FASB CHAIRMAN RUSSELL GOLDEN Q&A
In a wide ranging interview Jan. 10 with Bloomberg BNA correspondent Steve Burkholder, Financial Accounting Standards Board Chairman Russell Golden discusses the board's top priorities for the new year, emphasizing such “foundational projects” as its conceptual framework, disclosure framework, and the presentation framework as part of an effort to reduce accounting complexity. He touches on such high priority convergence projects with the International Accounting Standards Board such as revenue recognition, leasing, financial instruments, and insurance, and the relationship with IASB going forward. An edited transcript follows.By Steve Burkholder, with contributions from Denise Lugo
As the Financial Accounting Standards Board starts its 41st year of existence, what are its priorities for 2014? Here I have in mind general, over arching goals such as those you cited in your speech at the December American Institute of CPAs Conference on Securities and Exchange Commission and Public Company Accounting Oversight Board developments.Golden:
Our first priority is to continue the substantial progress we've made on the significant convergence projects. I fully expect us to complete revenue recognition; to continue progress and complete the improvements to impairment, classification and measurement, and leases; and to continue substantial work on insurance.
We've also started an initiative focused on how we can reduce complexity and promote simplification within U.S. [generally accepted accounting principles]. As a first step, I outlined how I think about complexity. We are in the final stages of instituting a policy where the staff can bring to the board an analysis of areas where we have increased or reduced complexity so that the board can understand that before we make a decision to move forward on a disclosure document or a final document.
I also anticipate that we'll be looking back to existing standards to see if there are areas in which we can reduce complexity. We'll also continue to focus on improving financial reporting for private companies to ensure that their financial statements provide decision-useful information to investors at a reasonable cost.Bloomberg BNA:
It sounds like a pretty concerted effort on reducing complexity. You've talked about reducing complexity, for example, during your speech at the FASB@40 conference in New York Sept. 12.Golden:
I served as the senior adviser to the chairman on the committee to improve financial reporting, also known as the Pozen Committee [The Advisory Committee on Improvements to Financial Reporting, headed by Robert Pozen. Jim Kroeker [former SEC chief accountant and current FASB vice chairman] also served as the senior government staff member at that point.
Both he and I are committed to understanding and reducing complexity, and promoting simplification in our financial reporting system. So this was an initiative that both he and I thought would be extremely important for the board to focus on, not only in 2014, but in the years thereafter.Bloomberg BNA:
On another related topic, do you and the FASB contemplate changes and approaches such as more comprehensive pre-agenda research that would perhaps cut down on the time it takes to complete what often turns out to be long duration standard-setting efforts?Golden:
We do. We've been working for a number of months on what would be improvements to our pre-agenda process. I hired a new assistant director to focus on pre-agenda research, where he and his staff could proactively go out into the market place and understand emerging trends and areas where financial reporting could be improved. I think it's important that when considering an agenda request, the board understands the pervasiveness of the issue and the cost-effective alternatives before we consider whether or not a new project should be added.Bloomberg BNA:
I've heard you talk about creating a mix of projects?Golden:
Yes, I also think in how we manage our agenda that the board needs to focus on those types of projects that will help both this board and future boards think about financial reporting holistically. I sometimes refer to these projects as foundational in nature.
Examples of those foundational projects are the conceptual framework, the disclosure framework, and the presentation framework. I think that some of the complexity that we have today is because the conceptual framework is not complete. I think it's important that we lay the foundation—that is, complete the conceptual framework and complete the disclosure framework—so that future standards can be less complex.
I think we also need to balance our agenda by going back and looking at some prior standards that people have viewed as complex and reduce the complexity. I want to balance the agenda between the foundational projects, reducing complexity, promoting simplification and promoting improved transparency—that is, additional improvements that people have said need to be made on certain types of activities: pensions, hedging, liabilities and equity. Then I think we also need to stand ready to provide implementation guidance as we complete these improvements.
I was very happy that both the FASB and the IASB have agreed to create the revenue recognition transition resource group. I think it's important that standard setters stand ready to provide implementation guidance and make any tweaks that may be necessary to ensure a smooth transition. As we complete revenue recognition, we will be introducing the members of the transition resource group. We'll be announcing a series of meetings so that we can be there to help our stakeholders as they move forward in the implementation phase.“I want to balance the agenda between the foundational projects, reducing complexity, promoting simplification and promoting improved transparency—that is, additional improvements that people have said need to be made on certain types of activities: pensions, hedging, liabilities and equity. Then I think we also need to stand ready to provide implementation guidance as we complete these improvements.”
