by Glenn Cheney
Norwalk, Conn. -- The Financial Accounting Standards Board juggled a full plate in 2003, and 2004 appears likely to present the standard-setter with an equally packed agenda.
In a year of tension within the accounting profession highlighted by the one-year anniversary of Sarbanes-Oxley, as well as the Public Company Accounting Oversight Board’s reformation of public company auditing standards, it seemed fitting that FASB started off the year with two significant moves to bolster investor confidence.
One was a series of projects on accounting for special purpose entities — the amorphous subsidiaries that sounded the death knell for Enron — while the other was the formation of a new Users Advisory Council, a group of over 35 investors, analysts and other professionals who will advise FASB on what needs to be done, undone or left alone.
The work on SPEs, which during the course of the year came to be known as “variable interest entities,” produced principles of consolidation for the entities and an amendment to FASB Statement 140.
Other highlights of the past year included:
• A crucial improvement to Statement 132, Employers Disclosures about Pensions and Other Postretirement Benefits, was hammered out. By improving the transparency of pension information, the statement responds to the fears of investors, who have watched pension plan funding erode during three years of stock market stagnation.
• Securities markets were made more dependable with Statement 149, amending Statement 133, Derivative Instruments and Hedging Activities. The standard clarifies accounting for derivative instruments, including those embedded in other contracts.
• Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May. It requires that certain instruments, which were formerly accounted for as equity, be classified as liabilities in statements of financial position. In an upcoming second phase, the board will address the accounting for convertible bonds, “puttable” stock and other instruments not covered in Statement 150.
Statement 150 raised considerable concern because it required partnerships to reclassify a partner or shareholder’s equity as a liability upon death or separation, a situation that in many cases of small, nonpublic companies resulted in apparent bankruptcies.
After widespread complaints that the rule was inappropriate for nonpublic companies, FASB indefinitely deferred the requirement for many types of mandatorily redeemable financial instruments.
The board has also been reassessing its standard on employee stock option compensation, a fiercely controversial issue that went global when the International Accounting Standards Board took on a similar project and moved toward requiring that such compensation be expensed.
Aiming at convergence with international standards and re-dubbing the project “equity-based compensation,” FASB has tentatively moved in the same direction. Unlike the IASB, however, FASB has tentatively decided not to require companies to use any one calculation formula, but to allow them to choose the most appropriate formula.
The board closed out the year with four relatively small proposals that should improve U.S. standards while bringing them closer to international standards. The exposure drafts deal with voluntary changes in accounting policy, calculation of earnings per share, asset exchanges, and expensing of inventory.
Last year also brought two new members to the board. Leslie F. Seidman, former vice president for accounting policy at J.P. Morgan & Co., was named to a three-year term following the resignation of John Wulff. and George J. Batavick, the former comptroller for Texaco, replaced John Foster at the end of his term.
No new members are expected in 2004.
The Financial Accounting Foundation, which has oversight and appointment responsibilities for FASB, also saw a big change as Robert E. Denham, a partner of Munger, Tolles & Olson LLP, was elected chairman and president, replacing Manuel H. Johnson, whose term expired Dec. 31.
As for 2004, Jane Adams, managing director at Maverick Capital Ltd., and a member of FASB’s Users Advisory Council, said that she had a wish list for the new year.
“I would like to see FASB publish a comprehensive standard, with no exception for nonpublic companies, that requires equity-based compensation to be measured at fair value and recorded as expensed in the income statement and the statement of operations,” Adams said. “I’d like to see them fix the pension standard so that the income statement and the balance sheet reflect the performance and financial condition. I would also like to see the board fix the standard on consolidations. And I would like to see the board address comprehensively the use of fair value as ‘the’ measurement attribute on financial statements.”
The board expects to issue an exposure draft on equity-based compensation in the first quarter of 2004. In the second quarter, the board hopes to issue an exposure draft on fair value measurement statements. On Dec. 24, FASB issued a statement on pension plan disclosures but, as of New Year’s Eve, the board had no project on accounting for pension plans. Jane Adams said, however, that she had heard that such a project might be proposed soon.
The first quarter of 2004 should see exposure drafts on three aspects of business combinations: purchase method procedures, combinations between mutual enterprises, and combinations of not-for-profit organizations. The board hopes to issue final drafts before the end of the year.
The board has already exposed a proposed amendment to Concepts Statement 6, on liabilities and equities. If re-deliberations do not result in radical departures, a final statement may be issued in the third quarter. The board is also working on a final statement on instruments with characteristics of equity and liabilities.
FASB will also be working on its revenue recognition project. By the end of the year, there may be exposure drafts on broad-based revenue recognition and an amendment to a related concepts statement.
