Leslie Seidman, the outgoing chair of the Financial Accounting Standards Board, spoke about her experiences leading the board and its work on the upcoming revenue recognition standard during a sometimes emotional speech Wednesday that will be the last of her term.
Speaking at Financial Executives International’s conference on revenue recognition in New York, Seidman noted that FEI was the organization that originally nominated her for a seat on the Financial Accounting Standards Board back in 2003. She remembered receiving a call from a General Electric executive, Mitch Danaher, who was a colleague at FEI, asking if she was interested in joining the board.
“I have you to thank for this amazing opportunity and experience,” she said. “It has been a true honor and privilege to work with you in this capacity.”
Seidman took over as chair in 2010 after the retirement of Robert Herz and has led the board through its efforts to converge the revenue recognition, leasing, financial instruments and other standards with the International Accounting Standards Board. Her term ends on June 30, with FASB board member Russell Golden elected to succeed her.
“In a few weeks, my 10-year tour of duty on the FASB will come to an end,” said Seidman. “During that time, we issued over 200 exposure drafts and over 200 standards, and you probably all are very well aware of that because you have all been right there with us. But I think that this standard has the potential to make the most significant improvement in global reporting of all of them. When I first started at the FASB in 2003, the relationship between the FEI and the FASB was pretty strained. People told me that it was because the board, the FASB, was too theoretical and wasn’t really listening. Now I grew up in an FEI company, and I have always had the belief that most companies are trying to do the right thing, and are even willing to change their accounting or their disclosures if they’re convinced that it’s important information for investors. However, I think we have a responsibility to make sure that the standard both reflects the economic activity of your companies and can be applied by a mere mortal without a team of experts constantly at your beck and call. So over the last few years, I think we have significantly improved the dialogue between the FASB and the FEI, including the CCR [Committee on Corporate Reporting], the committee that we primarily work with.”
Seidman extended her thanks to various FEI officials for working with FASB over the years. “There clearly have been some intense discussions over the years, but I think the standards have been better because of them,” said Seidman. “I know that the candid, constructive dialogue that we have had will continue with Russ Golden at the helm of the FASB.”
As for her future, Seidman said she would take the entire summer off. “Then in the fall, I’m going to start going to my FEI chapter meetings and start networking for a new job!” she joked.
The converged revenue recognition standards are due out sometime this summer, but Seidman noted that it may take until the end of summer before that happens. An implementation group will be created to help test out the standards.
“It’s true this is my last presentation as the chairman of the FASB, and that was by design,” said Seidman. “I am a member of FEI, and I thought that this would be a fitting group for me to deliver my farewell remarks. I can’t really think of a more fitting occasion than the completion of the finalization of our project on revenue recognition. I think it is a major milestone in our convergence activities, as well as a very good representation of the significant improvements in the process that we have been using over the last several years.”
Seidman discussed how the revenue recognition standards had evolved over the years. She noted that the first staff memo on the revenue recognition project had been about an inch and a half thick, but the project had really been underway for some time. The memo marked the threshold meeting of the boards to decide how to proceed. It included an analysis of the existing 180 parts of U.S. GAAP related to revenue recognition.
“It seemed that there should be one principle for revenue recognition, and for a time, the majority of the board was favoring the one approach being fair value for the measurement of the performance obligation,” she said, noting that she was not one of the board members who felt that way.
Around that time, Seidman spoke at one of FEI’s Current Financial Reporting Issues conferences, and heard from several of the attendees that the fair value approach would not work for their businesses. During the Q&A session at the end, one person after another stood up and said that the board’s work was completely out of touch with reality, Seidman recalled. “There was a guy from a shoe company who said, ‘Seriously? I just sell shoes. Really, it does not need to get more complicated than that.’ After a number of people got up and said those types of things, I finally had to admit that I didn’t agree with it. I think I got a standing ovation.”
