The Financial Accounting Standards Board and the International Accounting Standards Board are taking different approaches to setting standards for rate-regulated utilities, and a FASB board member sees little prospect for an agreement.
“This is one of those cases where differences between GAAP and IFRS may be inevitable,” said FASB member Thomas Linsmeier in a speech Tuesday at an accounting leadership and chief audit executive conference in San Francisco hosted by the Edison Electric Institute and the American Gas Association. “In the end, it is the FASB’s mandate to make the decision that is in the best interests of all the stakeholders in U.S. capital markets.”
The IASB released interim standards in January for rate-regulated utilities, such as gas, electric and water utility companies (see IASB Releases Interim Accounting Standards for Rate-Regulated Utilities). The two boards currently do not have any convergence projects on standards specifically for such companies, but while U.S. GAAP already has industry-specific guidance for rate-regulated entities, International Financial Reporting Standards do not. The IASB has been facing demands to develop more standards for such industries abroad.
Linsmeier prefaced his remarks by noting that he was speaking only for himself and not for FASB, and then assured the energy executives in attendance that U.S. GAAP needed little improvement in this area.
“While some in the international community may urge the FASB to work with the IASB to develop a new converged’ standard, I can tell you that that I don’t foresee the FASB making major changes to our model,” he said. “As I said earlier, our first and primary responsibility as board members is to serve the best interests of those who use GAAP—and moving to the IASB position on this issue is not the way to accomplish that objective. The FASB model, while not perfect, is not broken. The staff of the FASB recently performed some limited outreach with financial statement users, preparers, and auditors about the FASB’s rate-regulated guidance. While a few ideas for improvement were raised, the message was clear: GAAP as established by the FASB works well in practice and therefore I would find it very hard to conclude that it would be cost-beneficial to ask our stakeholders to completely overhaul their accounting for rate-regulated activities just to achieve convergence with IFRS. I believe that the FASB’s best course of action is to work with the IASB and other national standard setters to inform them about the reasoning behind the FASB model and what the FASB’s stakeholders think about it.”
He encouraged the audience members to read the IASB’s discussion paper when it becomes available and provide them with feedback.
The premise of the IASB’s model is that the regulatory agreement is a revenue-generating contract and the regulator is the customer. The IASB staff used the newly converged revenue recognition standard that FASB and the IASB issued last month as a framework for this analysis. However, Linsmeier is uncertain if the IASB approach would be workable.
“Evaluating the regulatory agreement as a revenue arrangement using the new joint revenue recognition model will be challenging in certain respects,” he said. “For example, when a performance obligation is satisfied by a rate-regulated utility, it does not involve transfer ring a product or service to the regulator. The revenue is earned, and cash flows are received, from the conventional customer. I believe that under the IASB’s revenue approach , an asset would be recognized as revenue is earned under the regulatory agreement. This asset may not correspond to customer billings. I presume it would be like an unbilled receivable’ or work-in-progress’ asset. However, the debits and credits of the IASB’s model are not entirely clear to me at this point.”
Linsmeier’s remarks are only the latest sign that the two standard-setters appear to be drifting apart. Even though they succeeded in issuing the long-awaited revenue recognition standard last month, IASB vice chairman Ian Mackintosh criticized FASB in a speech Monday for refusing to budge on some of the outstanding differences that are impeding their primary remaining convergence projects: financial instruments and leasing.
“I find it interesting to note that in recent speeches, various members of the FASB have begun to present a vision of international standard-setting that is remarkably similar to the old IASC [International Accounting Standards Committee, the predecessor to the IASB] approach,” he said. “This is an approach whereby major economies maintain their own accounting standards, using IFRS as the international benchmark and seeking to reduce their differences. The problem is that in this view, differences between accounting standards would persist.”
The IASB plans to set up its own transition group for its upcoming standard on financial instruments impairment, IFRS 9, after it failed to reach an agreement with FASB on how to handle impaired bank loans and credit losses (see IASB Goes Its Own Way on Financial Instrument Impairment). The two boards did agree to set up a joint transition group last month to help companies adapt to the largely converged revenue recognition standard before it takes effect in 2017 for public companies and 2018 for private companies, although even with that group there are worries that the standard may eventually diverge as different industries struggle to adjust (see New Revenue Recognition Standard Could Affect Tax Practitioners and Auditors).