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By Denise Lugo
Dec. 13 — EDITOR’S INTRODUCTION: A number of the proposals the Financial Accounting Standards Board issued earlier this year will be finalized in 2017, including changes to hedge accounting and long-duration insurance contracts, FASB Chairman Russell Golden told Bloomberg BNA.
FASB’s plans for the year also include moving forward to improve disclosures in financial reporting, Golden said during an interview in Norwalk, Conn. The board, additionally, will solicit feedback on whether it should add broad projects to improve rules related to liabilities and equity, pensions, intangible assets and financial performance reporting.
Bloomberg BNA sat down with Golden to discuss the board’s current and 2017 standard-setting initiatives. In a wide-ranging interview, Golden gave insight and advice about implementation issues surrounding new revenue, leases and credit losses standards. Other topics he addressed included the board’s current work to make disclosures more effective, FASB’s 2017 agenda and priorities, current international standard-setting collaborative work, and other standard-setting issues.
Bloomberg BNA: In 2016 alone, FASB issued 17 accounting standard updates (ASUs) and 19 public comment exposure documents. This year’s work will exceed last year’s. Reflecting on the past year, what are some of the biggest standard-setting challenges FASB faced?
Golden: In 2016, we made some substantial improvements to financial reporting within GAAP [generally accepted accounting principles].
We completed the classification and measurement [of financial instruments], credit losses, and lease accounting standards. We also devoted considerable resources to monitoring the implementation of revenue recognition and completed some very important ASUs associated with ways to interpret revenue recognition and change some of the guidance so that it is more cost effective to implement. We also completed an ASU to improve financial reporting for not-for-profit entities. It had been quite some time since the FASB had made a substantial improvement for this very important stakeholder group. And finally, we were successful in making improvements to the financial statements of employee benefit plans. That was something that was requested a number of years ago—by the AICPA expert panel—as a way to simplify some of the accounting and disclosure requirements for employee benefit plans.
As you observed, we issued a number of exposure drafts in 2016. A lot of those exposure documents will result in final ASUs in 2017. The most significant exposure documents were accounting for hedging activities and long duration insurance contracts—“long duration” meaning life insurance and annuities. We also issued exposure drafts to improve disclosures associated with income taxes and pension accounting.
Also in 2016, we issued an invitation to comment to help us plan the FASB’s future agenda. This was a new exercise. In the past, the FASB had not put forward potential multiple major projects for stakeholder feedback. In the invitation to comment, we asked stakeholders, ‘are these problems in financial reporting and, if so, are these feasible solutions’? The goal was to identify priority problems where the board should devote our resources.
In 2017, we have a goal to complete the deliberations on hedging, long-duration insurance and our disclosure framework projects.
Bloomberg BNA: Checking all of 2015’s standard-setting work and comparing that to work done this year to date shows FASB completed the same amount of projects. So you’re targeted to complete more projects by year-end this year than you did last year—that’s a pretty significant list. Were there any specific issues that came up that you found challenging as a standard-setting body?
Golden: This year, I was most proud of the fact that we were able to serve all of our stakeholders, including public company and nonpublic company stakeholders. I think we have a great relationship with the Private Company Council. We also served the nonprofit and employee benefit plan stakeholder groups. I think it’s important for the board to recognize that we need to serve all of our stakeholders equally and that, in so doing, it’s sometimes a challenge to determine if there is a financial reporting solution that can meet the needs of both public and private company stakeholders.
Bloomberg BNA: The invitation to comment would add more far-reaching standard-setting projects in areas relevant to: liabilities and equity, pensions, intangible assets and financial performance reporting. Some companies have expressed concerns that given the volume of major new standards they will have to implement over the next few years, it would be difficult for preparers, users, auditors and regulators to absorb the workload. You’ve heard those concerns before—what are your thoughts on this?
Golden: Well, we’ve received about 45 comment letters and they range from the point you just observed—which is that we should pause and have a period of calm—to very well thought out comments that observe the need to improve performance reporting, liabilities and equity, intangible assets and pensions.
The objective of the invitation to comment was to confirm—or not confirm—with our stakeholders whether these potential areas are in need of a financial reporting solution, and, if so, what the priorities are. As you can imagine, we received mixed feedback. As a result, we plan to have a roundtable discussion with our stakeholders. During the first quarter of 2017, the board would like to begin public discussions on how to narrow the potential projects in the invitation to comment as we move forward in setting our future agenda.
Bloomberg BNA: At the Securities Industry and Financial Markets Association (SIFMA) conference in October you mentioned that if FASB moves ahead with adding those new projects to the board’s agenda, likely those projects would take eight years to be completed. Could you expand on that?