Would it mean that the transition resource group that's planned for revenue recognition would also serve as a model, or you'd have parallel resource groups for other standard-setting efforts?Golden:
My hope is that as we complete classification and measurement, impairment, leases, and insurance, we would work to create transition resource groups for those standards as well. I suspect that we will learn from the revenue-resource group and that we will make tweaks accordingly to those other transition resource groups. The revenue transition resource group is really based on what we did following the fair value measurement standard—known at that time as Statement 157 [currently ASC 820]. We've talked to people about what they thought went well. We've talked to people about what they thought did not go well, and we have made improvements accordingly.Bloomberg BNA:
I'll have some more specific questions on the resource group, too. Regarding what might be on the FASB's agenda soon as the high-priority convergence projects wind down, the FASB has conducted outreach—especially through the Financial Accounting Standards Advisory Council—on what should be the next agenda. What are the likely new additions to the agenda?Golden:
I hope in late January or late February to have a public board discussion about how we want to balance our agenda and talk about how we ought to remove some projects that have been on the board's agenda that maybe at the time was a priority but is not a priority today.
The types of things that we are thinking about adding to our agenda, or allocating pre-agenda research to, are the conceptual framework, hedge accounting, liabilities and equity, pensions, and government grants.
As you can see, that's a substantial amount of projects and would require a substantial amount of resources. The board would have to consider which of those are top priorities and how much resources we could allocate to them. Those are the decisions the board members will be asked to make [probably in late January].Bloomberg BNA:
As you might know, [SEC Chief Accountant] Paul Beswick in one of his recent speeches suggested it would be good to reduce complexity in certain areas, and two of the candidates he mentioned were liabilities and equity, which has been a challenge over the years, and also hedge accounting. Regarding pensions, I imagine that might be a comprehensive project. Do you expect to take up smoothing?Golden:
In pension accounting there are a number of things that people have raised as issues. One is the alternative accounting treatment to changes in assumptions. Another is potential change in utilizing a discount rate in a current measurement. Some stakeholders have sent us some information about why it would be important to have a long-term view of a discount rate—20-, 25-year average. Others, however, have said it should be a current measurement. Also, current U.S. GAAP [on pensions] is not consistent with that of IFRS, and that will be something the board will consider—can we make an improvement to U.S. GAAP that is more closely aligned with IFRS? And, finally, there has been diversity observed in how companies account for cash balance plans, or defined-benefit plans that allow for lump-sum distributions. That will be another topic where the board will consider if it is a sufficiently pervasive issue where diversity needs to be resolved for investors.Bloomberg BNA:
Would pensions be an area where you might be cooperating somewhat with the Governmental Accounting Standards Board?Golden:
I believe it's important that we have a strong dialogue with the GASB, that we understand what they have learned, they understand what we have learned, in dealing with projects that are trying to account for similar economic phenomena. So they've obviously done a lot of research around pensions and [other post-employment benefits], and if we were to get into pensions we would look to what the GASB has learned. We would also look to what other standard-setters — the [International Accounting Standards Board], as well as others around the world — think about, what research they have done, so that we can arrive at the best possible product for investors in the U.S. capital markets.Bloomberg BNA:
Regarding the high-priority projects, and you already touched on revenue recognition a bit, has the FASB narrowed down the time frame for its planned first-quarter issuance of the final standard? There were some indications that it would be issued early in the first quarter.Golden:
All I can tell you is that board members are expected to receive the final draft next week. I would want the board members to take a final look at that, and then we would proceed through the normal drafting and production and editing cycle. I believe it is important that both boards issue this at the same time.“There is one difference [with revenue recognition] in disclosure. Under U.S. GAAP, if you are a public company, we would require specific disclosures be made in the interim financial statements. That is not something the IASB agreed with. I believe that is predominantly because of the emphasis that our capital markets place on interim financial statements. In other words the U.S. requires interim financial statements quarterly, and that philosophy is not consistent around the world.”
