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By Steve Burkholder
Oct. 31 — Efforts to align U.S. and international accounting standards around improved prescriptions aren't working and those convergence efforts should be reoriented, the chairman of the U.S. Senate's Permanent Subcommittee on Investigations has told the chief U.S. accounting rulemaker.
In a strongly worded Oct. 14 letter to the chairman of the Financial Accounting Standards Board, Sen. Carl Levin (D-Mich.) cited the example of five-month-old rules on revenue reporting, which were jointly written by FASB and the International Accounting Standards Board (10 APPR 525, 6/6/14).
Rulemakers and regulators have said they see those rules as a convergence success story 10 APPR 494, 5/23/14, 9 APPR 1014, 11/22/13).
The new standards on revenue reporting, which become effective in 2017, “appear to have weakened” U.S. generally accepted accounting principles and “may open the door to greater revenue recognition abuses,” Levin wrote. For many years, dubious revenue reporting abuses have been a leading area of enforcement work by the Securities and Exchange Commission.
In his letter to FASB Chairman Russell Golden, Levin cites “convergence that isn't working.” He also sees a need for FASB to “reorient” its participation in convergence efforts with IASB— which the U.S. has been in the process of doing for more than a year.
In addition, the Michigan Democrat urged the U.S. accounting panel to consider strengthening the new standards for revenue recognition.
“At a minimum, FASB should issue anti-abuse rules to combat the potential misuse of the principle-based convergence standards and make enforcement of accurate accounting standards both possible and effective,” Levin wrote to FASB's Golden.
In the first paragraph of his two-page-plus letter, the chairman of the permanent investigations committee, a subsidiary panel of the Senate Committee on Homeland Security and Governmental Affairs, noted that FASB and IASB have been working to align accounting standards for more than a decade.
The convergence labors have led to “a set of new standards with many troubling features,” according to Levin's letter.
“I fear that the convergence project as a whole, as well as FASB's most recent efforts to converge revenue recognition standards, are undermining U.S. financial reporting integrity,” the senator wrote.
“Convergence was intended to take the best attributes from both GAAP” and the IASB-written international financial reporting standards, or IFRS, “to produce accounting standards that would improve world-wide accounting disclosures,” Levin stated in his letter. “Instead, it seems to be resulting in a convergence on the weakest rules from each.”
The lawmaker added that FASB “seems all too willing to surrender U.S. control over its accounting standards to follow IASB's lead.”
The senator also faulted the standards being issued by the London-based IASB. “In many cases, IFRS permit less transparency and greater variations in financial reporting than GAAP,” Levin wrote.
For the past year, FASB and IASB have disagreed significantly on other key standard-setting projects besides revenue recognition. Those include insurance contracts and on accounting for financial instruments—the scope of which takes in accounting for loan losses and other impairments. The boards also are moving down different paths on leases, standards for which are expected in 2015.
Last year, Golden described the ending of what was essentially an exclusive FASB-IASB working relationship on high-priority joint projects. For many years, the two boards held the reins firmly in driving toward what they view as improved— and aligned— accounting standards.
However, over the last 13 months or so, Golden has emphasized FASB's “first priority,” as the board chairman said in a September 2013, of improving “financial reporting for the benefit of investors and other users of financial information in U.S. capital markets.”
Words in speeches about the goal of full convergence around identically worded— wherever possible— and jointly-written standards have changed to seeking to minimize differences between U.S. GAAP and IFRS and promote comparability in reporting.
Focusing on the new “principles-based” revenue reporting rules, Levin described what he views as a “relaxation” of existing, more prescriptive guidance on revenue recognition. The latter includes SEC Staff Accounting Bulletin No. 101 (SAB 101), as outlined by the senator.
In his letter, Levin suggested that the level of estimation and scope of judgment permitted in use of the new revenue reporting standards are excessive.
“The convergence revenue recognition standards allow an entity to use estimates more extensively and exercise more subjective judgments than previously permitted under GAAP,” he wrote.
“Shifting from a detailed rules-based approach to a more generalized principles-based approach creates greater opportunities for abuse,” according to Levin. If some companies take advantage of such opportunities, others will feel competitive pressures to follow suit, he suggested.
“The convergence standards simply offer less investor protection and may return us to a time when financial reporting fraud was more prevalent,” Levin wrote.
In a joint news release of May 28, when the FASB and IASB released the new standards on revenue reporting, the boards stated that the new rules will provide “substantial enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and U.S. GAAP.”
On Oct. 30, a FASB spokesman provided the board's initial response to Levin's letter. A more detailed response is in the works, said Robert Stewart, the spokesman.
“The FASB's first priority always has been to develop accounting standards that serve the best interests of investors and others who participate in U.S. capital markets— and other markets around the world that use” or refer to U.S. GAAP, Stewart said in an e-mail.
“We very much appreciate Sen. Levin's interest in the continued success of the U.S. capital markets and our efforts to work with the International Accounting Standards Board and other standard-setters to make global accounting standards more comparable,” the FASB spokesman added.
“The specific issues he has raised regarding the new revenue recognition standard—and the broadest issues regarding the appropriate relationship between the FASB and the IASB— are very important,” Stewart wrote. “We will address both in a detailed response that we are preparing to the senator's letter.”
An IASB spokesman declined comment Oct. 31 when asked if the London-based board or its parent foundation had a response to Levin's letter.
A spokesman for Levin told Bloomberg BNA Oct. 31 that the senator does not have plans for a hearing. The Michigan Democrat retires from the Senate in January.
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The Oct. 14 letter from Sen. Levin to FASB's chairman is available at http://www.hsgac.senate.gov/subcommittees/investigations/letters, under “Letters.”
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