Russell Golden, the recently appointed chairman of the Financial Accounting Standards Board, discussed the road ahead for FASB after the board marked its 40th anniversary earlier this year as it continues its efforts to reach a consensus with the International Accounting Standards Board on their remaining convergence projects.
In a speech Monday at the National Association of State Boards of Accountancy’s 106th annual meeting in Maui, Hawaii, Golden emphasized that his priority was to improve U.S. GAAP, particularly in the area of disclosures.
“GAAP is here to stay—just as long as we at the FASB work to serve the needs of our stakeholders and our capital markets by preserving the core of GAAP while enabling it to evolve to meet the needs of the future generations of investors, creditors and companies,” he said.
Golden believes FASB can successfully carry out its mission of improving financial reporting for U.S. capital markets while also trying to improve and converge financial reporting internationally through the development of GAAP.
“Because the FASB’s primary objective is promoting the reporting of highly relevant information for financial statement users of companies using GAAP, the FASB should continue to undertake improvements to GAAP when necessary to meet the needs of investors and other users of companies preparing GAAP reports both within and outside the United States,” he said.
He discussed the evolving model that FASB and the IASB are pursuing as they continue their work on converging the accounting standards for financial instruments, leasing, revenue recognition and insurance contracts. The IASB has moved to a more multilateral model of setting International Financial Reporting Standards through its recently established Accounting Standards Advisory Forum, in which it is consulting with a variety of national and regional standard-setting bodies, including the U.S.
“The FASB should, as a starting point, carefully evaluate and consider IFRS when implementing improvements to GAAP, seeking to promote global alignment where it is in the best interests of investors and other capital market participants,” said Golden. “Any improvements that the FASB makes to GAAP also may influence the shape and future direction of international standards.”
He added that FASB should advance the development of IFRS by actively providing input on IASB projects through the Accounting Standards Advisory Forum and through other means. “The FASB should contribute to the development of IFRS by sharing views developed through the FASB’s due process, stakeholder outreach, analysis, and deliberations,” said Golden. “Likewise, the FASB’s effort to improve GAAP will benefit from the additional international input resulting from its interactions with the IASB, the International Forum of Accounting Standard Setters, and other world standard setters. In all instances, the FASB’s objective will be to promote the improvement and convergence of GAAP and IFRS.”
Golden also believes FASB needs to continue to enhance relationships and communications with other national standard-setters. “That will contribute to an environment that will foster greater convergence,” he pointed out. “In particular, the FASB will seek to enhance relationships with the standard setters representing countries with a large number of foreign private issuers in the United States. This type of cooperation and collaboration would continue the process of developing the highest-quality standards while promoting global convergence. In some cases, the need to serve the best interests of investors in their own capital markets may outweigh the goal of creating completely converged accounting standards. But following this path would enable the FASB to work cooperatively with the IASB and others toward the goal of ultimately agreeing on and adopting standards that either are converged or that have the fewest possible differences.”
He sees a way for FASB to “create a new path forward in the quest for more common and comparable global financial standards.” That would involve working individually to improve the U.S.’s own national standards, working with the IASB on the continued improvement of IFRS, and working with each other on individual projects and to identify “best practices” in standard setting.
“This would result in a new, decentralized, multilateral model of international standard setting that is consistent with the goal of promoting greater convergence in global financial accounting standards,” said Golden.
Progress on Convergence Projects
Golden observed that through next year, FASB’s top priority will be to complete its major convergence projects with the IASB. The two boards hope to release a final standard on revenue recognition in early 2014. The standard had been expected to be released this year, but some differences have emerged in recent discussions, with the boards reportedly agreeing on Wednesday to add a probable “collectability threshold” that contracts would have to meet in order for the revenue to be recognized. For U.S. GAAP, “probable” would signify that the collection of the revenue is “likely to occur,” while for IFRS, the collectability would be “more likely than not.”
Golden noted that FASB also plans to issue final standards on two financial instruments projects— classification and measurement; and impairment—in 2014. A final standard on leasing should be completed in late 2014 and FASB and the IASB hope to complete their decisions on insurance after that. He also discussed the role of the SEC in considering the use of IFRS by U.S. companies.
“As this process has been progressing, the SEC has been weighing a public policy decision on the appropriate role for domestic issuers of IFRS as established by the IASB,” said Golden. “At the FASB, we have been discussing a vision for a long-term, global standard-setting environment in which the FASB, the IASB, and other major capital market standard setters co-exist and cooperate. The goal would be to develop converged standards, while also addressing the specific needs of the individual capital markets for which these organizations set standards. The FASB’s first priority is to improve financial reporting for the benefit of investors and other users of financial information in our own capital markets. In addition to serving our capital markets, the FASB’s work also benefits others.”
He noted that reducing global differences in financial reporting is dependent on more than simply reducing differences in financial accounting standards. “As others have repeatedly pointed out, significant differences continue to exist in the auditing and enforcement of financial reporting in jurisdictions around the world,” he said. “Therefore, broader or more complete convergence of financial reporting cannot be accomplished through financial accounting standards alone.”
Private Company Standards
Golden also discussed the role of the Private Company Council that was created last year by FASB’s parent organization, the Financial Accounting Foundation, and how its work on accounting standards for private companies compared with the American Institute of CPAs’ recently introduced Financial Reporting Framework for Small and Medium-sized Entities, or FRF for SMEs.
