In an annual survey of recommended projects and priorities, the Financial Accounting Standards Advisory Council has warned the Financial Accounting Standards Board that the world is changing fast and getting riskier, and that the board's agenda will have to prepare accountancy for what's coming.
So, what's coming?
Pension problems. Post-employment benefits problems. Soaring health care costs, possibly followed by a national health care plan. Increased risks in international trade. Budget deficits leading to inflation. Currency fluctuations. Market volatility.
Within that environment, council members saw an onslaught of reactionary changes in accountancy. The shift to fair value reporting, several said, raises a host of practice issues as its effects are seen rippling through other standards. International accounting standards beg convergence with U.S. standards. And just as technology makes real-time reporting possible, the complexity of today's transactions makes real-time reports of questionable reliability. These and other changes justify principles-based accounting standards, but the demands and punishments of the Sarbanes-Oxley Act have corporate officers pleading for bright-line rules and specific guidance.
A few of the 28 FASAC members noted that changes in the economy could be expected to complicate accounting in pensions and several other areas. The unprecedented federal budget deficit, a few noted, could lead to an inflationary environment. Corporate attempts to deal with inflation could reach outside of current reporting standards.
John F. Richards, managing partner of Crabree Ventures LLC, said inflation could cloud concepts of fair market value.
"Investors and other users of financial statements may need assistance in evaluating financial performance in periods of rapidly rising prices, something that has not been a major accounting issue since the late 1970s and early 1980s," Richards wrote. "The board may have to expand the scope of its fair value framework to satisfy this information need."
Richards suggested that the best way to accommodate changes of all sorts is to emphasize the principles on which standards stand. A stronger use of principles, he said, would preclude the need for standards written to fit the needs of specific industries.
Raymond J. Bromark, a partner at Big Four firm PricewaterhouseCoopers, agreed.
"We encourage the use of principles-based standards that can produce accounting results that more closely reflect the economics and substance of transactions, rather than their form, and believe that the current standards on lease accounting and pension accounting should be replaced with such broad-based standards," Bromark said. "We also encourage the use of a financial reporting model that reflects, in a transparent manner, information about the critical value drivers of the entity."
Pension problems
Among the most called-for additions to FASB's agenda were a project to improve standards on pensions and other post-employment benefits. Council members said that cost pressures, ongoing changes to pension plan designs, and a perceived lack of transparency were reasons to review FASB Statement 132, which amended Statements 87, 88 and 106.
Problems in accounting for post-employment benefits (related to the costs and inefficiencies of the nation's health care system) were seen as possibly leading to problems with the related accounting system. One FASAC member saw companies using accounting to shift and control health care costs. Another said that since some kind of national health care plan is becoming necessary, a future standard may need to deal with previously recorded post-employment benefit obligations.
Several other council members expressed concern over an increasingly global economy going down a rocky road of political uncertainty, economic volatility, conflicting regulations, resource shortages, and currency fluctuations.
These factors, they said, are likely to inspire creative new devices for managing risk, some of them likely exceeding the guidance of ASB Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties.
Fair value
Several council members called for more work on FASB's ongoing effort to base more aspects of accounting on fair market value. The need to manage risk, for example, was seen as leading to new kinds of derivatives and hedging instruments, which would in turn stress the parameters of fair value measurement and reporting.
"Fair value accounting is a very noble concept in theory, but can be extraordinarily complicated to deal with in practice," said Ernst & Young partner Kevin B. Reilly. "The board needs to understand that a multitude of practice issues will arise as more projects move closer to a fair value model."
L. Hal Rogero Jr., assistant corporate controller at paper products concern MeadWestvaco, who represents the Financial Reporting Committee of the Institute of Management Accountants, expressed concern over how fair value concepts should be put into practice.
"Fair value accounting - the thrust to push fair value accounting into more areas - is becoming difficult to deal with," Rogero wrote. "Some fair value measures are based upon estimates so far into the future that reliability is a real issue. The effects of seemingly small changes in discount rates can be very significant. And political and world events can cause dramatic short-term changes in fair values."
Priority One: Revenue recognition
For the third year in a row, council members agreed that FASB's project on revenue recognition should be of the highest priority. They expected the board's work on fair value and financial performance to continue well into the future.
Most council members generally agreed that the controversial call for a separate set of standards for smaller public companies or nonpublic companies - so-called differential accounting - was of low priority or not worth pursuing. There was some support, however, for allowing some companies to use different transition periods and sets of required disclosures.
Members also generally agreed that, while convergence of U.S. standards with those of the International Accounting Standards Board was desirable, projects should not be given higher priority simply for the sake of convergence.
FASB chairman Robert Herz said that decisions on additions to the board's agenda are made more complicated by "some very major challenges and cross-currents in the post-Sarbanes-Oxley world."
"These [challenges] include the pace of change (users' desires for continued improvements and change due to international convergence versus the ability of preparers and auditors to cope with further change) and the perceived tensions between an increased relevance of financial reports and a heightened emphasis on accuracy and reliability, and between calls for standards to be more 'principles-based' versus demands for the greater clarity and certainty provided by rules and bright lines in an environment of increased enforcement and litigation," Herz wrote in the FASAC survey. "These tensions and competing forces are very real and impact just about everything we do."
