Financial Accounting Standards Board chairman Russell Golden and technical director Susan Cosper discussed FASB’s upcoming leasing, classification, impairment and hedge accounting standards during a conference in New York, along with the board’s plans for future standards.
Speaking at Financial Executives International’s Current Financial Reporting Issues conference, Golden noted that FASB is planning to issue its leasing standard in the first quarter of next year. He pointed to the mostly converged revenue recognition standard that FASB and the International Accounting Standards Board issued last year and acknowledged there are a few differences between the two sets of standards.
“We’re trying very hard during the implementation phase to remain converged,” he said.
However, he admitted that the joint Transition Resource Group, or TRG, set up by FASB and the IASB has raised 80 implementation issues. As a result, the effective date of the standard has been pushed back a year. Nevertheless, Golden has a positive view of the process.
“I think the revenue recognition TRG has been a great success,” he said. “I know a lot of people want to be critical and say there have been 80 issues that have been brought to the board, and that is a situation where perhaps there was a flaw in the process. I think that when you look at it, just about every company has had to evaluate revenue recognition, and when you look at the 80 questions that have come to the TRG, only five or six have risen to the board level. I think it’s important that the board create an infrastructure so that you and your auditors and users can have a frank discussion about what is the most effective way to implement it.”
He acknowledged further interpretations may be needed on the revenue recognition standard, and there may be some disagreements among professionals on what those interpretations should be. “We need to reduce the diversity when the diversity could impact investors,” said Golden.
He said there would be a transition group for the upcoming impairment standard. “We think there could very well be questions, and we want to educate our stakeholders on what the board intended,” said Golden. “We want to potentially stand ready to make amendments if necessary to reduce the costs of application, providing we don’t impact the benefit. There could be some disagreements in the implementation, and we’ll stand ready.”
FASB’s transition group for the impairment standard will be separate from the one already set up by the IASB. “It’s not going to be joint, but we are sharing resources, we are sharing content, and we are observing their meetings, and they’re observing our meetings,” Golden told Accounting Today during a press conference.
He told the audience FASB won’t be creating a transition group for the leasing project, because even though the new standard will make a substantial change to the balance sheet, it’s not making many changes to the technical interpretations and judgments associated with leases.
“We are, in leases, making some changes around the definition of a lease, but the other types of things as far as what would go into the obligation are very similar to what you have today,” he explained.
He believes the upcoming leasing standard is successful in that both FASB and the IASB have agreed to put the assets and liabilities associated with leases on the balance sheet. “We have a little difference of opinion as to how the performance statement will work, but the main objective in my mind was to appropriately reflect the obligations and the rights on the balance sheet, and we have come to agreement on how to do that,” he said.
Golden said FASB is on pace to finish the leases standard, as well as the impairment, classification and measurement parts of the financial instruments standard by early next year.
Accounting Today asked at the news conference if he was disappointed the two boards hadn’t managed to converge more closely on the leasing standard.
“I think that the balance sheet is closer,” said Golden. “There is a benefit when we can have similar accounting between the two standards and there’s a cost when we don’t. In this case, I personally weighed the fact that we would come to a difference for the income statement as beneficial for U.S. stakeholders because our cost/benefit analysis showed us that there would be more required to implement the system if we were to do the original exposure draft that both boards came to, which is the likely IASB approach. We have a consistent definition and we have a consistent philosophy as to how you recognize the assets and liabilities. It’s just the income statement is different. They’ll have an accelerated expense and we’ll have a straight-line expense.”
Golden noted that FASB’s staff did an analysis of companies that have around 60 to 70 leases and those leases roll over time, as in the case of a retailer. The researchers found little impact on the income statement.
Golden told the FEI audience about how FASB is drawing up its plans for future standards once the leasing and financial instruments have been completed.
“Where do we go from here?” he asked. “I think we should continue to improve GAAP where necessary for U.S. stakeholders. It is the U.S. stakeholders who give us our authority. We need to recognize in essence you and the users of the information in the U.S. capital markets as our customers, so we need to continue to stand ready to make our product better when we can make it better. We need to try to keep converged standards converged. I believe there’s a benefit to having converged standards. I believe there’s a benefit when investors are investing across markets. And I also believe there’s a benefit to you all. There is a greater cost when we don’t converge.”