She took the message back to FASB headquarters in Norwalk, Conn., and began to implore the other board members to try to be more practical. “What we were hearing loud and clear is that the measure of revenue should reflect what the customer agreed to pay,” she said. “It really doesn’t need to be more complicated than that.”
At the time, FASB was also holding discussions with investors about revenue recognition and hearing similar feedback from them. They too thought the best measure of revenue would be the cash flows likely to come in from customers. Seidman said the experience showed that FASB’s process was open and the board did listen.
The upcoming revenue recognition standard will include the three models of proportionate performance, completed performance, and collection completed, although the words will be different in the final standard and some of the conditions will be clarified. The one model that was jettisoned from the final standard was the fair value model, Seidman noted, because in the cases where it’s required today, such as the valuation of precious metals, there is generally no contract with the customer. FASB has determined that a performance obligation is a liability.
Seidman noted that FASB and the IASB had conducted extensive fieldwork on the standard and jointly held nine roundtable meetings around the world to elicit feedback. They also held many individual consultations with different stakeholders.
“We want to provide investors with the most useful information, but the preparers are saying the costs are excessive,” said Seidman. “I really think that especially on the disclosure package but also on the transition package we successfully used that [consultation] technique and have ended up in a place where investors are going to get the information that they need, but at a much more reasonable cost to the preparers of financial statements. Now we realize that not everybody is happy, but my experience is that if people feel that they’ve been listened to, they will accept the outcome because they respect the process. I think that is the most important takeaway that I have learned in my years at the board.”
Seidman noted that the process was designed to develop a standard that would provide useful information to investors at a reasonable cost. FASB’s goal has been to develop a consistent principle for the recognition and measurement of revenue.
“Why is this such an important topic? We’re very well aware that it is considered by most investors to be the key line item in the financial statements,” said Seidman. “They want to be able to understand it. They want to be able to compare it, and they want to be able to model it to project the future profitability of a company. But I have to admit that, in all candor, this project is more of a ‘greater good’ kind of a benefit than you might expect. I think most people agree that it makes common sense to have a universal standard on revenue recognition so that any investor around the world can pick up a set of financial statements and understand the things on which the company is making its money. But if you’re an analyst in, let’s say, the telecom industry, you might be perfectly happy with the accounting which you’re getting right now, so you may not be terribly supportive of a change in accounting by way of a standard, even though it’s different from the accounting that’s currently being followed in the entertainment industry, for example. But our view is that we don’t only serve specialist investors who currently are invested in a particular industry. We also serve potential investors who may want to invest their capital with any company. What we’re trying to do is make sure we end up with a standard that would present similar economic arrangements consistently, regardless of what the industry is called, or what the name at the top of the contract happens to be.”
Seidman said FASB tries to make sure its improvements are cost-effective. FASB wants to understand what the costs to implement a standard would be, whether initially in transitioning to a new standard and over time on an ongoing basis. She said there would also be a cost in educating investors, which would be extremely important for the new revenue recognition standards.
“Importantly, a cost we do not consider is whether you’re going to look more or less profitable under this standard,” she said. “What we think should be the case is that the accounting should actually reflect the economic activity of the company, even if it might reveal lower revenue or an uneven pattern over time. Clearly when an industry doesn’t think the accounting reflects their economics properly, we very seriously consider that feedback.”
Seidman acknowledged that some finance executives from NBC Universal and Johnson & Johnson who spoke at an earlier panel discussion at the conference had expressed serious concerns about FASB’s revenue recognition proposal and whether it would appropriately reflect the economics of their arrangements. But Seidman reassured them that in the revised wording, which FASB has not yet released, both of their situations will be addressed. But she noted that there may be further adjustments in the standard.
“When serious people who work cooperatively with us come and say, ‘We really don’t think this reflects the economics,’ we’re not done,” she said. “We’re going to take it back to the drawing board and work it until we feel it does have acceptability.”