Golden: The length of time spent on a project is directly dependent upon the objective that the board sets out, which is based on the identified problem. In the past, broad-based, significant projects have taken a number of years to complete—eight to ten years. I believe that some of the items in the invitation to comment would take a significant number of years for the board to complete—and then the effective date is usually one to two years after completion. So, I believe the eight-year discussion was based on ‘from the date in which it is started to a potential effective date.’ It’s difficult to judge if it would be eight years, but it likely would be a rather lengthy period of time.
Bloomberg BNA: Shifting to current projects you completed this year and of course the revenue standard from 2014. Implementing those standards might be daunting as you would imagine for some companies. Alongside the Transition Resource Groups on revenue and credit losses, you’ve said FASB is standing ready to help educate and provide clarifications regarding rules for leases.
There seems to be a massive implementation effort that needs to take place to make sure there isn’t a crisis with companies. What needs to happen to ensure implementation goes smoothly?
Golden: I think the approach to revenue recognition has been a success. I think it was important to create the transition resource group, and I was glad that we were able to do that jointly with the IASB. The TRG has answered over 80 questions, with four additional topics addressed at our last meeting on November 7. By far, most of those questions have been educational in nature—meaning that the staff put forward some ideas on how to interpret it, and the TRG overwhelmingly supported those ideas. The minutes to TRG meetings as well as the staff papers are made publicly available so that others in the field that have these questions will know what to do.
The reason I think the TRG was a success is because companies and their auditors started early. They started early by reading the standard, talking among themselves about the changes, and then bringing to the board areas where there was potential confusion or diversity so that they could be resolved. I think there’s still more to do, and we stand ready to continue the TRG activity for as long as necessary to ensure that our stakeholders will be fully educated, and to address any potential diversity that needs to be resolved.
We used what we learned from the revenue recognition TRG to guide how we work with the credit losses TRG. For example: If we had had a TRG meeting on revenue before we issued the final standard, I think it would have become clearer to us that certain words or phrases could have been improved—and the board would not have had to do the revenue recognition technical correction project. Therefore, we had a couple of TRG meetings on credit losses before we issued that standard so that we could understand if there were better ways or better words to use to make the guidance clearer.
We plan to have a credit loss TRG meeting in 2017. Again, same approach as revenue recognition: We’ll ask companies—and, in this case, the banking regulators—to bring to us any items that they believe need additional clarification, education, or to narrow diversity. We stand ready to assist in that matter.
For the leases standard, we decided not to develop a TRG. That was because the degree of change in leases is not as significant as it is in revenue and impairment with respect to how or what you’re expected to do. As you know, in the leases project, there were some initial concerns about having to put leases on the balance sheet—but, with respect to understanding the change, we didn’t expect it to be as significant as credit losses or revenue recognition. Even though we did not create a TRG, we did assign a Board member and substantial staff resources to monitor the types of questions that are out there. We expect in late 2016 or early 2017 that the staff will bring to the FASB the types of questions that they are aware of, and ask us whether there are additional research or other activities the board would like to discuss.
Our most recent “FASB Outlook” newsletter (4Q 2016) contains an article in which the staff describes the approach we’re using for leases, the types of questions we’ve had, and staff members stakeholders can contact with their questions. Similarly, we’ve assigned resources to help the not-for-profit community implement our recently issued not-for-profit guidance. I believe it’s the board’s responsibility to provide educational materials to our stakeholders and to stand ready to help narrow diversity that may exist if that diversity matters to users—and also to evaluate if there are additional changes to be made that could reduce costs without altering the information provided to investors.
Bloomberg BNA: What advice would you give to companies as they’re working through implementation?
Golden: I think it’s important that companies start early, have a well-developed plan, think about the resources that are necessary beyond just accounting resources, and have a dialogue with their auditors and with others in their respective industries. The key is to start early and develop a robust plan for implementation.
When the board set the effective dates for revenue recognition, leases and credit losses, we did specifically consider the significance of these projects. We also gave companies the opportunity to stagger implementation between revenue and leases or, if they choose, to early adopt leases at the time they adopt revenue recognition. These options allow management to evaluate how and when they want to make some of these major changes.
Bloomberg BNA: I know revenue is applicable next year for the early adopters. Do you have any concerns that there might be an implementation crisis that could arise, or anything that could derail expectations?
Golden: At this point, we believe that systems should be—and will be—ready for implementation of revenue at the required effective date.
Bloomberg BNA: Let’s look ahead to 2017. You touched a little on it with the invitation-to-comment paper. What are the board’s main priorities; what can our readers look forward to next year?
