FASB Chairman Golden Addresses Board's Top 2016 Priorities, Challenges

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In an interview with Bloomberg BNA correspondent Denise Lugo, FASB Chairman Russell Golden discusses the board's 2016 domestic priorities. He provides insights about the forthcoming standards on lease accounting, classification and measurement of financial instruments, and impairment of financial instruments. Golden also discusses FASB's simplification initiative; private company issues; emerging trends; reducing disclosure overload; global standard-setting; and, the SEC's possible international financial reporting standards (IFRS) plan. An edited transcript follows.

Bloomberg BNA:

What are FASB's top standard-setting priorities for 2016?

Golden:

In 2016, we will be focused on completing our leases standard and the standard on impairment of financial instruments. We will also continue implementation activities related to Revenue from Contracts with Customers (Topic 606), and on new implementation and educational activities related to the standards on leases, impairment of financial instruments, and classification and measurement of financial instruments.

Another top priority will be issuing a discussion paper to determine the board's future agenda. The discussion paper will articulate the board's observations about potential problems in financial reporting and feasible solutions. The paper will enable FASB's stakeholders to weigh in about which financial reporting issues the board should prioritize.

We also expect to continue our progress on the disclosure framework project, including gathering input from stakeholders about all of its phases and hosting a roundtable. Lastly, we will continue working to amend standards under our simplification initiative, with a goal to complete those on our current agenda in 2016.

Bloomberg BNA:

At the Dec. 15 meeting of the Financial Accounting Standards Advisory Council (FASAC), you mentioned FASB will have a more relaxed standard-setting pace the second half of 2016, having completed those comprehensive standards you just mentioned. Do you envision slowed standard-setting activity by the board in the second half of 2016?

Golden:

The board's activities will remain at a high level, but I don't expect the same volume of exposure drafts and final documents to be issued in the second half of 2016 as were issued in the second half of 2015, or the first half of 2016.

Bloomberg BNA:

Regarding the discussion paper you just mentioned for new potential agenda topics—when will it be issued?

Golden:

I am hopeful that the discussion paper will be issued during the first half of 2016. Board members have been educated on the potential big ticket items that have come to our attention as a result of a survey of all of our advisory council members, as well as other discussions with prominent stakeholders.

Bloomberg BNA:

Will any large accounting standards be included in the discussion paper?

Golden:

The top five projects were selected by our stakeholders, who include preparers, investors, practitioners, academia, and others. The following were consistently ranked high by all of our stakeholders: financial performance reporting, improving cash flow classification, and accounting for defined benefit pension and other post-retirement benefits.

A significant number of stakeholders—but not all of them—also identified as top priorities areas such as liabilities with characteristics of equity and the accounting for intangible assets. Segment reporting was classified as a top priority by the investor community, but it was ranked last by the preparer community.

At this time, I don't know which of these projects will be included in the discussion paper—that will be a board decision. Our process starts with educating the board members about each of these topics, and then bringing them to a public board meeting sometime during the first quarter of 2016. The discussion paper would be issued sometime thereafter.

Engage Early on Leases

Bloomberg BNA:

As you mentioned, FASB will issue standards on classification and measurement, impairment, and lease accounting by the first half of 2016. Both FASB and the International Accounting Standard Board will issue lease accounting standards, but they're not converged. Both standards will be effective for public companies Jan. 1, 2019. The new standard, for the first time, will require companies and other organizations to include lease obligations on their balance sheets. What benefit will these changes provide to investors?

Golden:

We believe that putting long term lease obligations on the balance sheets will give investors, lenders and others a more accurate picture of the financial conditions of the companies to which they provide capital.

Bloomberg BNA:

What types of discussions should preparers have with their auditors to better transition the guidance?

Golden:

Once the final standard is issued, we would encourage preparers to gain an understanding of its requirements and begin a dialogue with their auditors. They should understand the effective dates and the transition methods so they can prepare a timeline for implementing the standard—including collecting data about the company's leases. I do think that the key to a successful transition will be engaging early. This would include proactive transition plans such as educating employees across many departments and organizations. And, as I said before, discussion with their auditors.