But Seidman pointed out that FASB is not trying to avoid change. “We’re change agents,” she said. “That’s what we do, and we’re also not trying to avoid adverse consequences. At the end of the day, we’re just trying to give a faithful reflection of the economic activity of the company.”
FASB also took into account the needs of private companies in writing the standard, Seidman emphasized. “We are particularly sensitive, especially lately, to the costs of our proposals and published standards for private companies, especially small companies,” she said. “What’s interesting to me, on this project, we did not hear significantly different feedback from private companies and public companies. We spent a lot of time working with the construction industry, which is very heavily weighted toward private companies, who had some concerns about losing the percentage of completion method, but after working with them extensively over a number of years, and I think listening very effectively to what they had to say, I think we’ve landed in a good spot. There may be some minor changes for them, but I think they believe that it is an appropriate reflection of their activities at this point. We did end up exempting private companies from some disclosure requirements, and we extended the effective date for them, just to allow more time for learning and transition to the new requirements.”
Seidman noted that the revenue recognition project was a joint project from the early days with the IASB. “I think all of us would agree that if there ever were to be a project where we should reach a converged outcome, this one is it,” she said. “I just think it is extremely important for the revenue line to be converged in reports around the world.”
The existing standard under IFRS was general and brief, she noted, while the U.S. GAAP is very detailed with approximately 180 specific pieces of guidance, mainly for individual types of transactions and industries. “That brings up the age-old debate about principles and rules,” said Seidman. “I think it’s undeniable that we Americans like our rules detailed enough so that people know what’s expected of them, and that’s not just applicable in accounting.”
She noted that a friend had sent her an article about attempts over the years to globalize the rules for golf for use in international tournaments. “I read in that article that the first chairman of the USGA formed a committee to try and interpret the Royal Rules of Golf and summed it up by saying, ‘We find that in America it is necessary to have the rules more clearly defined, as Americans are inclined to play more by the letter than the spirit.’ That was in 1897, well before Sarbanes-Oxley. So it was not surprising to me that the letters we have received from U.S. stakeholders said that we need more guidance and more examples, whereas the letters from people in the rest of the world said that we had gone too far and that we should have a more principle-based standard without so many examples and not so much guidance.”
Seidman said that at last count, they had over 50 examples in the final standard. They would not answer every question, but the set that has been included should be representative of the major types of transactions and issues that will be encountered in practice.
Seidman pronounced the convergence on revenue recognition to be a major success. “We managed to stay in step throughout the process, both in terms of the due process procedures, but also in terms of the conclusions that we reached,” she said.
She noted that FASB is putting together an implementation group to facilitate a smooth transition to the new revenue recognition standards. “We know that questions are going to arise, especially here in the U.S.,” she said. “I like to describe the U.S. environment as the canary in the coal mine because if implementation issues are going to emerge, they’re going to emerge here first. So the question is, how do we want to answer them? In private negotiations between you and your auditors, or do we want to discuss them in a public forum, so that everybody has the benefit of the issues that are surfacing and the preferred resolution of them before the implementation efforts begin?”
Seidman said that FASB would proactively set up a group that will include auditors and preparers, as well as representatives from the IASB, the Securities and Exchange Commission, the Public Company Accounting Oversight Board and the American Institute of CPAs. “What we want to make sure we’re doing is creating an environment where people are encouraged to raise questions, and then they will be discussed in public so that everybody has the benefit of that discussion before we move forward with implementation activities,” she added. “Our hope is that this will be primarily an educational effort, but if necessary, we would be poised to do any necessary narrow clarifications or amendments before the standard is implemented. To be clear, what we’re trying not to do is re-instate all of the industry-specific guidance that we’ve just smoothed out, but what we do want to do is make sure that important questions surface early so that people can feel confident transitioning to the new requirements. We also hope that being proactive will ensure that the standard is applied consistently not only here in the U.S., but around the world, so by making those activities public, we’re hoping it can influence the way the standard is applied elsewhere in the world as well.”