Golden: In 2017, our most important technical priorities will be to consider the input on the hedging project and proceed to a final ASU. We will also consider the input on the long-duration insurance project, and we hope to complete that in 2017 as well. On the disclosure framework, we’re anticipating a roundtable discussion with stakeholders towards the end of the first quarter in 2017. At the roundtable, we’ll talk about the improved conceptual chapter, the entities-specific approach to assessing materiality and the four look-back projects including disclosures of fair value, pensions, income taxes and inventory. We also will be looking at the disclosures associated with government grants. Depending on the feedback we received, we will then be moving forward to complete all of those phases of the disclosure framework project in 2017 and 2018.
Bloomberg BNA: Speaking of disclosures—that includes the whole materiality discussion and as you know that created a little bit of controversy. How does FASB plan on moving forward with this topic?
Golden: We issued various exposure drafts associated with the phases of that project: the foundational aspect, which was the conceptual basis of materiality, followed by the standards level, which were the lookback projects. We think it’s important to have a dialogue with our stakeholders to look at all of these together. That’s because we believe stakeholders need to see the proposed changes to the standards disclosures to help us understand if they think that the conceptual foundation is the right foundation. For that reason, we have paused in moving forward on materiality and the conceptual chapter until all phases of the project have been exposed and we’ve received feedback on all of them. Like a lot of our projects, we have received mixed feedback. Some companies at this point believe that the conceptual framework requires additional disclosures that aren’t necessary, and a lot of our investors believe there could be more disclosures.
Bloomberg BNA: That’s an interesting mix. Some board members have actually said that the test standards the board applied to the disclosure framework would result in more disclosures. For years as you know, disclosure overload has been a topic that’s been raised. Some people say disclosures are either inadequate or too voluminous—or both. From the comments you just made, it sounds as if the board is faced with a conundrum.
Golden: Those who have observed that the disclosure framework is adding disclosures are correct. I asked the staff to do an analysis on this. We found that, for every one disclosure that the project is removing, it is adding four. That said, the projects that were specifically evaluated for this original phase were evaluated because our stakeholders observed to us that fair value and pensions often had too many disclosure requirements that weren’t used by investors. But income taxes and inventory were observed by investors as having very few disclosures that were not providing them the information that they needed. Through dialogue, discussions, and comment letters, we have confirmed that most of the disclosure requirements for pensions and fair value are being used by investors and therefore are important to retain in GAAP. But we’ve also learned that the information that investors need to appropriately analyze income taxes and, more importantly, cash paid to taxing authorities, as well as the types of inventory estimates used, are not required to be provided to investors. That leads me to believe we should have additional disclosures for inventory and additional disclosures for income taxes, and we would likely remove very little from pensions and fair value. That said, we’re in the middle of the project and we need to have all of the data, analysis, and feedback before we can decide on our path forward.
Bloomberg BNA: So far many comments you’re getting seem opposed. Is the disclosure problem in financial reporting fixable?
Golden: I think what’s important is that we are able to understand and evaluate the benefit of the disclosures, and that we also understand and evaluate the costs of the disclosures. In the revenue recognition exposure document, for example, we received similar feedback regarding the disclosures. The investors thought it was helpful and useful and the preparers thought that there were too many disclosures. We found that the way for all of us in the system to understand the right cost benefit balance was to engage in a dialogue with preparers and investors at the same time. That helped the board understand how an investor would use this information, what it would cost the preparer to produce the information, and what the potential cost would be if the preparer didn’t provide the information and the investor had to make an estimate in the absence of that information. Consequently, we were able to come to, I think, a very solid conclusion about the disclosures appropriate for the new revenue model. We did the same thing related to credit losses around disclosures, and I think we will be successful at finding the right balance for these additional disclosures by having the dialogue with investors and preparers that we’re hoping to have towards the end of March.
Bloomberg BNA: Would the package be the same for both private and public companies or are you going to do something different for private companies?
Golden: Our decision-making framework observed that there is a difference between public and private companies regarding access to management. As a result, investors in private companies do not need the same level of detail for disclosures as public company investors do. This is something we specifically consider, by project, to determine if there should be different disclosures for public and private companies. We will do that in each of these projects.
Bloomberg BNA: That’s a good segue into the private company question. It’s been four years since the Private Company Council was established. Much has been done in the initial stage of the PCC to provide GAAP alternatives for private companies. There hasn’t been any more “look back” projects for private company GAAP. Is the drive to provide alternatives for private companies as strong as when the PCC was initially established or has it waned somewhat?