Bloomberg BNA:

You've mentioned in several past speeches that there will be no transition resource group (TRG) for lease accounting. You've explained that the standard isn't complex to apply. However, at the AICPA's December conference on SEC and PCAOB developments, some panel discussions suggested that, like the new revenue standard, the leasing standard will require judgments. Judgments, for example, would be required for the determination of whether an arrangement is or contains a lease and the applicable discount rate. Furthermore, practitioners have said there may be implementation challenges, which will likely require significant changes to processes, systems, and controls. In light of there being no TRG, how will the board address issues that emerge from applying the lease accounting rules?

Golden:

By not changing the way most leases are treated on the income statement, we believe that the implementation of the lease standard will be easier than if we had made that kind of change.

It's important to note that the most significant judgment in the standard is going to be to the scope or definition of the lease. We are going to make it clear in the final standard that the existing methodology in Statement 13 is an acceptable methodology to use to determine between operating leases and financing leases—although it won't be the only acceptable method.

We will monitor any implementation issues that stakeholders confront during the transition—and we will stand ready to assess them and provide educational information as needed. When major standards have been issued in the past, this is what the board and the staff did. We have a process in place for questions to be submitted, and a process in place to monitor those questions to determine if we are getting recurring questions. If our stakeholders can benefit from more transparent, educational information, we will provide it.

In the past, we've issued FASB staff questions and answers; we've also had public discussions. At this point, we are ready to provide educational information if necessary, but we haven't tried to predict the number of questions we expect our stakeholders to have. We don't believe, however, it will be as large as the number of questions we expected our stakeholders to have—and that they actually did have—for revenue recognition.

Bloomberg BNA:

Is the leasing standard still on track for issuance late January 2016?

Golden:

We're on pace to issue it during the first quarter of 2016.

Talking With Bankers About Credit Loss Rules

Bloomberg BNA:

On another priority topic: the new credit losses standard will require a forward-looking “expected loss” approach instead of today's “incurred loss” approach. It's also effective Jan. 1, 2019, for public companies. This standard has generated a lot of discussion. During your speech Dec. 11 at the AICPA conference, you mentioned four areas of troubling misperception about the forthcoming rules. You said this is an area the newly established impairment TRG should tackle. Some companies aren't in favor of the standard. Why will this forthcoming standard provide better accounting provisions for investors than current requirements under today's GAAP?

Golden:

We think the new model will provide investors with more timely reporting of credit losses on loans and other financial assets held by banks and lending institutions and public and private organizations. As underscored by many of our stakeholders, the current incurred loss approach, which requires recognition of credit losses to be deferred until the loss is probable or has been incurred, fails to alert investors about credit losses in a timely manner.

On your observations about my speech, taken in context, the problem I was highlighting was the limitation of the current accounting standard. My remarks were intended to demonstrate the limitations of the existing incurred credit loss standard, and how it prevented more timely recognition of loan losses among lending institutions of all sizes, not just large banks.

Bloomberg BNA:

In a Dec. 16 letter, the Independent Community Bankers of America urged FASB to reassess the credit losses proposal. Among their concerns, as expressed in the letter, is that they believe it will inflict permanent damage on the economy and forever change the landscape of community bank lending to the detriment of main street communities. How will the board address the concerns raised by ICBA?

Golden:

I did have an opportunity to read their letter. I think it is clear from that letter that there still is a misunderstanding about the requirements of the new standard. My discussion of loan impairment was not intended to suggest in any way that community banks were the cause of the financial crisis. As I said in my speech, this is an important role and objective of the credit losses transition resource group. I've asked the FASB staff to facilitate a meeting with small financial institutions so that we can better understand this misunderstanding. All of us at the FASB believe that it's important that when the standard is issued—and throughout the implementation phase—that there is a clear understanding of the objective of the standard and of the requirements of the standard. This ensures that the improvement the board believes is necessary is accurately reflected in the financial reports.

Bloomberg BNA:

The TRG for the credit losses standard, which is headed by FASB member Lawrence Smith, has already met privately. Assuming that the public meetings will begin next year, are you able to provide more insights about this new TRG—such as when it will begin its meetings and whether or not it has yet established a schedule and an agenda?

