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Friday, August 31, 2012
The officers on the ship of accounting rulemaking known as the Financial Accounting Standards Board sometimes have to navigate among shoals of dubious wording.
The way an accounting policy or classification is described may contribute to misunderstanding, as FASB members have warned – or to companies trying to steer around channel markers, brightly or dimly lit, to financial advantage.
In addition, particular word choices can add many hours of labor by FASB staff accountants for years to come. Explanations take time.
Such naming issues seem to carry more import and is spotlighted when standard-setting is marked by two elements, as it is in the current, closely-watched effort on impairment, or credit losses, part of the difficult effort on financial instruments.
First, the desire to avoid misunderstanding and misapplication is stronger when a proposal is being revised and reissued for public comment in hopes of attaining a final standard as soon as possible. Second, that wish acquires more significance when the topic at hand amounts to a cluster of political mines bobbing in the path of the rulemaking vessel moving at deliberate speed.
`Held to Maturity:' Perils of Dicey Wording
The term “held to maturity,” as used in the 1993 rules still known as FAS 115, on investments in debt and equity securities (ASC 320-10), presents a lesson in the perils of dicey wording.
The standard was hardly two years old, when FASB was faced with the situation in which debt securities labeled held to maturity – which were given business -friendly cost treatment – weren’t, well, really held to maturity. However, banks and companies asked for guidance on how a minor break with the held-to-maturity designation would not “taint” a portfolio, heading the holdings into fair value territory. (The held-to-maturity label for securities has brought with it the unwanted baggage of “accounting for intent,” a target of criticism by veteran rulemakers, investors, and accounting academics.)
The result: detailed staff guidance, such as a 50-page Q&A guide written in 1995 by a FASB industry fellow at the time, Leslie Seidman, who is now the board’s chairman, and by Robert Wilkins, a veteran staff accountant in Norwalk. The fact that Seidman graduated from Colgate with a degree in English likely helped her wordsmithing.
Seidman Warning on Wording
In recent weeks, Seidman has been sounding the cautionary signals on wording in FASB’s discussions on impairment. At an Aug. 22 board meeting, she addressed at least twice the avoidance of words carrying an implication that the linchpin notion of an estimate of expected credit losses, as it was accounted for, reflect a “worst case” scenario that would have to be represented up front in reporting.
or example, there was the section of the meeting just after a FASB staff accountant noted that he and his staff colleagues thought of the nascent impairment accounting approach as “a full credit deterioration model based on expected losses.” Reporting under that would represent “the full tenor” of credit deterioration that occurs, wherever that occurs, the staff accountant said.
Seidman balked at the use of one word. “The word ‘full’ troubles me, the FASB chairman said, “because I thinks it’s leading some people to think that on day one, you book your worst case” estimate of losses “and then never change it after that, which is clearly not what we’re contemplating.”
Two days later and apparently after much care in wording, FASB’s staff issued a detailed summary of board decisions made Aug. 22. The summary featured what is called the “current expected credit loss model”. It remains to be seen whether that new “CECL” model, in title and description, has a future – and doesn’t take accountants and companies into foggy waters.
Steve Burkholder , Bloomberg BNA staff correspondent
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