FASB to Issue Leasing, Credit Loss, Financial Instrument Rules

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By Denise Lugo

Jan. 4 — Issuing new rules on leases, credit losses and classification and measurement of financial instruments will be among the Financial Accounting Standards Board's top 2016 priorities after largely completing development of them in 2015, Chairman Russell Golden told Bloomberg BNA.

Golden outlined FASB's 2016 initiatives and objectives during a Dec. 17 interview.

To ensure effective application of the new rules, FASB also plans to make their implementation a priority. To that end, a transition resource group (TRG) has been established to monitor emerging issues from the credit-losses standard.

For leases, the board will follow its standard process for questions to be submitted and monitored as needed and “will stand ready to assess them and provide educational information as needed,” Golden said.

Concurrent with that work, FASB will continue its disclosure framework, which is part of its efforts to fully develop the conceptual framework of accounting standards, he said.

Moreover, the board plans to finalize its projects to create simpler, cost-effective accounting standards as part of its simplification initiative.

Vigorous Standard-Setting Pace

Asked whether there will be a more relaxed standard-setting pace in the second half of the year, Golden said 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,” he said.

Completes Decade-Old Objectives

The forthcoming standards for leases, credit losses and classification and measurement will be issued during the first quarter.

Their issuance will close a chapter that FASB embarked on more than a decade ago with the International Accounting Standards Board: to prioritize the revision of certain key standards with a goal to converge or more closely align them.

Leases, three topics on financial instruments, and revenue were among the priority topics earmarked since 2006 by FASB and IASB under a Memorandum of Understanding for completing their convergence goals.

The convergence work for those standards was initially set to be completed in 2011. Ultimately, that time frame didn't pan out.

Nevertheless, the forthcoming standards will be a major milestone for FASB. These new standards, along with the 2014 issuance of a sweeping revenue recognition standard—Revenue from Contracts with Customers (Topic 606)—highlight the board's accomplishments during the past few years.

Both the standards on revenue recognition and classification and measurement go into effect in 2018 for public companies. The standards on leases and credit losses will take effect in 2019.

Engage Early on Leases

With the exception of classification and measurement, which provides only targeted revisions, the forthcoming standards have been generating heavy industry discussion.

The lease accounting standard has been controversial because it will require companies and other organizations to include—for the first time—lease obligations on their balance sheet. Currently, these obligations are recorded off-balance sheet.

However, Golden said companies will find the guidance easy to implement because it won't change the way most leases are treated on the income statement. Once a final standard is issued, preparers should begin a dialogue with their auditors to understand the effective dates and transition methods and plan a timeline for implementing it, he said.

“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,” Golden said.

Timely Identification of Credit Losses

The credit losses standard—impairment of financial instruments—will require a forward-looking “expected loss” approach instead of the “incurred loss” approach, which is used currently.

The “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, Golden said.

“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,” he said.

To date, some financial institutions have expressed apprehension about the forthcoming standard. For example, the Independent Community Bankers of America expressed concerns in a Dec. 16 letter that the guidance will inflict permanent damage on the economy and change the landscape of community bank lending.

Golden said he thinks much of the trepidation stems from misunderstandings about the rules and will be cleared up by the impairment TRG when it meets. In the interim, FASB staff accountants will meet with small financial institutions so there is a clear understanding of the objective of the standard, he said.

Value Realization Theory

Unlike leases and impairment, the standard on classification and measurement isn't expected to be controversial. This is because the changes are limited to differentiating changes in credit versus interest when an entity fair values its own credit.

The rules follow an approach consistent with the philosophy that financial instruments should be reported under a value realization theory, Golden explained. “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,” he said.

Moreover, if an entity isn't sure it's going to hold something to maturity or sell it, the entity would reflect it at fair value in the balance sheet, but net income is reflected at cost—similar to today's approach for debt securities, Golden said.

Proposal on Hedging

Rounding out its financial instruments work is FASB's upcoming proposal on hedge accounting. Work on this standard is far from complete because the board hasn't yet issued an exposure draft—its process to generate public feedback so that it can determine whether the changes it envisions are operational.

An exposure draft will be issued during the first quarter, Golden said. The document is expected to address concerns that the current guidance doesn't appropriately reflect potential risk-mitigation strategies into which companies have entered. Companies argue that the current guidance is rules-oriented and fairly rigid.

Next Batch of Topics

With those bigger projects wrapped up, FASB will regroup to issue a discussion paper during the first quarter—or shortly thereafter—to determine another batch of agenda topics, Golden said.

Topics identified by FASB's stakeholders as in need of standard-setting work include:

• financial-performance reporting;
• cash flow classification;
• accounting for defined benefit pension and other post-retirement benefits;
• liabilities with characteristics of equity;
• intangible assets; and
• business-segment reporting.


“At this time I don't know which of these projects will be included in the discussion paper—that will be a board decision,” Golden said.

“Our process starts with educating the board members about each of these topics and then bringing them to a board meeting during the first quarter of 2016,” he said.

SEC's Potential Plan for IFRS

In terms of its international activities, FASB has been broadening its global standard-setting dialogue. Not only has the board been meeting with IASB, but it also has met with other national standard-setters worldwide to enhance accounting rules globally.

This isn't coincidental. “There are a lot of very prominent 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,” Golden said. “That is why we have spent time and resources to develop those relationships and to continue the dialogue with them and with the IASB,” he said.

The board's global work has enabled it to continue to move the convergence needle forward, as consistent outcomes under generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) have been achieved.

Lack of convergence had been a major issue for U.S. multinational firms because of the costs of having to apply GAAP and IFRS, practitioners have said.

Furthermore, convergence is an issue at the heart of IFRS discussions in the U.S.—a topic the Securities and Exchange Commission is currently trying to navigate. To date, no formal decisions have been made related to IFRS, though there has been much speculation and even talk of an emerging plan for U.S. companies to supplement their GAAP disclosures with IFRS information without reconciling it to U.S. GAAP.

The plan was initially mentioned a year ago by SEC Chief Accountant James Schnurr, and highlighted Dec. 9 by SEC Chairman Mary Jo White at the American Institute of CPAs conference in Washington.

Asked for thoughts about the SEC's potential plan, Golden said that if companies do follow it, 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,” Golden said. “I think it will also help the FASB, IASB and other standard-setters work together to improve accounting standards for the global capital markets.”

To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at dlugo@bna.com

To contact the editor responsible for this story: Ali Sartipzadeh at asartipzadeh@bna.com

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