Golden:

We have not yet published public meeting dates because they are dependent upon when the actual standard is issued. While we expect a public TRG meeting to occur in 2016, there needs to be sufficient time for stakeholders to read and digest the document, and to begin thinking about the questions they have. I would expect the time difference between the issuance of the standard and the first public TRG meeting to be about the same difference as occurred when the revenue standard was issued. Consistent with what we have done in revenue—and which I think worked well—we will announce the members and make public the issue papers and meeting minutes.

Two Significant Improvements for Classification and Measurement

Bloomberg BNA:

The classification and measurement of financial instruments standard focuses on targeted improvements only. FASB plans on issuing a standard by the end of the year or early next year. What are the more significant aspects of the standard and what do you think it will achieve in financial reporting?

Golden:

The two most significant improvements as a result of classification and measurement relate to differentiating changes in credit versus interest when an entity fair values its own debt. Today, a company that fair values its own debt will take all changes to net income. This proposal would take the ‘own credit’ amount to other comprehensive income. For the first time, we also will be requiring all investments in equity instruments to be fair valued through net income. There are practical expedients to how you fair value those investments, but you will have to remeasure those investments through net income. That approach is consistent with the philosophy of the majority of the members of the FASB—that financial instruments should be reported under a value realization theory. Meaning, if you expect to obtain value by selling it, it should be fair value net income; if you expect to obtain value by holding the instrument to maturity, cost is the relevant measure. And, if you're not sure if you're going to hold something to maturity or sell it, you would reflect it at fair value in the balance sheet, but net income is reflected at cost. That is similar to an approach we have today for debt securities.

Proposal on Hedging in First Quarter

Bloomberg BNA:

The board plans to issue a new standard revising hedge accounting during the first half of next year—the third piece of your work on financial instruments. I'm aware that some of the board's stakeholders have said current GAAP doesn't appropriately reflect potential risk-mitigation strategies into which companies have entered, because they are rules-oriented and fairly rigid. What will the board propose that will address these concerns? What is the timeline for issuing a proposal?

Golden:

We hope the hedging project will better align the accounting requirements to companies’ existing risk mitigation strategies. In our upcoming exposure document, the FASB will propose allowing organizations to obtain hedge accounting for certain valid risk management strategies that either 1) do not qualify for hedge accounting under current GAAP or 2) do qualify, but the reported results in earnings do not reflect the actual effectiveness of the organization's risk management strategy. To make it easier to apply, we will propose no longer separately recording hedge ineffectiveness, requiring qualitative hedge effectiveness testing after an initial quantitative test of hedge effectiveness, and allowing additional time to prepare the initial quantitative test of hedge effectiveness. We also are proposing amended disclosure requirements for fair value and cash flow hedges to provide a more complete view of the impact of hedge accounting on the income statement and balance sheet. I expect for us to issue an exposure draft in the first quarter of 2016.

Keeping an Eye on Revenue.

Bloomberg BNA:

The revenue standard (Topic 606), issued 2014, has generated significant discussion over the past year [and earlier you mentioned implementation activities alongside the other priority standards]. The standard is effective in 2018, but since issuance, has resulted in three standard setting projects from dozens of raised issues. The revenue TRG, however, appears to be winding down its work. Comments from the SEC's staff at the AICPA conference seemed to indicate that it's still much needed since most companies haven't done an initial assessment of the rules. Will there still be a functioning TRG group next year? If not, how will emerging issues be handled?

Golden:

The TRG will continue to exist as long as there continues to be issues that need to be addressed. As I like to say, if there's more to do, we'll do more.

Investors and the Disclosure Framework.

Bloomberg BNA:

Let's discuss the board's project on disclosures. FASB issued proposals to clarify the process for assessing the materiality of information included in their notes to financial statements. As you've stated, the proposals don't change the legal definition of materiality, but would clarify the predominant current practice related to the assessment of materiality by companies and other filers. Disclosure overload has been an ongoing topic within the accounting arena. How will these new provisions improve disclosure requirements?