Golden pointed out that the PCC, in the five meetings it has held since its initial meeting last December, has taken action on four issues that users, preparers and auditors of private company financial statements have identified as priorities: 1) accounting for identifiable intangible assets acquired in business combinations; 2) accounting for goodwill; 3) applying variable interest entity guidance to common control leasing arrangements; and 4) accounting for certain receive-variable pay-fixed interest rate swaps.
To date, the PCC has voted to finalize proposed alternatives under U.S. GAAP for the accounting standards for both interest rate swaps and goodwill. In the coming weeks, FASB will discuss the proposed alternatives and also consider the applicability of these alternatives to public companies and not-for-profit organizations, Golden noted. If FASB decides to endorse the alternatives, they will be issued as final Accounting Standards Updates.
In November, the PCC will also discuss the feedback it has received on its proposal for applying variable interest entity guidance to common control leasing arrangements and will continue to discuss a separate project on identifiable intangible assets. The PCC also has been advising FASB on various projects, including revenue recognition, leases, accounting for financial instruments, going concern, disclosure framework, the definition of a nonpublic entity, and government assistance.
Golden believes FASB has responded in a positive way to the PCC’s work, for example, by adding a project to its technical agenda to address financial reporting complexity for both private and public companies in the development stage, and beginning to do some research on issues involving share-based compensation and liquidity features commonly provided by private companies.
“The FASB is first and foremost focused on identifying how GAAP can be improved, simplified, and made more relevant for all companies and organizations,” said Golden. “In cases where we believe it is appropriate, we may endorse some differences for private companies. But in other cases, we’ll look to incorporate improvements across the board. In other words, our effort is to develop a common body of standards under GAAP—not big GAAP’ and little GAAP;’ not private GAAP’ and public GAAP.’ It is the same principle that is guiding our efforts to contribute to the development of a common—but not necessarily identical—body of global accounting standards.”
Confusion over AICPA’s FRF for SMEs
Golden acknowledged that much of FASB’s understanding of private company issues is a direct result of work undertaken by the American Institute of CPAs. “For many years, the AICPA and its representatives have worked to help the FASB better appreciate the needs of private companies and their constituents and how those needs might better be served by GAAP,” said Golden. “We owe the AICPA and its leaders a debt of gratitude for that contribution.”
He pointed to the AICPA’s work in developing FRF for SMEs. “The AICPA has appropriately characterized the framework project as an effort to create a non-GAAP, special purpose framework (otherwise known as an Other Comprehensive Basis of Accounting, or OCBOA) for smaller, owner-managed, “Main Street? businesses, whose lenders or investors do not require the comprehensiveness of GAAP financial statements.”
Golden acknowledged that the AICPA’s effort has been controversial, however. “NASBA, the Institute of Management Accountants, and The RMA Journal, the official publication of the Risk Management Association, have cautioned potential users of the framework to fully understand its provisions and, more importantly, to recognize that FRF for SMEs is not GAAP,” he added.
Golden noted that GAAP is “not for everyone.”
“I understand that historically some organizations have found GAAP too complex or too costly—that is, not relevant to their needs or those of their stakeholders,” he said. “I understand why using a special purpose framework can be useful. I understand why cash-basis OCBOA can be useful. And I understand why tax-basis OCBOA can be useful. But it is important to remember that neither cash nor tax OCBOAs were based on an existing GAAP framework—unlike the FRF for SMEs. Add to that the smorgasbord of choices and options available under FRF for SMEs, and the potential for confusion multiplies exponentially.”
Golden pointed out that the confusion over FRF for SMEs already exists, with one state automobile dealers association advertising a webinar earlier this month entitled, “The New GAAP—AICPA’s New Financial Reporting Framework.” At the urging of NASBA, the group subsequently changed the name of the webinar, but the confusion persists.
“Confusion can have consequences,” said Golden. “GAAP is our national set of accounting standards. It serves the needs of both public and private companies, as well as private sector not-for-profit organizations. Indeed, much of GAAP originally had its roots in common accounting and reporting practices here in the U.S., involving public companies, private companies, and not-for-profits. Because of its general acceptance, GAAP often is the best choice for many private companies.”
Reflections on FASB’s 40th Anniversary
Golden also recapped FASB’s recent celebration marking its 40th anniversary, in which most of the past chairs were in attendance.
“About six weeks ago in New York City, the FASB and the Financial Accounting Foundation sponsored a thought-provoking conference marking the 40th anniversary of the board,” he said. “One of the highlights was a panel discussion that brought together five of my six predecessors—all but the FASB’s first chairman, Marshall Armstrong, who passed away a few years ago. During the course of the panel, each of the former chairs described in detail the major challenges that they faced during their tenure.
“For Leslie Seidman, it was the issue of derecognition—or when to take items off the balance sheet. For Bob Herz , it was the Sarbanes-Oxley legislation—and the re-designation by the Securities and Exchange Commission of the FASB as the public company standard setter. Bob also cited the financial crisis of 2008 and 2009, and the second great debate over the expensing of stock options.
“For Ed Jenkins, it was the involvement of Congress in the controversy surrounding accounting for derivatives. For Denny Beresford, it was the first battle over the FASB’s proposal to expense stock options, a battle that the board lost—and then won later on. And for Don Kirk, a member of the original board and the FASB’s second chairman, the principal challenge of his tenure was survival in the face of political pressure.”
For Golden, the discussion among the former FASB chairmen crystallized some “important truths” about GAAP. “GAAP lives and breathes,” he said. “It is never finished.’ It establishes unifying principles while recognizing appropriate differences. While it is powerful, it also is vulnerable. And most importantly, the members of the FASB are not the masters of GAAP. We are its stewards.”
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