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Jan. 16 --As its first priority for 2014, the Financial Accounting Standards Board plans to continue the substantial progress it has made on its significant convergence projects with the International Accounting Standards Board, FASB Chairman Russell Golden said in a Jan. 10 interview with Bloomberg BNA.
“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,” Golden said (see related interview).
FASB and IASB have said they will issue a final revenue recognition standard during the first half of 2014, and will set up a transition resource group to facilitate conflicts that may stem from unforeseen implementation issues.
For FASB's constituents the guidance will be effective for public users for annual reporting periods beginning after Dec. 15, 2016, including interim reporting periods therein. FASB will not allow early adoption. IASB will allow early adoption to its guidance, which will be effective for reporting periods beginning on or after Jan. 1, 2017.
The revenue project was touted by SEC Chief Accountant Paul Beswick at the December “AICPA Conference on SEC and PCAOB developments” in Washington, D.C., as a successful example of how convergence should work.
Concurrent with its convergence work with the IASB, FASB will focus on how to reduce complexity and promote simplification within U.S. generally accepted accounting principles, Golden said. “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 better understand the complexity challenge “before we make a decision to move forward on a disclosure document or a final document,” he said.
FASB, moreover, has improved its pre-agenda process whereby its staff can understand emerging trends and areas where financial reporting could be improved. The staff can develop the pervasiveness of an issue and understand what are cost-effective alternatives before considering whether or not a new project should be added, Golden said.
Among other areas of key focus for the board is creating a mix of projects on its agenda that will include its foundational projects, that is, those projects that will have an over-arching, long-standing impact on how those who use U.S. GAAP practice accounting.
“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,” said Golden. “Then, I think we also need to stand ready to provide implementation guidance as we complete these improvements,” he said.
Projects that are described as representing the foundation of accounting practice are the conceptual framework, the disclosure framework, and the presentation framework. Practitioners point to these projects as especially critical in the board's convergence efforts.
In upcoming weeks FASB plans to have an in-depth, day-and-a-half private workshop with members of the academic community to get their opinions on where they think the conceptual framework [project] can 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 if to reinstate the conceptual framework and, if so, what will be the scope of that and what would be the most effective way to order that,” Golden said.
FASB is also expected to issue an exposure document on its disclosure framework during the first quarter of this year. The disclosure framework will be incorporated in the conceptual framework. It comprises the board's decision process and the entity's decision process.
Related to the current bigger convergence projects, Golden said FASB and IASB will have initial joint discussions in January on their proposed lease accounting, which will include lessor accounting and lessee accounting. The boards felt those are the two most significant issues, said Golden.
Practitioners have referred to lease accounting as one of the stickier issues the boards will face in their convergence work. In May 2013, the FASB and IASB issued their second joint exposure draft on lease accounting, which has generated heavy debate and controversy , .
“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,” Golden said.
Asked if the boards would make a decision on whether to continue with the dual approach that is in the revised lease accounting proposal, Golden said 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,” he said.
Related to financial instruments, Golden said the boards still plan on issuing final standards on classification and measurement and on impairment for the first half of 2014. During the latter part of 2013, FASB decided that for classification and measurement it would continue with an approach similar to what was exposed for impairment.
The boards will in the future consider whether or not there should be an initial transition of that initial change between current reserves and reverses under the current expected credit loss (CECL) model, he said.
Golden told Bloomberg BNA there was extensive analysis done by its staff and the board to consider the CECL model, the IASB's mode, and other models that were recommended by the banking community and others to understand the impact on the balance sheet at the effective date.
On classification and measurement, the board considered whether or not to continue with a concept similar to “solely principal and interest,” like the IFRS approach, and if it should continue to bifurcate embedded derivatives, which is consistent with existing US 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 aspects of bifurcation,” said Golden. “Board members felt that even though it is complex, it provided better information to investors,” he said.
Asked about the possible repercussions should the boards not end up in harmony on impairment, Golden said in meeting with “a substantial number of investors” both in the US and internationally, “we believe that US investors perform an 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.”