Is there an expectation that the boards will issue a final standard on revenue recognition at the same time?Golden:
That is the current plan, and I believe it is the appropriate plan.Bloomberg BNA:
The SEC chief accountant has effectively called the joint FASB-IASB revenue recognition effort a convergence success story. What explains that? The FASB, for example, had to winnow out scores of pieces of industry specific guidance to arrive at essentially a single model, correct?Golden:
Correct. I would agree with the SEC chief accountant. I believe revenue has been a convergence success. I believe it will improve U.S. GAAP, and I believe it will improve IFRS. And I believe it is substantially converged.Bloomberg BNA:
If there are differences—and you say “substantially converged”—what are some of the differences? Would it be in disclosures, I understand?Golden:
There is one difference in disclosure. Under U.S. GAAP, if you are a public company, we would require specific disclosures be made in the interim financial statements. That is not something the IASB agreed with. I believe that is predominantly because of the emphasis that our capital markets place on interim financial statements. In other words the U.S. requires interim financial statements quarterly, and that philosophy is not consistent around the world.
The other difference has to do with a collectability threshold—that is, the level of confidence [enterprises have] that they will collect from their counterparty. We have the same word—“probable”—but “probable” means two different things.Bloomberg BNA:
In the U.S. context it's generally…Golden:
It is a higher level of confidence than that in IFRS. In IFRS, it is 50-50, 50.1 [percent probable], “more likely than not.” In the U.S., “probable” is a higher confidence level than “more likely than not.”Bloomberg BNA:
You spoke already about the planned transition resource group. It has several aims, I believe—to ease initial implementation and to identify and potentially head off, or at least mitigate, what could be problems in implementation. When do you expect the group to be named and seated?Golden:
I expect it to be around the time that we issue the final document.Bloomberg BNA:
A few months later perhaps, or weeks?Golden:
Shortly thereafter.Bloomberg BNA:
I think you've talked about looking for experts who have worked in revenue recognition. Have members been selected?Golden:
There is a list of interested parties, and we are working through that.Bloomberg BNA:
Where will the group meet and how often would it meet?Golden:
How often would be dependent upon how many issues arise. At this point, it's scheduled to meet in Norwalk, but if it is more effective to meet somewhere else, we would do that.Bloomberg BNA:
Moving on to leases, the joint FASB-IASB project on leases has encountered some headwinds. Last year, at the “FASB@ 40” conference in New York, you said that a final standard on leasing should be completed in 2014. Is that still the expectation, as you indicated earlier, and, if so, when?Golden:
We plan on having initial joint discussions this month [January]. Those initial discussions will include lessor accounting and lessee accounting. Those are the two most significant issues, and we felt it was important to bring the two most significant issues at their early stages of redeliberation. In January, the discussion will be held to educate all members of the FASB and IASB about the alternatives the boards should and could consider. A decision will be made in March.Bloomberg BNA:
And the decision would be on whether to continue with the dual approach that's in the revised proposal?Golden:
The decision would be based on what we think should be the accounting for lessors and lessees. So it would include an evaluation and analysis of the dual approach; the 2011 [exposure draft]; other approaches; as well as potential things we could do to make it more cost-effective. For example, utilizing a portfolio approach and/or extending the short-term lease exception.Bloomberg BNA:
Moving on to financial instruments. In this multifaceted joint project with the IASB, the two boards appear to be much closer together, so far in the pending effort, on the classification and measurement element of the instruments project than they are in impairment, or accounting for loan and other credit losses. Could you give a thumbnail sketch of where the boards are in their respective approaches and what might be some of the upcoming standard-setting activities?Golden:
Just before the holidays we met as a board and by majority vote concluded to continue with an approach similar to what was exposed for impairment. We will in the future consider whether or not there should be an initial transition of that initial change between current reserves and reserves under the [current expected credit loss, or CECL] model.
There was extensive analysis done by the staff and board to consider the CECL model, the IASB's model, and other models that were recommended by the banking community and others. This analysis helps us understand the impact on the balance sheet at the effective date, to understand the impact on the balance sheet under various scenarios—nine, in fact, that were consistent with what often happens in the U.S. as loans move through various economic cycles. It helps the board understand in each of these models the impact on the balance sheet as well as the income statement.