Golden: The drive to serve both public company stakeholders and private company stakeholders is still strong. The reason you don’t see as many look back projects by the Private Company Council is because they’re advising the board on potential private company changes in projects in progress. For example: in lease accounting, a private company may use a different discount rate than what’s required for a public company. That was on the specific advice of the Private Company Council. So the board is making private company alternatives available when it makes sense for private companies while setting standards, and we’re obtaining advice from the Private Company Council or other private company stakeholders as part of our ongoing process. For that reason, there will be much less of a need to have the Private Company Council do look backs.
Bloomberg BNA: FASB used to have the Small Business Advisory Committee for private companies, which turned into an advisory committee for smaller public companies. Part of the problems private companies face are faced by smaller public companies. When is the new small business advisory committee planning on meeting? Are you yet aware of maybe the topics you plan on addressing?
Golden: The agenda is still a work in progress. We recently changed SBAC’s mission so that, going forward, it will serve as the primary advisory committee to the board on smaller public companies. That allows the board to have the PCC focused on private companies; the Investors Advisory Committee focused on investor activities; the Not-for-Profit Advisory Committee focused on not-for-profits; and an advisory group—the FASAC—whose membership reflects our diverse stakeholder universe. We think this is the best way for us to obtain formal advice from various stakeholder groups because sometimes they deal with similar issues, and sometimes they deal with different issues. It’s also why we think it’s important to have specific advisory groups made up of specific stakeholders, and to have an advisory group made up of all of our stakeholders.
Bloomberg BNA: Thought our readers would be interested in an update about what’s going on internationally in a concise manner. One of the things I read in a letter submitted to FASB by Financial Executives International’s Committee on Corporate Reporting is that the rules on revenue, credit losses and leases represent the most significant overhaul of existing accounting in decades. All three of those standards, I would imagine, would have cross-border impacts, especially with large multinational firms that would need to apply both IFRS and U.S. GAAP. Convergence discussions have shifted and you’ve explained in past speeches that FASB’s primary focus is to serve U.S. companies. You’ve also said you look for where the standards can be aligned with IFRS. Revenue is still a mostly converged standard, but are the standards on leases and credit losses more aligned than different or are they very different?
Golden: I think it’s important to consider the international community when setting standards in the U.S., while recognizing that our first responsibility is to improve financial reporting for the U.S. capital markets. But, as a board member, I believe it is beneficial for U.S. multinationals if we can come to common solutions with international standard setters. I believe there’s also an increase in cost for multinationals if we do not come to common solutions and that we have to compare that to the impact we have on domestic companies. With respect to leases, I think we have found common ground: both boards will require leases to be depicted on the balance sheet. There are some minor differences, but both boards’ primary objective was to put leases on the balance sheet, and we both met that objective. With respect to credit losses, both boards believed that an approach focused on expected losses would be an improvement to financial reporting. But the method in which you get to expected losses is obviously different between the FASB and the IASB. When we set our future agenda, and in the invitation-to-comment, we discuss the potential international solutions. For example, in pensions and intangible assets, we talk about the solution that the IASB has and we specifically ask for feedback as to whether or not that would be an improved solution in the U.S. We are in constant contact with members of the IASB and its staff about the projects that are on their research agenda, and we share our research activities to see if we can continue the progress towards improved financial reporting and find common solutions between the FASB and IASB. We also have strong relationships and extensive dialogue with other standard setters across the world. For example: we have a long-standing relationship with the accounting standards board of Japan, which sets GAAP for Japanese companies. If we make solutions in the U.S., and the IASB makes solutions for those who use IFRS, it’s also important that we have agreement with the accounting standards board of Japan on a similar conclusion so that there’ll be broader common ground around the world.
Bloomberg BNA: How does the FASB and IASB collaborate these days? Specifically, what does the relationship look like now and how does standard-setting work on the international stage.
Golden: Staff members of the FASB, IASB, and other international standard setters engage in dialogue. We’ve had joint meetings with the IASB regarding goodwill impairment and the definition of a business, and we expect to have joint meetings with the IASB in 2017 to talk about the FASB’s and IASB’s respective priorities and potential solutions. We also have regular meetings with standard-setters from around the world to talk about what is important in their countries, to talk about what research they have done and what types of research we could do to help them. For example, our colleagues in Canada are working on an improvement to their not-for-profit standard, an improvement to their agricultural standard. So we talk about what we have seen and how that could help them as they progress in improving standards for Canadian companies. That said, those are private companies in Canada.
The IASB is a quality standard setter with great board members and great staff. We have the opportunity to learn from their experiences. We also have the opportunity to learn from the experiences of other standard setters. These relationships help us improve financial reporting, while at the same time bringing us all closer to common solutions around the globe.
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