On insurance contracts, Golden said FASB is in the process of analyzing all the comment letters it received, all the feedback it got, and all the comment letters the IASB received to try to work with IASB to resolve the differences between the two boards, “recognizing that their anticipated time frame for completion is sooner than our time frame for completion.”
FASB June 27, 2013, issued its exposure document, Insurance Contracts , and the IASB issued its second proposal June 20 . The documents are not converged, an issue especially important to the insurance sector, panelists at a Dec. 2 roundtable discussion in Norwalk said. The panelists said the costs of the changes would not be worthwhile without converged accounting .
Addressing those concerns, Golden said the FASB first plans to ensure that board members fully understand all the feedback and then prioritize them. “I think the first question that should come to the board is the scope, meaning--should this apply to insurance contracts or insurance entities--as well as should we continue to make an improvement to the property and casualty side of U.S. insurance,” he said.
Following that analysis, FASB needs to work with IASB on the other significant issues and significant differences between FASB's and IASB's approach, said Golden. Specifically, the boards need to address risk margin and unlocking the margin, as well as an area that has been raised by many, which is the use of the other-comprehensive-income designation for changes in discount rates. “I am optimistic that we can do those joint discussions in March,” he said.
Analyzing U.S. international standard setting activities, some practitioners told Bloomberg BNA Jan. 13 FASB's convergence work with the IASB--outlined by Golden--will likely achieve the SEC's prior IFRS adoption goal. This is being accomplished via a wiser process than initially outlined in its 2008 roadmap while keeping the brand name “U.S. GAAP”, they said.
Though Golden did not state that in his interview, he addressed the prospects of U.S. GAAP and IFRS melding simply from convergence. He stated that as FASB looks to make improvements to U.S. GAAP--whether it is through reducing complexity or major projects in the future as it looks to what is in IFRS--the differences will be narrowed.
“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 [Accounting Standards Advisory Forum] 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,” said Golden. “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.”
The Governmental Accounting Standards Board is planning to propose revised standards for other postemployment benefits (OPEB) and financial reporting during the half quarter of 2014, according to an update of its technical agenda, posted in December.
The project looks at the current governmental standards related to OPEB--principally retiree health insurance, which were issued in June 2004.
GASB is considering whether to make changes to the OPEB standards similar to the revisions it issued to pension accounting in August 2012, the board said. GASB's pension standards require, among other factors, recognizing the net pension liability on the face of the financial statements.
Specifically, the guidance would require governments that offer OPEB to begin to report a significant long-term liability in the financial statements. This would greatly reduce a government's reported unrestricted net positions, GASB said.
The guidance will provide financial statement users with more informative note disclosures and 10-year schedules tracking sources of changes in the OPEB liability and contributions by governments to their OPEB plans, said GASB.
GASB is also reexamining its standards for lease accounting to consider whether they continue to function well in the government environment and result in decision-useful information. The project is considering whether revisions currently proposed by the FASB and the IASB are appropriate for governments, GASB said.
“A major focus of the project is on whether the present requirements for financial reporting display and disclosure meet the essential needs of users. A key area of emphasis is the criteria that identify a lease as in the operating or capital category. The Board also will evaluate whether leases meet the definitions of assets and liabilities in the GASB's conceptual framework,” GASB ssaid.
If the project results in revised guidance, users will have access to more consistent, comparable and decision useful information about leased assets and the related obligations to make payments, said GASB. An exposure draft is schedule for issuance in late 2014.
Other GASB projects are:
• Conceptual framework: measurement: a final concepts statement is expected to be issued in March 2014
• Fair Value Measurement and Application: project seeks to improve comparability and consistency of governments' measures of fair value. An exposure draft is expected in the second quarter of 2014.
• Fiduciary Responsibilities: project considering whether to develop additional guidance on how to decide if a government should report fiduciary activities in its general purpose external financial reports. It will also address the proper users of private-purpose trust funds and agency funds and whether a standalone business type activities engaging in fiduciary activities should present fiduciary fund financial statements. An exposure draft is schedule for late 2014.