On classification and measurement, the board considered whether or not we should continue with a concept similar to “solely principal and interest,” like the IFRS approach, and if we should continue to bifurcate embedded derivatives, which is consistent with existing U.S. GAAP but not consistent with the IASB's approach. At that meeting, the majority of the board members recognized that existing U.S. GAAP is complex, but based on input from our stakeholders and comment letters, we decided to retain the aspect of bifurcation. Board members felt that, even though it is complex, it provided better information to investors.Bloomberg BNA:
So there would be an effort to perhaps simplify that?Golden:
What we heard from our stakeholders was that the proposal, which was “no bifurcation” and focusing solely on principal and interest, would increase complexity in U.S. GAAP. And while the existing accounting is complex, it is less complex than what we had proposed.Bloomberg BNA:
When do the two boards plan to issue final standards on classification and measurement and on impairment? The technical plan lays out a timetable for the first half of 2014. Is that still the plan?Golden:
I believe that's still the plan.Bloomberg BNA:
What do you see as the possible repercussions should the FASB and IASB not end up in harmony on impairment, as is likely, according to IASB Chairman Hans Hoogervorst? Post-crisis, this was seen by regulators in Washington as a kind of “must-converge” topic.Golden:
In evaluating the IASB approach to impairment as well as the approach we had proposed, we met with a substantial number of investors and asked them how they evaluate loan losses, and what additional assumptions and changes do they make to reported results. We asked not only U.S. investors, but also international investors. We believe that U.S. investors perform analysis based on a full expected loss, and we believe that the approach that is being promulgated by the FASB will provide additional information to investors who use U.S. GAAP.Bloomberg BNA:
Still there is some concern about a level playing field, when you look at global banks that operate in these huge worldwide markets, on such an important item as the loan loss reserves. However, it sounds like what you are saying is in tune with your overall duty to basically serve the capital markets and financial reporting needs in the U.S.Golden:
When I voted, I was focused on what I felt was an improvement for those investors that use U.S. GAAP, irrespective of which country or which capital market they are associated with. As you know, there are a lot of capital markets around the world that do use U.S. GAAP.Bloomberg BNA:
The next question concerns the insurance contracts project. It's another joint project with the IASB, of course, which is seen as being more important at the international board because of the dearth of insurance guidance in IFRS. Does the FASB expect to re-vote on whether it will continue with the joint project, or will it continue to move ahead jointly with the IASB to conduct redeliberations and issue a final standard?Golden:
From a project planning standpoint, insurance is a challenge. The IASB recognizes the need to improve IFRS and have a consistent insurance standard. They also have been further along in their project. They started before us. They've had more exposure documents and their latest exposure document had a different scope of questions than our project. We are in the process of analyzing all of the comment letters that we received, all of the feedback that we got, and all of the comment letters that the IASB received, to try to work with the IASB to resolve the differences between the two boards, recognizing that their anticipated timeframe for completion is sooner than ours.Bloomberg BNA:
At the roundtable discussions in Norwalk Dec. 2, a number of panelists said the cost of implementing the proposals on insurance contracts would not justify an overhaul or revamping of US accounting unless the boards are able to converge the rules in key areas. How do you plan to address those concerns?Golden:
The first thing we are going to do is to ensure that the board members fully understand all of the feedback—specifically the point you're raising, Steve—then, prioritize the questions that come to the board. I think the first question that should come to the board is about the scope—meaning, should this apply to insurance contracts or insurance entities?—as well as if we should continue to make an improvement to the property and casualty side of U.S. insurance.
Then I think we need to work with the IASB on the other significant issues and significant differences between the FASB and the IASB approach – that is, risk margin and unlocking the margin, as well as an area that has been raised by many, and that is the use of OCI [other comprehensive income] for changes in discount rates. I am optimistic that we can do those joint discussions in March.Bloomberg BNA:
You mentioned earlier the disclosure framework project. What is the project's significance and where does the board stand on it right now?Golden:
I think the project is an important priority of the board. I think that we have added a substantial amount of disclosures. I think those disclosures have helped investors make more informed decisions, but we don't have a consistent philosophy or foundation for how we think about making disclosure improvements. So the disclosure framework first starts with a conceptual description of why disclosures are important and the information the disclosures should be providing. The board has been working on that, and we are in the final stages of issuing an exposure document on an amendment to the conceptual framework about disclosures.Bloomberg BNA:
And that's expected…Golden:
In the next couple of months. While that is out for exposure, the board will start to consider changes to existing disclosure requirements to make disclosures more effective for investors. That may mean reducing disclosures in some areas; that may mean increasing disclosures in other areas.
