In a rare conjunction, both the Financial accounting Standards Board and the Governmental accounting Standards Board installed new chairs on July 1. In what may be an even rarer conjunction, we were fortunate enough to have both chairs -- FASB's Russell Golden and GASB's David Vaudt -- into our offices in late July for a wide-ranging discussion on the boards' individual agendas, how they interact with their stakeholders, and how they learn from each other.
FASB CHAIR FACES MORE MULTILATERAL ENVIRONMENT
Russell Golden, the newly appointed chairman of the Financial Accounting Standards Board, will be overseeing a board that will be dealing with a new and uncertain environment in which it will be only one of a number of standard-setters from around the world working together in a more multilateral way to decide on future standards for the profession to follow.
In our interview, he described FASB's changing role in setting standards internationally and in the U.S. "When we make improvements to U.S. GAAP, I want to understand how those improvements could be potentially accepted in other jurisdictions, so I would want to reach out to other jurisdictions to understand what they think about the improvements we are making," he said.
FASB has been working on a joint basis with the International Accounting Standards Board to converge U.S. GAAP with International Financial Reporting Standards for over a decade. One of the major convergence projects, revenue recognition, is expected to be completed by the end of this year. The two boards announced a joint transition group in late July to help companies and accountants make the transition to the new standards.
FASB and the IASB are also making progress on the other major convergence projects under their memorandum of understanding, or MoU, including leasing, financial instruments and insurance contracts. But the IASB is also moving to a more multilateral way of setting accounting standards now that the MoU has run its course, having set up an Accounting Standards Advisory Forum, or ASAF, on which the U.S. is just one of the members.
"In the future, we will still remain committed to improving U.S. GAAP for those capital markets that choose to use U.S. GAAP," said Golden. "Because our relationship with the IASB, subsequent to the MoU projects, will change, we'll no longer be working with them jointly on projects and we no longer will be debating them at the table. I will be in a position, as a member of their ASAF, to advise them on improvements that they can be making to International Financial Reporting Standards, and advising them as to what the U.S. accounting standard-setters believe would be an appropriate improvement to IFRS. I take that responsibility very seriously and will be working through some processes to ensure that when I make that advice, that is something that is accepted by the FASB in its entirety."
Golden said that he is committed to improving U.S. GAAP, and other parts of the world might be able to use the improvements as well. "As the IASB is choosing to make improvements to IFRS, I think the U.S. can bring our experience and our expertise to help them understand what can be accepted in the U.S.," he said. "I think the goal isn't changing, that both sets of GAAP should be improved, and we should try to bring it together, working with the ASAF to try to achieve the goal that we have today, which is making both U.S. GAAP and IFRS improved and making them as close as possible."
The Financial Accounting Foundation's board of trustees recently announced that former SEC chief accountant James Kroeker will be joining FASB as a new member, taking the seat of former FASB chair Leslie Seidman, and filling a newly revived role of vice chairman. He will be working with Golden closely. "I think Jim was an excellent choice by the trustees," said Golden. "He has a broad range of experience as an auditor, as a chief accountant. He has a lot of experiences from a public policy standpoint as well as a regulatory standpoint during the financial crisis. He has a great reputation of being someone who is fair, who listens to all the various views before arriving at a decision, so I think he will be a great asset to the board in helping us make improvements to U.S. GAAP. His role as vice chairman is there to help the board develop a strategy and to help facilitate any type of meetings, or to stand in for me if I am working on other things at the time."
Feedback and progress
FASB and the IASB plan to hold roundtable meetings to hear feedback on the proposed leasing standards. "Typically when we expose an area where there can be significant improvements that can impact a wide number of companies, we often create these forums so that we can facilitate a discussion among multiple stakeholders," said Golden. "It helps us to understand why there might be different perspectives between perhaps that of an equipment lessor versus a real estate lessee. These are being conducted jointly with the IASB, so there will be two roundtable discussions in the U.S. and some in Europe, South America and Asia. The preliminary views that I've heard are that the boards have listened to what stakeholders advised us on the last exposure draft, and have made improvements since that exposure draft. As we would all expect, people will still be providing us with comments about additional improvements that we can make, and I expect that will come to the boards in three different ways, one of which is the roundtable, another of which is formal comment letters, and also it will be specific meetings that we request of various stakeholders. Those stakeholders would include investors, companies that are significant equipment lessors and lessees, real estate lessors and lessees, and the public auditing profession. It's very important that anything that we require to be changed can also be audited at a reasonable cost."
Golden noted that the research is still in its preliminary phases on the feedback received to date on the leasing standards. "We've gotten some feedback from some of the stakeholders that we should go further, and we've gotten feedback from other stakeholders that there just need to be additional tweaks," he said. "As we get additional information from investors and from the various preparer groups, we'll have a better feel for what additional improvements need to be made that will then start those deliberations in the fall."
