Leaders of the Financial Accounting Standards Board and the International Accounting Standards Board are bracing for the release of the leasing standard and other standards that have been under development and generating debate for over a decade.
[IMGCAP(1)]“With regard to the potential economic impact and behavioral effects, the proposed leasing standard, like all accounting standards, is intended to reflect—not drive—economic activity and behavior and to promote reporting that neutrally reflects in the financial statements a company’s activities,” said FASB chairman Russell Golden, during a speech at the American Institute of CPAs’ Conference on Current SEC and PCAOB Developments, in Washington, D.C., on Thursday. “Our aim is to create a neutral playing field that enables investors, lenders and other users of financial statements to make their own independent judgments about where to invest, based on the best possible information available. To that point, the FASB is not a government agency, accounting standards are not regulations, and the FASB does not make economic policy decisions.”
FASB plans to release the leasing standard early next year, along with accounting standards updates from its financial instruments project, including impairment and classification and measurement. The IASB has already released its own financial instruments standards.
Golden acknowledged differences between FASB and the IASB’s versions of the standards, along with disputes over the standards among others who have provided input. “You’ll note that I’ve discussed a number of projects—impairment, leases, and materiality, to name a few—about which there has been substantial disagreement among our stakeholders, and in some cases, among members of the board,” he said. “It’s our job to sort through all of those conflicting opinions and to take the action that we believe will best meet the needs of investors and others who use financial reports. Our mission at the FASB is to set standards that accurately reflect economic transactions, and provide investors and other users of financial reports with the information they need to make decisions about how to invest their capital. It is our duty as we work through the standard-setting process to take into account all points of view, including those of the investors and other financial statement users, as well as preparers and auditors. Our independence from political and special interest influence is important because, in the end, we are not in the business of picking winners and losers. Our job is to set standards that promote the reporting of useful information to those who make the decisions that drive our capital markets.”
One of the main differences in the financial instruments impairment standards involves the recognition of loan losses. FASB favors a current expected loan loss, or CECL, model. “The CECL model was developed based on extensive feedback from stakeholders,” said Golden. “In fact, this issue was brought to the FASB’s attention by a group of financial statement preparers who were concerned about the high threshold for recognizing loan losses and requested that the FASB change the existing incurred loss model. During a meeting, they told us that they knew there were losses within these assets, but the high probability threshold in current GAAP prevented them from booking losses—even when there’s a substantial amount of risk in those loans. In other words, current GAAP was prohibiting banks from looking forward. The credit crisis of 2008 underscored the need for a more forward-looking model—one that gives preparers the opportunity to recognize losses that exist in the loan portfolio, and recognize them up front. Many aspects of the CECL model in its current form were developed in direct response to bank stakeholders, who provided feedback intended to reduce the cost and complexity of implementation.”
IASB Viewpoint
IASB chairman Hans Hoogervorst also spoke at the conference Thursday and encouraged the U.S. to stay involved in setting International Financial Reporting Standards, despite the different approaches taken by FASB on some convergence projects.
[IMGCAP(2)]“In the second week of January 2016, the IASB will publish its leasing standard,” he said. “Our standard is converged with the FASB’s standard in its main objective, namely to put most operating leases on the balance sheet. These can no longer lurk in the shadows as off-balance-sheet financing.”
Hoogervorst pointed to the wider acceptance of IFRS in countries like China, India and Japan as signs that it is spreading globally. He sees positive signs in the U.S. as well, as evidenced by a recent IPO by Italian carmaker Ferrari on the New York Stock Exchange.
“Listing in the U.S. gave Ferrari a platform to attract U.S. investment,” said Hoogervorst. “Yet Ferrari was able to do this with home-country financial statements which are prepared in accordance with IFRS. This is obviously beneficial to Ferrari, but it also increases the international appeal of the United States as a market for IPOs. The lack of fuss about Ferrari’s use of IFRS for its IPO in the United States shows how far we have come in the last decade. Indeed, for companies using IFRS, the world of accounting increasingly looks like a monolingual world. For all others, including investors, we have moved very close to a bilingual world, with only two languages: IFRS and U.S. GAAP. That is not perfect, but it is a heck of lot better than the Tower of Babel where we came from.”
Hoogervorst jokingly compared the demands of different stakeholders to a family arguing at a Thanksgiving dinner. “While we are happy with the still-growing IFRS family, I can assure you from personal experience that it is not a simple task to keep all the members of the diverse IFRS community happy,” he said. “In fact, we know we cannot even begin to do so. If we did keep try to everybody happy, the world would soon revert to the accounting hodgepodge that we came from 10 years ago. So sometimes I believe that the best thing the IASB can do is to distribute unhappiness as evenly as possible around the world. Joking aside, the progress we have reached in terms of adoption of IFRS is by no means guaranteed or irreversible. We also know that consistent application requires permanent attention and rigorous enforcement.”
Hoogervorst urged the U.S. to remain engaged in the process, despite the disagreements. “We ask you to continue working with us and to respond to our various consultations,” he said. “We know that the next several years are unlikely to bring big progress towards domestic use of IFRS in the United States. Still, there are substantive American interests at stake. IFRS strips out significant costs for American investors, multinational preparers and global accounting networks. More generally, the U.S. has a big interest in a strong infrastructure for the global economy, of which IFRS is an important part. That’s why we encourage you to stay engaged and help us in continuing to build our standards in the future.”
Departing from his written text, Hoogervorst pointed out that the stakes are huge in the United States. “I feel that we really need very strong U.S. leadership to help consolidate our success,” he added in closing. “It is quite clear that outside the United States the world does not see that American leadership. Some representatives of the SEC more or less acknowledged that yesterday when they said the world hadn’t heard from us since 2010 when the Commission gave its last statement. That is not a healthy situation for the United States. I truly hope that the United States will be able to help fight its way back to the center of decision-making in improving IFRS. The center of decision-making is the natural spot for the United States, and I truly hope you can fight your way back.”
