Financial Accounting Standards Board chair Leslie Seidman gave a cautious thumbs-up to the so-called “condorsement” approach to incorporation of International Financial Reporting Standards in the U.S., while defending FASB’s authority over private company accounting standards.
In a speech Monday to the annual meeting of the National Association of State Boards of Accountancy, Seidman discussed the status of FASB’s and the International Accounting Standards Board’s efforts at melding U.S. GAAP with IFRS, and the eagerly anticipated decision of the Securities and Exchange Commission on whether and how to proceed with incorporating IFRS into the U.S. financial reporting system. She is expected to deliver similar remarks Tuesday at an IFRS conference in New York sponsored by the New York State Society of CPAs’ Foundation for Accounting Education.
Seidman noted that the SEC staff had circulated a paper in May outlining how the U.S. could move toward IFRS adoption through “condorsement,” an approach that combines convergence with endorsement by “endorsing” one standard at a time into U.S. GAAP.
“I think the ‘condorsement’ process outlined by the SEC staff has many positive aspects,” said Seidman. “First, ‘condorsement’ shows U.S. support for the ongoing development of global accounting standards. As I mentioned, the FASB has demonstrated a strong and continuing commitment to making progress in this area. Second, ‘condorsement’ adopts the very practical approach of retaining the label ‘U.S. GAAP.’ In other words, regardless of the way IFRS is brought into the U.S., it’s easier on the system if it’s called U.S. GAAP for federal and state legislative and regulatory purposes, contractual covenants, and those kinds of things.”
Seidman added that “condorsement” also calls for some level of U.S. involvement in the establishment of any new standards.
“When I look at the letters that have come into the SEC, most people feel very strongly that they want to continue to have active participation in the process themselves, as stakeholders, but also that the FASB should continue to have a strong role in influencing what goes on the international agenda, the process by which these issues are analyzed, the level of implementation guidance provided, and the outreach that is conducted in the U.S.,” she said. “Is this isolationist? I don’t think it is. I think it is an acknowledgment that if we want a global standard that the U.S. follows, it has to work here, in our environment, and we can work cooperatively to bring those insights to the discussion. I believe there are other countries around the world that also would seek substantive roles for their national standard setter in the process, such as Japan. I think there is a way to leverage the national processes and resources that exist, and with proper coordination, bring them to the development of international standards.”
Seidman also noted that the “condorsement” approach recognizes that there should be a gradual approach to dealing with the remaining differences between U.S. GAAP and IFRS.
“We’re in a very different position than a lot of other countries that have gone through this endeavor, and we need to go through a thoughtful exercise to look at those differences and determine the best course of action,” she said.
Seidman also addressed the controversial matter of private company accounting standards. The American Institute of CPAs has been pushing to create a separate standard-setting board for private company accounting in accordance with the recommendations of a Blue Ribbon Panel on Standard Setting for Private Companies. Last week, at the AICPA’s Fall Meeting of Council, the Institute voted to approve a strongly worded resolution urging FASB’s parent organization, the Financial Accounting Foundation, to substantially revise a proposal to instead set up a Private Company Standards Improvement Council that would be able to identify and vote on differences in standards for private companies, subject to ratification by FASB (see AICPA Issues Ultimatum on Private Company Accounting Standards). The AICPA resolution left open an option for the Institute to set up its own standard-setting board or committee unless the FAF agreed to limit FASB’s involvement in setting private company standards.
Seidman disputed the criticisms, enumerating FASB’s efforts to open up the standard-setting process to private company constituents, including the addition of two members of its board who have experience in the private company world, along with extra staff members.
“We’ve put in place an expanded professional staff to address private company issues, and these individuals are part of every project team,” she said. “We also added a FASB board member with a private company preparer background, and another board member with significant experience investing in [and auditing] private companies. So the private company voice is better represented in Norwalk. We have also significantly increased our outreach to private companies, and taken other steps to make private company concerns an integral part of every standard-setting deliberation we undertake.”
Seidman noted that FASB adjusted its goodwill impairment testing standards recently to take into account the concerns of private company constituents, as it did with standards governing multiemployer plans. Still, she acknowledged that FASB has not gone far enough to address the needs of private company accountants.
“I have been a member of the board for eight years, and I have been very candid in admitting that we could have done a better job in the past,” she said. “I hope you can see that we have made meaningful process changes that have clearly led to changes in the standards, as well. I believe the private company plan proposed by the trustees will build on and augment the efforts that the FASB already has undertaken to address private company issues. By adding a new committee, I think it alleviates the concerns I have heard about the changes we have made being temporary, rather than being embedded in the structure and processes of the organization.”
She noted that under the proposed plan issued by the FAF trustees, the new Private Company Standards Improvement Council would identify, propose, deliberate, and formally vote on specific exceptions or modifications to U.S. GAAP for private companies.
“They would look at old standards, as well as the ongoing standards being set by the FASB,” said Seidman. “These deliberations would be conducted in meetings attended by members of the FASB, who would ratify any changes put forward by the Council. The process being proposed is quite like the [Emerging Issues Task Force], but the scope of the mission is different and broader.”
Seidman argued that the new council would represent a major step forward in the standard-setting process for private companies, and would build on the work of the Private Company Financial Reporting Committee, a FASB advisory group that was created in 2006. The AICPA has contended that the new PCSIC would simply be a repeat of the PCFRC, but Seidman disputed that characterization.
“The PCFRC made important progress in representing the interests of users, preparers and auditors of private company financial statements, but frankly, I believe that the effort was not wholly successful, in two respects,” she said. “First, the PCFRC and the FASB did not develop a common understanding or framework for considering when exceptions or modifications to U.S. GAAP for private companies are appropriate. Second, the two organizations did not integrate their people or operational processes.”
She acknowledged that “our approach with the PCFRC was not a recipe for success,” but said the FAF trustees’ plan would directly address both of those issues. She argued that the plan was in keeping with the recommendations of the Blue-Ribbon Panel.
“As you know, creating a separate standard-setting board for private companies under the auspices of the FAF was one of the recommendations made earlier this year by the Blue-Ribbon Panel on Standard Setting for Private Companies,” she said. “The Trustees’ proposal has generated heated criticism in some quarters, largely because the Trustees felt it was important to maintain the FASB’s role as the sole standard-setting board for U.S. GAAP through the ratification mechanism. But what has been overlooked in the debate thus far is that the Trustees adopted virtually every other recommendation that the Blue-Ribbon Panel made. The Blue-Ribbon Panel called for creation of a new body, under the supervision of the Trustees, which would ensure that appropriate exceptions and modifications are made to U.S. GAAP for private companies. The Blue-Ribbon Panel recommended development of decision-making criteria to enable standard-setters to determine whether and when exceptions or modifications of U.S. GAAP for private companies are warranted. The Blue-Ribbon Panel called for a comprehensive review of the new board’s work in three to five years. And the Blue-Ribbon Panel called on the trustees to include issues related to private companies in its new post-implementation review process. Each of these recommendations was included in the plan issued by the trustees.”
She noted that the FAF trustees had met with many stakeholders and weighed divergent views, and they ultimately decided against the idea of creating a second standard-setter for private companies “because they believed that setting up such a board could, over time, lead to more significant differences between the standards for public and private companies.”
“It is hard enough to get the FASB members to agree,” she added. “Trying to get two independent organizations to agree is demonstrably difficult, despite strong commitment to the goal. Adding a third organization to the mix makes it even harder, and adds unnecessary complexity, in my opinion.”
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