In the meantime, FASB and the IASB hope to issue the revenue recognition standards by the end of the year. The standards had been expected this summer, but Golden said there wasn't really a delay. "We had a very productive joint meeting earlier this week and we are still processing some additional feedback that we've gotten from various stakeholders about that meeting, as well as some other areas where people want to focus, and I think it's in its very final stages of drafting," he said. "There will definitely be at least one additional board meeting. There may be multiple board meetings, but there won't be more than two or three."
At the last joint meeting, FASB and the IASB were still unable to resolve a lingering disagreement over how to treat loan losses and impairments in the financial instruments project. "What we discussed at the joint meeting was the status of the feedback, and the initial results," said Golden. "We still think there is more work to do. But it was quite clear that investors in the U.S. had different views than investors in Europe. It was clear that preparers in the U.S. had different views than investors in the U.S. What we talked about was how to have joint deliberations on areas where there were common issues that need to be resolved by both boards. Both boards' models have views that life of loan is important. Our proposal caused the recognition of life of loan earlier than that of the IASB. Both have life of loan, that being an area where both boards need to make improvements, in my view, and we'll work together to make improvements on life of loan. And we will continue to work together to understand the outreach that both boards are receiving to try to continue to work toward that more converged conclusion."
IFRS and beyond
With a new SEC chair, Mary Jo White, recently installed, Golden was asked about the prospects for her and the other commissioners making a decision on approval of IFRS use by U.S. companies, but he declined to speculate: "I don't think it's appropriate to make predictions about what they will be doing. I have great confidence that they will make a well-informed, appropriate decision in the interests of the country."
As for a timeframe for the new ASAF model for standard-setting, Golden noted that he is already participating as a member of the Accounting Standards Advisory Forum. "I believe that as we complete these MoU projects, we will then move into the transition phase of those MoU projects, which will last from the time in which we complete them to the effective date," he said. "So for revenue recognition, the transition phase will last until 2017, and those will continue to be joint activities. We will also be adding areas to U.S. GAAP and projects that we think are of strategic importance. As our Web site discusses, we are currently looking at potential improvements to pension accounting, and when we do that, we will be looking to what others, including the IASB, have recently done to determine whether their improvements for IFRS are also potentially an improvement for the U.S. While the process for completing the MoU projects and for continuing to make strategic improvements is ongoing, my role as a member of the ASAF will also be ongoing. When I go there, I will be bringing what the U.S. perspective is in any advice I provide to the IASB as they make improvements."
Golden also hopes to improve the way accounting standards have been organized under FASB's U.S. GAAP Codification. "In the short term we also are going to be looking at process improvements as to how we create, update and develop the codification," said Golden. "I think the codification was a very productive thing to do for accountants, but certain aspects of the codification have been criticized as overly complex and not very user-friendly. Now that it has been in place for a few years, I think now is the time to look internally and see if there is a more effective way in which we can communicate those changes, a more effective way in which we can think about how we draft those changes, and to consider if there are certain sections that are too confusing, and is there an easier, more plain English way to write some of that codification. That process is underway, and I'm looking forward to using some of the things we learned there to make some positive changes to the codification."
Working with the PCC
Also on the agenda is the increasing importance of adjusting standards for private companies with the help of the Private Company Council, which has begun working with FASB under the oversight of their parent organization, the Financial Accounting Foundation.
"Going forward, we'll still have important focus for improving accounting for non-public companies, including not-for-profits," he said. "We have a very important project on improving the accounting for not-for-profit institutions, and we hope to have an exposure draft sometime in 2014. We're very committed to working with the PCC, who I believe have done great work in their first few meetings. We recently completed discussions on the decision-making framework, which will help guide both the board and the PCC to understand the uniquely different needs of private companies' users, as well as help us understand how to better evaluate costs to smaller private companies and also to smaller public companies. I think that is a major step to help both the board and the PCC. The interaction with the board and the PCC, I think, is very positive. Both are committed to making improvements, and I think we've seen that in the three documents that have been recently exposed. We will have another one that will be coming shortly related to variable interest entities. I think that's a very positive step forward, and I think there will be a lot of good things to come."
GASB CHAIR KEEPS AN EYE ON PENSION STANDARDS
David Vaudt, the new chairman of the Governmental Accounting Standards Board, plans to closely monitor the impact of GASB's new pension accounting standards on the finances of state and local governments.
"Pensions are still at the top of the agenda for the GASB board," he said in our interview.
GASB issued its long-awaited standards for improving pension accounting and financial reporting last year with the goal of more faithfully representing the full impact of pension liabilities and expenses on state and local governments. But the problems with underfunded government pension obligations were highlighted recently by Detroit's bankruptcy filing and mounting concerns about similar problems in other cities and states.