You may know that the SEC recently issued a press release where they described or observed the need to work with the FASB to consider redundancies of disclosures between the financial statements and the other financial reporting packages promulgated by the SEC. I believe that is an important part of the disclosure initiative—that is, to work with the SEC to ensure effective disclosures.Bloomberg BNA:
You also spoke earlier today about the conceptual framework. Some veteran standard-setters have suggested the long running project is a linchpin project worthy of concerted effort to complete. And you mentioned this is on the roster of potential new agenda projects. What is the status of work on a conceptual framework at both the FASB and the International Accounting Standards Board? It's been more active at the IASB.Golden:
It is more active at the IASB, and they've issued a discussion paper. There has been a number of discussions at their Accounting Standards Advisory Forum (ASAF), which is made up of various standard-setters from around the world. I am a participating member of the ASAF. At the FASB we have prepared an initial analysis of areas where the conceptual framework can be improved. That is, areas where there is a hole or no guidance, areas where we think the guidance could be updated. And we are thinking about what would be the most effective way to manage that project, in other words, which topics should go in front of other topics.
In a couple of weeks we plan to have an in-depth, day-and-a-half workshop with members of the academic community to get their opinions on where they think the conceptual framework could be improved, and what they think would be the most effective and efficient management of that project. All of that will help the board decide whether to reinstate the conceptual framework project and, if so, what will be the scope of that project and what would be the most effective way to order it.Bloomberg BNA:
Is that workshop going to be public?Golden:
No.“I think we should advise the IASB on improvements that we made in U.S. GAAP, why we felt it was an improvement, and how it could or could not be an improvement to IFRS. I think if we continue to improve U.S. GAAP, if we continue to work with the IASB, both of us can continue to improve our respective financial reporting languages and we can get them closer together.”Bloomberg BNA:
On the international front, as you mentioned, the IASB has formed this relatively new Accounting Standards Advisory Forum, which is to be a vehicle for receiving counsel on standard-setting topics from national and regional standard-setters and other interested parties. As you mentioned, you, and also board colleague Tom Linsmeier, attend ASAF meetings. Are you optimistic that the ASAF will fulfill its role and be able to render timely, meaningful advice on the substance and direction of standard-setting?Golden:
I believe it is a worthwhile objective to obtain input from national standard-setters and regional standard-setters. And I believe the IASB is committed to using this forum to obtain that timely advice that they feel they need to make improvements to IFRS.Bloomberg BNA:
I asked that because at a recent meeting of FASAC, a view was expressed that the advice might not have been timely, or that the debate focused on what was essentially a sort of fait accompli at the IASB, or at least some tentative decisions that had already been made. And I think that was on financial instruments, where the horse might have been already half way out the barn door. This is acknowledging the start-up of or sort of transition to a new forum where you have standard-setting in progress already—that's what prompted that question.Golden:
[slight nodding, in acknowledgement]Bloomberg BNA:
In your speech at the “FASB@40” conference, you mentioned that basically the IASB and FASB were on sort of a new footing—my words—and that the more intensive bilateral relationship was ending. At the same time you wanted to move forward, of course, and make efforts to have converged standards, while concurrently fulfilling your financial reporting responsibilities in the U.S. Could you describe how you would make that work?—this sort of balancing, I believe, with the idea that because you're not working in tandem on projects directly, that inevitably there are going to be some differences that would arise.Golden:
I think that it should continue to be the goal of the FASB to make improvements to U.S. GAAP and to consider the capital markets that use U.S. GAAP. I think as we make improvements we should think about improvements that others have made—specifically, the IASB. I think that we should understand the issues in IFRS. I think we should advise the IASB on improvements that we made in U.S. GAAP, why we felt it was an improvement, and how it could or could not be an improvement to IFRS. I think if we continue to improve U.S. GAAP, if we continue to work with the IASB, both of us can continue to improve our respective financial reporting languages and we can get them closer together.Bloomberg BNA:
Some observers of accounting standard-setting—some veterans, too—suggested that as we go forward, the major differences between U.S. GAAP and IFRS will simply melt away. What do you think the prospects are for that? Do you have any comment?Golden:
I think as we look to make improvements to U.S. GAAP—whether it is through reducing complexity or major projects in the future—as we look to what is in IFRS, I think we'll narrow the differences. I suspect as the IASB makes improvements to IFRS, they'll ask members of the FASB, they'll ask me as a member of the ASAF what I think and I'll be able to educate them on what works in the U.S. and they'll be able to make changes to IFRS that will narrow differences. And so again we can continue to work together to improve our respective financial reporting languages, and I think we can both continue to work together and bring them closer together.
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