FASB will ontinue to develop GAAP and actively participate in the development of IFRS, while maintaining enhanced relationships and communications with other national and regional standard-setters. Golden said FASB would continue to meet with the IASB on at least an annual basis, both in person and by videoconference.
Golden said that FASB’s advisory group, the Financial Accounting Standards Advisory Council, recently surveyed stakeholders about which areas they would like to see FASB address in the future. Among them are improving financial performance reporting, cash flow classification, pensions and other post-employment benefits. FASB plans to issue its research on its future agenda and ask for further feedback.
Golden said FASB needed to have a “culture of simplification” to make the accounting standards simpler, but with the caveat that it needs to be in the interest of investors. He acknowledged that in some instances FASB’s simplification initiative hadn’t worked as planned, and some stakeholders prefer to have the more complex accounting. He said they would only work on future simplification if it doesn’t impact the information that investors receive.
FASB has learned simplification that results in better information is not always supported by all stakeholders, as in the case of simplifying the debt classification standard. Some simplifications may also turn out to be more costly to implement than others, as in the case of a simplification related to intra-entity tax transfers. However, Golden pointed to several more successful accounting simplifications, such as those relating to share-based payments, extraordinary items, debt issue costs and inventory measurement.
FASB technical director Susan Cosper, who also chairs FASB's Emerging Issues Task Force, spoke at the conference alongside Golden. She said the upcoming leases standard aims to increase transparency and comparability. During redeliberations after issuing their exposure draft, FASB and the IASB tried to bring down the costs of the leasing standard. She noted that some companies wanted to be able to implement the new revenue recognition and leasing standards at the same time, and they will be able to do that.
She said FASB is also working hard on getting the classification and measurement part of the financial instruments project finished by the end of the year. FASB plans to issue those standards early next year, and separately the impairment standards part of the financial instruments project. The classification and measurement standards will apply after Dec. 15, 2017 to public companies, and after Dec. 15, 2018 to private companies.
FASB has also been working on hedge accounting, and Cosper hopes to have an exposure draft issued by the second or third quarter of next year. Because of the way FASB’s accounting codification is set up, the standards will be released separately, unlike the IASB’s release of a unified financial instrument standard, IFRS 9.
FASB has also been working on its disclosure framework, including the possibility of more disclosures related to taxes, particularly unremitted foreign earnings. This could include disaggregation of income before tax, disaggregation of indefinitely reinvested earnings, disclosure of domestic tax on foreign earnings, and any changes in circumstances. Cosper acknowledged this could prove to be an area of controversy.
“I think unremitted foreign earnings is an area that has been fairly controversial,” she said. “Disaggregation of income tax is a disclosure that we’re going to add, separated out between domestic and foreign, and from foreign further disaggregated for any country that would be considered significant to the total. Disaggregation of indefinitely reinvested earnings, that’s an add where if if the cumulative amount [for a country] is greater than 10 percent of the total, there would be some disclosure of that temporary item as well. Then change in circumstances—if a company is no longer asserting to have this unremitted earnings permanently reinvested, making an explanation of that in the notes. For many of these items, we’ll get a lot of feedback on them, I suspect. But what we’re hoping to understand is some of the operationality concerns around some of these disclosures. We’ll also be reaching out to investors as we have throughout this process to try and understand if this is the type of information they’re interested in.”
Other disclosures could involve unrecognized tax benefits. For public entities, those could include additional disclosures around the breakdown of the liability by balance sheet line items and of settlement cash as opposed to tax assets, whether they’re cash settlements or settlements through tax assets. For both public and private entities, FASB might also remove disclosure of changes in the next 12 months of an unrecognized tax asset since that is considered to be more forward-looking information and shouldn’t be included in the disclosures.
Later at the news conference, Accounting Today asked if the disclosures of unremitted foreign earnings could have an impact on companies’ inversion or repatriation strategies, but Cosper and Golden said the changes wouldn’t have an impact on how much in taxes companies paid. The goal is simply to provide more transparency for investors.
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