Golden:

Overall, the FASB's disclosure framework project is aimed at the relevance—not the volume—of notes to the financial statements. Some stakeholders have told the FASB that investors benefit when reporting organizations put their emphasis on disclosing information that is relevant and material, and when they exclude disclosures that are irrelevant. In many cases, the disclosure framework project is likely to result in more or different disclosures, not just fewer disclosures. The board has already made tentative decisions on requirements that will increase disclosures, and I believe they will improve disclosures to investors in a number of areas, including income taxes, pensions, and the recently-issued proposed ASU on fair value. The proposed ASU on materiality is intended to clarify the process that companies and other financial reporting organizations use to assess whether or not their note disclosures are material. Stakeholders have often stated that certain disclosures may be relevant to other organizations, but they do not provide relevant information in their circumstances. We believe that the ASU clarifies the long standing provision in GAAP that companies need not apply FASB standards to immaterial items. Specifically, the proposed clarification indicates that companies need not include immaterial information in their financial reporting disclosures.

Bloomberg BNA:

Some of FASB's stakeholders—from the investors’ community—in a written response to the board in December expressed concerns about a lack of investor input in FASB's process on the topic. They've said the draft update refers numerous times to complaints and suggestions coming from the issuer and preparer communities, but make no mention of investor views. They also said a final concept built around materiality would: 1) cause certain types of information to disappear from public view; 2) wrongly increase the influence of attorneys in compiling financial statements. Are their concerns valid? If not, please clarify the board's position.

Golden:

The exposure document was part of an improvement to our concept statement, in that we were attempting to observe that the board does not define materiality. Materiality is defined as a result of a legal concept and therefore, when the board is setting standards that only apply to material items, it's important for the board to understand the definition of materiality as set by—in this case—the U.S. Supreme Court. That definition, we observed, is consistent with existing U.S. auditing standards for public companies and U.S. accounting standards for public companies—specifically, SEC staff accounting bulletins. Regarding the observation about investor input, we have had discussions with our investors advisory committee. And, as I said earlier, we do plan to have a public discussion with all of our stakeholders about the various phases of the disclosure framework project. I look forward to inviting some of the investors who have written us comment letters to attend those public discussions.

Bloomberg BNA:

Speaking of the conceptual framework—about two years ago you mentioned the conceptual framework was still incomplete. This lack of completion, you said, might be the cause of problems in standard setting. How is that project moving along?

Golden:

The board believes that the conceptual framework is incomplete in areas related to disclosures, so that's phase one of the disclosure framework project. The other two areas are presentation and measurement. We've had ongoing discussions at the board and staff level and we hope to have proposed chapter amendments in the first half of 2016 in both of those areas.

Making Simplification Effective

Bloomberg BNA:

The board's simplification initiative—its process to provide simpler, cost effective solutions to GAAP—has generated a number of amendments to GAAP. In some of your past speeches you've said the simplification initiative didn't always result in a simpler solution. Why is that? What steps has the board taken to address this problem?

Golden:

I think we've had some successful conclusions to certain items in the simplification initiative, where we were able to reduce cost and complexity without impacting the quality of information for investors. Some of the projects where we thought we could reduce complexity by removing existing exceptions in GAAP were met with resistance by some of our stakeholders because their systems or internal processes were already established. They observed that changing or removing those exceptions would increase—not decrease—their costs. And so, in those cases, we have elected not to move forward on those projects. While that keeps the preparers in the same accounting policies, that complexity still exists for the system as a whole.

Throughout the simplification initiative, as we get input from varying stakeholders—investors, preparers, and auditors—about future improvements, we'll be able to do better pre-agenda analysis. I think that will result in more effective and efficient conclusions going forward.

Navigating Private Companies

Bloomberg BNA:

Let's touch briefly on private company issues. At a high level, what are some of the areas that are going to be addressed for private companies next year?

Golden:

I think the Private Company Council has been a great success. I look forward to working with the new chair, Candy Wright, to continue to build upon its successes. At the last PCC meeting, they added to their agenda research, analysis, and potential education about very common, complex transactions on related party common control VIE issues. I think that is a good service for private companies.

Bloomberg BNA:

Are there any private company alternatives that the FASB will consider for public companies?