Some Practitioners said in about four-to-five years, U.S. GAAP and IFRS will most likely be converged, with differences stemming from capital market constraints on issues like income taxes, health care, and litigation.
“It started with business combinations and that was really the first converged standard--leases, revenue, insurance and financial instruments--those will also be the same way,” Peter Bible, chief risk officer of accounting firm EisnerAmper, told Bloomberg BNA Jan. 13.
“I think the only issue right now is how quickly [convergence gets completed]. I think a lot of international observers would like it to happen overnight and the US just isn't ready for that,” he said.
Bible said the process has to go through standard-setting, which is currently happening. In addition, FASB members generally consider IFRS approaches as they develop GAAP. “You build a consensus by giving people votes--that's what the due process does at the FASB and the IASB, and I think that as long as people are allowed to vote and weigh in and form consensus, then it'll happen,” he said.
Still, the boards have significant hurdles to overcome via the convergence path, others said.
“There are quite a few differences still remaining between U.S. GAAP and IFRS that need to be resolved, and they're sticky points,” Michele Amato, partner in accounting firm Friedman LLP, told Bloomberg BNA Jan. 13.
“The FASB and the IASB still have some very serious detail they need to work out before it becomes the same,” she said.
Amato said the differences that remain are the ones that were the most difficult to start with, and she predicts slower movement in developing converged standards in 2014, although the boards' timetable for the key convergence projects state differently.
“I think the new standards, in an effort to converge, are going to come out a little bit more slowly--that's just my opinion--because there are very serious issues that remain,” said Amato. “The fair value of financial instruments is very serious and the idea of impairment is very different,” which means people must “change their viewpoints,” she said.
The sticky points that remain are the most difficult, said Amato, but the majority completion of convergence work by the boards is “possible in four- to- five years.”
In terms of its U.S. domestic initiatives for 2014, Golden said that the FASB will hold a public board discussion in late January or late February to consider how to balance its agenda or allocate pre-agenda research to not only the conceptual framework, but also to hedge accounting, liabilities and equity, pensions, and government grants.
FASB is also working on revising financial statements for not-for-profit organizations, an analysis of the board's technical agenda reveals.
Expounding on the board's pre-agenda work on pension accounting, Golden reiterated that the FASB is dialoguing with the Governmental Accounting Standards Board as well as the IASB and others to 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.”
In pension accounting, there are a number of things that people have raised as issues, said Golden. Among them are the alternative accounting treatment to changes in assumptions and potentially change in utilizing a discount rate in a current measurement, he said.
The board will weigh whether to align pension accounting with IFRS, said Golden. “Current U.S. GAAP on pensions is not consistent with that of IFRS and that will be something the board will consider, is could we make an improvement to U.S. GAAP that is closer aligned to that of IFRS,” he said.
FASB will 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, Golden said.
In 2013, private company issues moved ahead significantly, with actual issuance of final standards expected to continue in early 2014. The Private Company Council and FASB Dec. 23 issued the final private company decision making framework, Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies, and Accounting Standards Update No. 2013-12, Definition of a Public Business Entity: An Addition to the Master Glossary.
On Nov. 25 FASB endorsed the PCC's decisions for a private company alternative related to goodwill on PCC Issue No. 13-01B, Accounting for Goodwill Subsequent to a Business Combination .
The board also endorsed PCC Issue No. 13-03A, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps--Simplified Hedge Accounting Approach. FASB decided against extending the private company alternatives--on both topics--to public companies or not-for-profit entities because of a number of concerns related to PCC's decisions for such entities.
At the last PCC meeting, the PCC had cleared for potential endorsement by the FASB, Issue 13-02 dealing with accounting for variable interest and related parties .
At the Jan. 8 FASB board meeting, Golden said subsequent to that, the PCC obtained some additional feedback from private company stakeholders and has asked the FASB to wait on its endorsement consideration until after the PCC has had the opportunity to consider the feedback.
The FASB will participate in that meeting and then consider the topic for endorsement following the PCC's meeting, Golden said.
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