by Glenn Cheney

Norwalk, Conn. — If the Financial Accounting Standards Board follows through on its project schedule, the fourth quarter of this year could see a host of pronouncements — five final statements, one final interpretation and eight exposure drafts.

The avalanche of production comes after a three-month lull in the third quarter — time spent making decisions in preparation for final documents.

Still, the schedule is only a plan, and the board is less than totally confident that it will be able to issue all the documents before the end of the year.

“I won’t guarantee anything until they’re out the door,” said board member G. Michael Crooch. “I’ve adopted that approach to life around here.”

Crooch said that some projects are more firm than others.

Among those in better shape are two on business combinations. Working with the International Accounting Standards Board to improve earlier statements, the board hopes to issue an exposure draft on procedures for the purchase method of accounting for mergers and acquisitions. The proposed statement should improve the transparency of financial statements, while making FASB Statements 141 and 142 more consistent with the board’s conceptual framework.

FASB and the IASB are also likely to issue an exposure draft on standards for the accounting and reporting of non-controlling (i.e. minority) interests in consolidated financial statements and for the loss of control of subsidiaries. This statement would replace FASB Statement 94 and ARB 51.

Crooch was somewhat skeptical that the board will be able to complete a third proposal, on the accounting and reporting for combinations of not-for-profit organizations, though it is in the works and scheduled to be issued in the fourth quarter.

However, Crooch expressed optimism that the board will be able to issue four relatively short and simple statements that will allow U.S. standards to converge with international standards. The board has an ideal long-goal of converging all of its existing standards to those of the IASB. In the short-term, however, the convergence project aims to adjust standards that are most readily adaptable to the international standards.

One convergence project would bring the treatment of asset exchanges into line with a new IASB requirement that a gain or loss be recognized on the exchange of similar productive assets based on the fair value of the exchange. Current U.S. generally accepted accounting principles prohibit recognition of a gain on the exchange of similar productive assets. The board has not yet discussed comments received after the issuance of an exposure draft.

The IASB has also amended an international standard to require retrospective application of voluntary changes to accounting policy. U.S. GAAP generally requires a cumulative adjustment in the year of the change. FASB has tentatively decided that a voluntary change in accounting principle should be accounted for retrospectively, and that all prior periods should be restated as if the newly adopted accounting policy had always been used, except when retroactive application is impracticable.

FASB also tentatively agreed with an IASB position that requires inventory idle capacity and spoilage to be excluded from the cost of inventory, and be expensed when incurred.

The board’s tentative decisions on earnings per share move toward the IASB’s broader recognition of the dilutive effects of securities-related instruments. The likely statement will parallel the international standard in several ways:


  • The dilutive effect of options and warrants would be reflected by applying the Treasury stock method for the year-to-date period. Options and warrants would have a dilutive effect under the Treasury stock method only when the average market price of the common stock for the year-to-date period exceeds the exercise price of the options and warrants.
  • Shares that would be issued upon conversion of a mandatorily convertible security should be included in basic EPS from the date it becomes mandatorily convertible.
  • When a contract may be settled in shares or cash at the entity’s option, the entity should presume that the contract will be settled in shares if the effect is dilutive.

The board is now entering a second phase of the convergence project, taking on three new projects on income taxes, intangible assets and interim reporting.So far, the board has only begun to discuss accounting for income taxes by assessing differences between IASB Statement 12 and FASB Statement 109. The differences generally relate to the explicit exceptions to recognition of a deferred tax asset or liability. There are also recognition and measurement differences. The board hopes to issue an exposure draft before the end of the year.
This fall should heat up for FASB as the board proceeds with a plan to issue a final statement on equity-based compensation. At the core of the issue is the board’s tentative decision to require that such employee stock option compensation be expensed and measured by a fair-value-based method. With limited exceptions, equity instruments would be measured based on the grant-date fair value of those instruments. That cost would be recognized over an employee’s requisite vesting period. Generally, no compensation cost would be recognized for equity instruments that do not vest.

Despite strong corporate and congressional opposition — including a bill passed in the House that would allow a much weaker approach to expensing — the unflappable FASB is moving forward, claiming that the statement will simplify accounting while improving the comparability of reported financial information. It will also bring U.S. standards closer to international standards.

“I think it’s unfortunate that Congress has seen fit to try to set accounting standards,” Crooch said. “I’m a firm believer in accounting standards being set by independent standard-setters. In my personal view, this is not a very good precedent.”

FASB also is working on a comprehensive statement on revenue recognition that is conceptually based and framed in terms of principles. The board is partnering with the IASB on this, sharing research as they attempt to deliberate the same issues at the same time and to issue concurrent documents.

The objectives of this project relate to two overarching board objectives. One is to eliminate the inconsistencies in the existing authoritative literature and accepted practices. U.S. GAAP on revenue recognition is currently based on over 185 individual documents, many of them contradictory.

The other objective is to provide a conceptual basis that will serve as guidance for future and unspecified situations.

The board also plans to establish principles consistent with the concepts statements, then develop appropriate application and implementation guidance. FASB and the IASB plan to issue simultaneous preliminary views documents on conceptual guidance. They then hope to issue statements on application and implementation.

Lastly FASB will also enhance three application and implementation projects.

To improve Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of Statement No. 125 — the board may issue an exposure draft on qualifying special-purpose entities and the isolation of transferred assets.

The board has not yet decided whether to issue separate exposure interpretations of Statement 87, Employers’ Accounting for Pensions, and a final interpretation on Statement 143, Accounting for Asset Retirement Obligations.

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