FASB also plans to hold educational sessions with investors to make sure they understand the nature of the changes that are coming in revenue recognition, she added, in addition to a “train the trainers” session for small practitioners who primarily rely on continuing professional education providers for their training before they start to implement the standards. FASB intends to use similar processes for any major changes in standards coming in the future, such as with the ongoing convergence projects on leasing and financial instruments.
Seidman later told Accounting Today that the next steps in the process for the revenue recognition standard will be to issue a document for “fatal flaw review,” which usually takes a couple of weeks. “We will have to see whether there are any issues we need to deal with from that,” she added. “But I would say sometime in the middle of the summer is the most likely date for the issuance of a final standard. In terms of implementation guidance, all of it will be included in the standard. I would say the general volume of it is approximately the same as what was in the last exposure draft. It’s just that it has been reconsidered and adjusted in response to the feedback we received the first time around.”
Seidman was also asked by a member of the audience about the process used in the leasing standard, which is further away from completion. “Fundamentally I would say that we’re using the same process,” she responded. “I think that there is just a much wider set of views about what the economics of those arrangements are. What’s interesting to me is that today both we and the IASB have a standard on leasing that distinguishes between the kinds of leases based on the extent to which ownership is transferred, etc. So what we have exposed for public comment is a variation on that same theme, but with the important difference that it has to be reported on the balance sheet. I believe FEI has sent us a letter saying, ‘We accept that it’s going on the balance sheet. Now let’s talk about the income statement.’ That’s a practical position to take, but at any rate what we tried to do in this latest exposure draft is to address the concerns about the income statement and the cash flows statement to be responsive to that very pervasive concern. At the end of the day, I guess what I would want to emphasize is that during the comment period on leasing, both boards and staff will be conducting extensive fieldwork to meet with people again and refresh the feedback about whether the standard is providing useful information and whether it can be implemented at a reasonable cost. Fundamentally it’s a reasonable concept. It’s just that not every issue resonates the same way with people. The leasing standard is, plain and simple, extremely controversial. It was when FAS 13 was issued, so I’m hopeful that working it through the process, we’ll get it to a good spot.”
Seidman was also asked about FASB’s interactions with the SEC on the revenue recognition standard. “Revenue recognition, as we all know, is one of the top reasons for a restatement, so it’s something that’s of keen interest to the SEC staff throughout the organization, whether you’re talking about the Office of the Chief Accountant or you’re talking about the Division of Enforcement, so it’s something that we know we need to land in a good place on, especially with regard to the way the SEC views it,” said Seidman. “What we don’t want to have happen is to issue a standard and then have the SEC overrule us because they don’t think it was appropriate in some regard. So we have a very constructive relationship with the staff, especially at the Office of the Chief Accountant on a matter like this, to have periodic checkpoints to share conclusions and if they have any concerns about it. On a document like this, we will sit down and work it through to find out if there are any areas of concern. That’s been happening throughout the process on revenue recognition.”
She noted that the SEC has to wait and see what the final standard says before issuing it. But there have been some differences of opinion of late in a different area, she acknowledged.
“The one area where lately there seems to be an issue that the FASB and the SEC staff may need to work through has to do with the boundaries of disclosure,” said Seidman. “We are about to issue an exposure draft on uncertainties related to going concern as well as a proposal that we issued earlier this year that would expand disclosures about interest rate risks and liquidity disclosures. The concern that was expressed is that we were stepping into areas that rightfully belongs in MD&A. So Paul Beswick, the [SEC] chief accountant, has indicated a desire to hold a roundtable to bring some visibility and discussion to that issue. I think it’s an important issue. We frankly could care less who sets the disclosure requirements, but what we’re trying to do is be responsive on the feedback that we’ve heard from investors on, for example, interest rates and liquidity in the context of our financial instruments project. So we took action to try to improve the disclosures. At the end of the day, I think it’s important to clarify who’s responsible for what and then get on with life, and we’re looking forward to participating in those roundtables.”
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