Golden:

As a result of the PCC process, the board considers, in all of our projects, whether there should be differences for private companies. Those differences may range from measurement, recognition, disclosures or effective dates. For example, in leases we've allowed for private companies a different determination of discount rates than we have for public companies. I would expect that philosophy to continue for all projects that the FASB does—whether those projects are PCC projects or FASB projects. That philosophy will reduce the concerns of some as to whether or not to allow PCC alternatives for public companies. We will, at the beginning of our research and analysis of each project, determine if the potential financial reporting problem and solution is a better or an appropriate solution for all stakeholders, or if it's just a solution for private company stakeholders.

Some of the simplification projects came as a direct result of dialogue or interaction with the PCC. In those cases, it was clear it was not just a private company solution, but that it was a solution important for all stakeholders. The development stage enterprise elimination from GAAP was observed originally by the PCC, but during the research process it became clear to us that it was an issue for all stakeholders. That was why we made it relevant and applicable to all companies, not just a subset of all of our stakeholders.

Bit Coins, Virtual Transactions, Non-GAAP Measures.

Bloomberg BNA:

Shifting gears slightly to a broader topic. Some companies have expressed fears about the number of new standards that will take effect next year—more than 16, including short-duration insurance contracts, consolidation, a number of Emerging Issues Task Force issues and simplification rules. What is your response to those concerns?

Golden:

Internally, we do monitor the level of exposure drafts that are in the marketplace at any one time, or that may be coming, as well as the level of final standards that will be coming. As I said at the AICPA Conference on Current SEC and PCAOB Developments, during the two years ending in the middle of 2016, roughly the same number of exposure drafts were issued or are expected to be issued as compared to the two years ending in the middle of 2014.

The Board does look at the number of documents that are required to be in effect at the same time. We also look at the significance of the change, as well as which types of industries are most likely to be impacted by it. Recently, because we were completing classification and measurement, impairment, and leases within a few month period, the board decided to set the effective dates for all three at the same meeting. The analysis the board had to undertake to make that determination did give us an understanding of other standards’ pending effective dates, so that we can balance the degree of change and the timing of change.

Bloomberg BNA:

Regarding audit and enforcement issues being dealt with by the SEC or PCAOB, have there been areas of U.S. GAAP that have surfaced that would need more standard setting work?

Golden:

We have a process in place to monitor public comments and public inspection reports by the PCAOB, and public comments and public enforcement actions by the SEC, to determine if there are standard setting activities. We also have a technical inquiry service, and we monitor those inquiries to determine what, if anything, needs to be done. However, I would point out that the projects on our agenda did not come from any of those sources—they have predominantly come from discussions with stakeholders. The big ticket items that I talked about for the discussion paper came as a direct result of surveys of our council members.

Bloomberg BNA:

Is there a need for the board to address financial reporting for emerging technological trends? For example, bit coins, virtual type transactions or issues related to cybersecurity?

Golden:

At our Dec. 16 board meeting, we finalized the improvement for gross versus net revenue. That issue came about because of questions we received on how to deal with the virtual gaming mechanism that we all like to play on our mobile devices. We do monitor emerging trends, and we do try to determine if existing accounting requirements provide investors with what they need as a result of those new trends.

At each of our advisory group meetings, we specifically ask stakeholders about trends, and about potential accounting improvements as a result of them. We've had a discussion in the past with FASAC about bit coins; we've had discussion in others about disclosures of cybersecurity risks. At this point, based on analysis and judgment, we don't see the need for additional items or additional implementation projects related to those areas. That said, and as I noted earlier, one of the significant items that was raised by a number of our stakeholders was the accounting for intangible assets. This observation specifically comes from the technology community, where their market cap is generally substantially greater than their book value, because internally-developed intangible assets are not reflected on the balance sheet.

Bloomberg BNA:

The topic of non-GAAP measures surfaced a number of times during recent conferences by the SEC—both at Financial Executive International's November conference in New York and the AICPA's conference in December in Washington, D.C. It's a significant issue for regulators. At the Dec. 15 FASAC meeting, you asked the council whether it was feasible for FASB to provide some standardization for non-GAAP measures. Their reaction was somewhat mixed. Is this a topic that the board will seriously consider in its upcoming agenda?

