at this point is concerned” that such treatment “could, in some industries, allow for material obligations to not be depicted as a liability,” Golden said Jan. 5.
The FASB chairman also highlighted the boards' different positions on the treatment of leases in the income, or performance, statement. The U.S. panel, he said, advocates an approach that would result in little or no change from today's accounting: there would be two types of leases, with one treated as a financing and the other leading to straight-line expensing.
Golden explained the board's two main reasons for that view. “First, we don't see a lot of investors adjusting reported performance results,” he said. “We do see a lot of investors adjusting reported balance sheet and reported obligation approaches.”
“So we think that ours will be beneficial to the U.S. investors,” he added, “because it will adjust the balance sheet,” providing a more refined measure of assets and liabilities. However, it wouldn't change the income statement, he said.
Citing the second reason, Golden said FASB members believe their proposed approach on income statement treatment of leases would be “substantially less costly to implement, because companies wouldn't have to change their systems as much if you are only changing the balance sheet.”
Golden said staff accountants are analyzing what “the ultimate difference in reported information” would be under the FASB and IASB lease accounting approaches. He suggested that the two approaches wouldn't lead to a difference in total net income.
“So it is a difference between the two boards,” Golden said of FASB's and IASB's respective income statement accounting paths for leases. However, he added, “it's not as great, I think, as some initially believe when you're talking about a number of companies that have a number of leases and those leases don't all come due at the same time.”
IASB Vice-Chairman Ian Mackintosh seemed to take a cup-more-than-half-full view of the boards' differences on lease accounting in his Dec. 9, 2014 speech at the AICPA conference in Washington. “We have not reached agreement on every aspect,” he said, “but we are 100 percent converged on the fundamental issue, which is that leases are present obligations that need to be recognized as liabilities on the balance sheet.”
For his part, James Schnurr, the SEC chief accountant, signaled disappointment in the boards' discord thus far on the income reporting aspects of leases.
“The two parties have worked on this a long time,” Schnurr said Dec. 8, 2014 at the AICPA conference in Washington. “It's just unfortunate that they can't agree on, primarily, income statement treatment of leases, from lease payments.”
The SEC chief accountant indicated that he had spoken with accountants at FASB about making further efforts toward reaching accord.
Related to that, Golden said Jan. 5 that “projects evolve over time and we continue to try to encourage each board to try to work through their differences.”
“We're still working together” on leases, the FASB chairman said of his board and IASB. “We have plans for joint meetings in 2015.”
Footnote disclosure would be on the leases menu, Golden suggested, as would what would be the effective date for the planned standards and “consistent implementation guidance” for applying the aligned definition of a lease.
“We want to talk and see if we can reconcile some of these differences,” he said.
Asked if 2015 would be the year that FASB would hope to have a final leases standard completed and issued, Golden responded: “We're moving forward towards that goal.”
In the Jan. 5 interview, Golden said that the board hopes to publish two final standards on financial instruments “in the middle of this year”: one on impairment, which notably includes accounting for loan and other credit losses; the other on classification and measurement of financial instruments.
The long-running, multi-part standard-setting effort on instruments began a decade ago. Since 2005, FASB and IASB pursued the rulemaking jointly. However, as the years passed by—including amid pressure by regulators to converge on impairment after the financial crisis—the boards drifted apart in key areas.
Last July, IASB issued a package of final standards on instruments, which were mostly the product of the joint rulemaking with FASB. Those become effective in January 2018.
One of the main new IFRS on instruments, on classification and measurement, adheres to a plan previously worked out with FASB. Classification is to hinge on cash flow traits of instruments and the business model in which an asset is held.
In March 2014, FASB voted to drop the cash flow characteristics test in its redeliberations of the classification and measurement proposal.
Looking back further, in its rulemaking on instruments, the U.S. board retreated significantly from a May 2010 exposure draft on instruments. In the 2010 document, FASB had “proposed a much greater use of fair value measurement for financial assets and liabilities than exists in U.S. GAAP,” as noted in a February 2013 edition of “FASB in Focus” published on the release of a “re-exposed” proposal on classification and measurement.
The 2010 proposal contained provisions that would have led to recording loans at fair value. Prospects of that expansion of fair value-based measurement and recognition led to substantial and vocal opposition from bankers.
In the Jan. 5 interview, FASB's Golden commented on the reduced scale of change in the classification and measurement effort.
“Based on the feedback from the 2013 exposure draft,” he said, “what we learned was that the improvement to stakeholders for U.S. GAAP was to make targeted improvements. Not substantial changes.”
Therefore, he said, the board has been advancing toward “targeted changes.” A “value realization model” is the rulemaking guidepost, he suggested, toward improving the accounting for instruments and cutting complexity.
He spotlighted the proposed treatment of equity securities as “one of the most significant changes” in prescriptions for classifying and gauging financial instruments. FASB would generally require that equity securities should be measured at fair value, with changes recognized in net income—“because the only way to realize the value related to an equity security would be to sell it,” Golden said
In the summer of 2014, Golden and a senior staff accountant signaled FASB's intent to stick with its own model for impairment of loan and other credit losses—one that differs from the approach that is a linchpin of IASB's standard issued last July.
The U.S. board calls its expected losses approach the “current expected credit loss” (CECL) model for impairment. IASB faults FASB's approach on impairment for, in the view of the London-based board, leading to excessive up-front recognition of credit losses. However, Golden has defended the CECL model as one that sheds needed light on risks facing banks and is favored by many investors.
At an AICPA conference on banks' accounting on Sept. 9, 2014, the FASB chairman described “overwhelming support by investors” for the U.S. board's impairment recipe. His words were offered in response to a question about which “stakeholders” supported the FASB approach in light of what the anonymous questioner said was a lack of favor registered by preparers of financial statements and auditors.
Golden suggested that a final standard built on the current expected credit loss model—a departure from current GAAP's linchpin of incurred losses—would yield “a better depiction of the true risk within your banking book.”
In the Jan. 5 interview, the FASB chairman said that the board hopes to issue the two instruments standards in mid-2015. “They might go on the same day,” he said. “They might go a week apart.”
The board has not set effective dates for the planned standards on instruments. However, based on the January 2017 advent of the May 2014 revenue recognition rules and the IASB's January 2018 effective date for its own new instruments standards, it is unlikely that the forthcoming FASB rules on instruments would be effective before 2018.
That would be almost a full decade after the financial crisis, which spurred the difficult joint standard-setting on instruments by FASB and IASB.
“The global economic crisis of 2008 further highlighted the need to improve the existing accounting model for financial instruments, whose gaps and inconsistencies were exacerbated in an increasingly complex economic environment,” the U.S. board wrote in the February 2013 “FASB in Focus.”
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