Asked about what role the pension accounting standards changes may have played in Detroit's bankruptcy, Vaudt responded, "I think it's hard to comment specifically on Detroit, but I think when you look at any particular government out there, there are a lot of factors that go into what their situation looks like, and obviously a lot of different issues that can impact them. But on the pension side, the really positive side of the pension standards is it has elevated the discussion about the promises that have been made to employees and how we make sure that we're funding those promises. ... I think it will definitely elevate the discussions on longer-term planning. I've seen it happen in the state of Iowa, where I came from. Rather than just looking at a one-year budget, they're looking at two-year budgets and also looking at five-year financial plans to project out where they see they're going and how they're going to sustain those levels of services. So I think that's the real positive that's come out of the pension standards."
The other area that GASB is focusing on is "other post-employment benefits," also known as OPEB, such as retiree health care benefits, Vaudt noted. "Definitely, for some governments, that net liability is probably going to be larger than their pension liability because in most cases, they've set no assets aside to fund those particular promises, so that's going to be another area that is going to get increased focus over the next couple of years."
Reaching out
GASB relies on its advisory council to help address these types of questions, as well as other problems that municipal and state governments are having with their finances.
"We reach out to our advisory council to see which issues they see as the most pressing that they're trying to deal with, so we can follow up on those issues," said Vaudt. "The other thing we want to do is to work strategically with maybe some of the players that haven't given us as much input in the past to say, 'What's coming down the pike and how can we keep in front of it?' Rather than saying, 'Now that this has happened, how do we account for it?' we're trying to be in there helping governments deal with it."
Asked about whether that might include meetings with municipal employee unions, Vaudt responded, "I think every group can provide input. The key thing is to bring different perspectives to the table at the same time because it helps get each of the different groups to understand there is another way to look at things. When you do that, I think you come up with better conclusions and better comments."
Government fiscal woes
As the federal government cuts back on its aid to states and local governments, they will be faced with more fiscal challenges and spending reductions. "I think part of that is more on the budgeting side of things," said Vaudt. "What they need to do from a budgeting perspective is to be thinking longer term. That's the real key."
Vaudt is a former elected official himself. His previous job was Iowa Auditor of State and he is still in the process of moving from Iowa to GASB's Connecticut headquarters. He took over from his predecessor, Robert Attmore, who retired on June 30 after leading GASB for a decade. Vaudt said he had received valuable advice and guidance from his predecessor.
Vaudt will also be bringing his perspective as an elected state auditor to the job. "My office there was responsible for over 200 local government audits each and every year," he pointed out. "I not only bring that state perspective, but also that of large community governments to very small community governments, so I've been able to see the differences, capabilities and resources that they have."
Working with FASB
"I think we can definitely learn a lot from what's taking place on the FASB side with the Private Company Council," said Vaudt. "You obviously have totally different resources available at very small governments versus large governments, and we have to see what we can learn from the process that they're going through and how we can leverage that on the governmental side."
GASB has been closely following what its sister organization, FASB, is doing with converging lease accounting standards with the International Accounting Standards Board for companies in the private sector, so it can align its standards for the public sector.
"We want to stay up to speed with what they're doing so that we can track and follow and do updates as we need to on the governmental side, following their guidance and where they end up in the final statement," said Vaudt.
He said GASB is always trying to get broad participation from a variety of stakeholders: "I want to continue to do more direct outreach to all those organizations and establish strong relationships and communication channels with each of the organizations and stakeholder groups out there."
Future standards
To help with the new pension standards, GASB has been issuing guidance for government officials to aid them with making the transition. "We've issued the standards, of course, but this demonstrates that once we've issued the standards, our work is not done," said Vaudt. "So we just recently issued an implementation guide on the plan side for the pension accounting and reporting, and now we're working on the employer side for an implementation guide. Obviously, pensions are going to be a very important topic over the next few years, and we want to make sure for the stakeholders we're providing them with adequate resources so that they can understand and implement the new standards. We're also spending a lot of time going out and meeting with constituent groups so that they have a good understanding of the statements and how to implement those. We're making good progress there."
Vaudt noted that GASB recently issued an exposure draft on the concepts for measuring the assets and liabilities of state and local governments, and a document outlining its preliminary views on the measurement of fair value and the application of fair value, including note disclosures. The board is planning to expand on that work.
"We'll be looking at the feedback that comes from our stakeholder groups, along with preliminary views on fair value," he said. "There we followed a lot of what FASB has done, so we'll be looking for feedback on both of those due process documents coming up. Looking a little bit longer term, we're going to be definitely looking at the recognition side on the concepts statement. When we first started on the measurement side, it was going to be measurement and recognition, but when we got into the project, we decided to split those two apart. The recognition side, I think, will be much more difficult to deal with, especially as we look at governmental funds and the basis there. My own personal view is I think it will also bring us into discussing the financial reporting framework. The two are so tied together, it's going to be impossible to separate them."
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