Golden:

I believe that the FASB should monitor the level and proliferation of non-GAAP measures to understand if GAAP improvements would impact those measures. For example: a few years ago, companies started to create non-GAAP measures related to fair valuing their own debt by carving out certain credit components from net income. That was an area—as a result of that research—which lead us to change the accounting standard such that the credit component would no longer be in net income. In my view, certain non-GAAP measures are just different ways to portray operating income or various components of earnings. Our financial statement presentation project is an observation that there may be a marketplace desire to have certain additional subtotals within the performance statement. Those subtotals could be ‘core’ ‘non-core’, ‘operating,’ or ‘nonrecurring’, but the financial performance reporting project is designed to see if that would be useful to the market.

Overall 2015 Successes.

Bloomberg BNA:

To wrap up domestic topics—at a high level—what were the board's key accomplishments/successes in 2015?

Golden:

I regard one the Board's biggest successes in 2015 to be the completion of our major projects—specifically, finalizing our decisions on leases, and two of our three financial instruments projects, in the areas of credit losses and recognition and measurement. I also would point to the progress we've made on our simplification initiative as well as the conceptual framework. Since beginning work in these areas in 2013, I think we've come a long way in addressing both long and short-term issues that set the foundation for better standard setting while also addressing areas of unnecessary complexity identified by our stakeholders.

SEC and International Issues.

Bloomberg BNA:

In recent years there has been a broadening of FASB's international platform. In past speeches, you've mentioned a number of international standard setters FASB works with—in addition to the IASB—to enhance accounting rules globally. Many of these nations are adopting IFRS, not U.S. GAAP. As more nations adopt IFRS, including most which currently work with the board, do you foresee a shift in FASB's ability to influence the global accounting standards dialogue?

Golden:

I believe it's in the best interest of the world's major capital markets to work together to create a more comparable set of global accounting standards. As I said before, I think there is a benefit to narrow differences, and I think that benefit is directly for investors. I think there's also a cost to preparers and the auditor community when we do not narrow differences—and I believe that it's important for the board to consider that in our conclusions. There are a lot of very prominent national standard setters around the world that are very diligent and experienced, and I believe we can all learn from each other about the way to work together to improve accounting standards used by the world's capital markets. That is why we have spent time and resources to develop those relationships, and to continue the dialogue with them and with the IASB.

Bloomberg BNA:

SEC Chairman Mary Jo White at the AICPA conference in Washington Dec. 9 said SEC officials have made a plan, not yet public, for companies to supplement their GAAP disclosures with IFRS information without reconciling it to U.S. GAAP. The plan was first mentioned at the same conference in 2014 by SEC Chief Accountant James Schnurr. What are your thoughts about this proposed plan?

Golden:

I think the proposal, if companies choose to do it, will give investors more information. Long term, it may help both boards to determine what is the most important accounting standard that investors use. I think it will also help the FASB, IASB and other standard-setters work together to improve accounting standards for the global capital markets.

Bloomberg BNA:

At the Dec. 16 FASAC meeting, Steven Buller, FASAC's chairman, observed that what has now occurred in the development of U.S. GAAP and IFRS is a goal to provide for consistent outcomes as opposed to complete convergence. FASAC members said preparers now have to be bilingual—versed in both IFRS and US GAAP. Isn't this costly for companies? Is this a sustainable position for financial reporting in the U.S.?

Golden:

I do think there is a cost when the boards do not converge. That cost is borne by U.S. multinational public companies. It is not borne by U.S. domestic-only public companies, and I think that's something that the boards need to consider when coming up with a final conclusion. It is something that we do consider in our cost-benefit analysis.

During that discussion, a lot of the FASAC members did observe that both the FASB and IASB should work collaboratively to improve financial reporting for the global capital markets—but that we should do what we think is in the best interest of our respective sets of accounting standards.

I think those comments are consistent with what our strategy is, which is, first, to focus on developing high quality GAAP standards; second, to actively participate in the development of IFRS; and third, to communicate and enhance relationships with others so that we can learn from them, and so that we can have an open and frank dialogue about what is the best—what are the highest quality sets of accounting standards for use by the global capital markets.